The question of whether school districts respond to increases in State Aid by maintaining local tax effort or lowering tax rates has been a traditional concern of public finance experts. In light of the Regents emphasis upon targeting State Aid to high need school districts and ensuring adequate resources are available to enable all students to achieve high academic standards, the issue of fiscal response has remained an area of concern to New York State policymakers as well. As the State focuses additional resources on high need schools, any diminution of local tax effort, particularly if local tax effort is "inadequate" to begin with, poses a significant policy concern. For this reason, particular attention was paid to understanding patterns of fiscal response in districts of varying need/resource capacity.

This paper presents findings of an initial exploratory analysis. It is focused on two major areas of concern. First, it examines the extent to which changes in State Aid are reflected in district expenditure. In other words, if districts are using their State Aid to fund educational programs while maintaining local effort, increases in State Aid should be accompanied by increases in expenditure on a per pupil basis. This paper describes the strength of this association and those variables that have been found to be associated with changes in per pupil expenditure. Secondly, the strength of the relationship between changes in State Aid and changes in local effort was examined, and specific categories of district fiscal response have been identified.

District spending and State Aid patterns were examined for the period 1993-94 to 1998-99. In order to examine spending changes adjusted for inflation over this period, the 1998-99 expenditure, State Aid and local levy data were converted to 1993-94 constant dollars. Results are presented in 1993-94 constant dollars unless otherwise noted.

Throughout the study, the State Aid measure used was total State Aid on the database minus Building Aid, Transportation Aid and Reorganization Incentive Building Aid. The expenditure measure used was total expense minus transportation, debt service, and district intra-fund transfers. The expenditure and revenue categories that were excluded are associated with capital-intensive activities. Since these activities typically include periodic one-time investments in assets like buildings or school buses – assets that will be used over an extended period of time - they distort both accurate year-to-year comparisons as well as inter-district or inter-group comparisons.

As a first step, the relationship between changes in State Aid per pupil and changes in expenditure per pupil was examined. This portion of the analysis was designed to determine the extent to which State Aid increases could be detected in increases in expenditure per pupil. Major findings are:

• The average inflation-adjusted dollar increase in State Aid per pupil for high need urban/suburban districts was $462 (Chart A). The average increase in expenditure per pupil for these districts was $350. Therefore, 75.8 percent of the State Aid per pupil increase was reflected in corresponding per pupil changes in expenditure.

• After adjusting for inflation, low need districts experienced a decrease in State Aid per pupil of eight dollars and an average decrease in per pupil expenditures of $264.

• Each of the Big Five City school districts experienced CPI-adjusted increases in State Aid per pupil (Chart B). The largest increase was $732 per pupil and occurred in the Buffalo school district. New York City, Buffalo, and Yonkers experienced increases in expenditure per pupil during the same time period, while Rochester and Syracuse experienced decreases in per pupil expenditure.

• Although Chart B does not directly address the local effort issue, it is apparent that Rochester and Syracuse did not respond to State Aid increases with corresponding spending increases. In sharp contrast, increases in expenditure per pupil exceeded State Aid per pupil increases in New York City, Buffalo, and Yonkers.

• There was a positive relationship between changes in State Aid and changes in expenditure over the five-year period covered by this study. As shown in the table below, the strength of this relationship varied according to need/resource category, but was generally stronger in high need districts, and weaker in low need districts.
• From 1993-94 to 1998-99, as shown in Chart C, 430 school districts received inflation-adjusted State Aid per pupil increases. Of these districts, 19.5 percent or 84 districts experienced decreases in expenditure per pupil.
• Low need districts were found to be three times more likely than average need districts and nine times more likely than rural high need districts to decrease their per pupil expenditure while receiving State Aid per pupil increases over the same five-year period.

• Whether a district increases or decreases its expenditure per pupil depends on a number of factors. Among the most important: the district’s spending level per pupil at the beginning of this five-year period, its initial tax rate, its need relative to fiscal capacity, as well as the change in State Aid per pupil. All are strong predictors of changes in district expenditure per pupil.

A conceptual framework was developed to examine both State Aid changes and local effort changes from 1993-94 to 1998-99. That framework is displayed in Figure 1. Districts were first classified regarding changes in State Aid, i.e., they either received increases or decreases in State Aid per pupil over the time period examined (after eliminating inflationary changes). With respect to changes in local effort, districts were classified in one of three ways. If a district experienced both a decrease in local tax rate and a decrease in cost-adjusted levy per pupil, the district would be considered to have decreased local effort. A district with both an increase in local tax rate and an increase in local levy per pupil was considered to have increased local effort. In some districts the change in local effort was mixed. If a district had an increase in local tax rate accompanied by a decrease in local levy per pupil (or a decrease in tax rate accompanied by an increase in levy per pupil), the district was classified as a mixed effort district.

Additionally, districts that experienced decreases in State Aid and decreases in local effort were considered to be negative compensating districts (bottom left of Figure1). Districts for which the direction of the local effort change was mixed were considered to be mixed response districts. Figure 1 also displays the number of districts identified in each category.

• There were 276 districts identified as having positive fiscal response, meaning that, while they experienced CPI-adjusted increases in State Aid per pupil, they also increased their local effort. For these districts, the local share of total education revenue was 48 percent in 1993-94 and decreased to 46 percent in 1998-99. Revenue from STAR was kept separate and accounted for two percent of total district revenue.

• The median percent change in tax rate for districts with positive fiscal response was 18.45 percent over the five-year period and the median percent change in CPI-adjusted levy per pupil was 10.25 percent.

• The estimated "lost revenue" associated with district failure to maintain their local funding share in the face of State Aid per pupil increases was $328 million in 1993-94 constant dollars. Twenty-one (55 percent) of the 38 negative fiscal response districts were found to have low performance.

• There were 123 districts that were identified as having a positive compensating response, meaning that these districts increased local effort in the face of constant dollar decreases in State Aid per pupil. Eighty-seven percent of these districts were either average or low need districts.

• Twenty districts were classified as negative compensating response. These districts experienced decreased effort and received decreases in State Aid per pupil after adjusting for inflation. The local share of education revenue for these 20 districts was greater than any other category, with 67 percent of their total revenue being raised locally.

• Whether districts received State Aid decreases or State Aid increases, districts were more likely to be classified as increased effort as opposed to decreased effort. Only 58 districts (8.8 percent), including both negative fiscal response and negative compensating response, were identified as having decreased their local effort.

• High need districts that received State Aid per pupil increases were found to be more likely to increase local effort, than to decrease local effort. However, those few districts that decreased local effort (n=38 districts) were found to have substantially higher 1993-94 tax rates than districts in the same need/fiscal capacity decile that increased local effort.

• High need districts that decreased their local effort were found to receive larger State Aid per pupil increases than districts in the same need/fiscal capacity decile who increased their local effort. However, it is important to note that overall, the number of negative fiscal response districts was much smaller (n=38) than the actual number of districts that exhibited positive fiscal response (n=276).

• As shown in the table above, each of the Big Five received CPI-adjusted per pupil increases in State Aid. New York City and Rochester were categorized as mixed response. Despite increasing tax rates from 1993-94 to 1998-99, these two districts experienced decreases in CPI-adjusted levy per pupil.

• Buffalo fell into the positive fiscal response category. Increases in tax rate, levy per pupil and State Aid per pupil are clearly evident in the case of the Buffalo school district.

• Syracuse and Yonkers were classified as negative fiscal response districts. These districts have experienced substantial decreases in tax rates and local levy per pupil, while at the same time, receiving increases in State Aid per pupil.

The technical supplement provides a detailed description of the methodology and findings of this study of the fiscal response of school districts.