Economics of Education Review 19 2000 417–429 www.elsevier.comlocateeconedurev
Does fiscal dependency matter? Aid elasticities for dependent and independent school districts
Thomas A. Downes
Department of Economics, Tufts University, Medford, MA 02155, USA Received 30 January 1998; accepted 26 February 1999
Abstract
In New York state, there is a perception that the fiscally dependent status of the five large city school districts creates an impediment to the attainment of standards. I attempt to assess the impact of fiscal dependence on educational
spending. The results suggest that levels of spending may be systematically lower in the fiscally dependent districts. There is, however, little evidence that the general purpose governments to which these districts are fiscally dependent
“steal” a disproportionate share of state aid for education. I conclude by evaluating policies that could mitigate any detrimental impact that fiscal dependence might have. This evaluation leads me to the conclusion that, even if spending
levels are inadequate, elimination of fiscal dependency may not be the best policy for addressing this problem. Instead, policy makers may want to consider governance changes that would better align responsibilities for allocating revenues
to the schools and for governing the schools.
2000 Elsevier Science Ltd. All rights reserved.
JEL classification: I22; H77; H72
Keywords: Fiscal dependency; Aid elasticities; Flypaper effect
1. Introduction
Providing students with the skills to meet or exceed stringent academic standards requires both sufficient
resources and effective use of those resources. In New York state, there is a lingering perception that the fiscally
dependent status of the five large city school districts
1
creates an impediment to the attainment of standards in these districts. For example, when the Board of Regents
proposed in 1994 that the “category of fiscally dependent districts be eliminated”, the proposal noted that “[t]he
present Maintenance of Effort requirements are ... insuf- ficient” to ensure that adequate resources will be allo-
cated to the schools. Further, the impetuses for the pro-
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1
The fiscally dependent districts are Buffalo, New York City, Rochester, Syracuse, and Yonkers.
0272-775700 - see front matter
2000 Elsevier Science Ltd. All rights reserved. PII: S 0 2 7 2 - 7 7 5 7 0 0 0 0 0 0 7 - 8
posal to eliminate fiscal dependency were the desires to ensure “the efficient use of adequate financial resources
to areas which demonstrate the most need and ... to move the accountability closer to the public” Office of Fin-
ance, Management and Information Services, 1997.
The facts that have led to these concerns about the fiscal dependency of the five large city districts are
numerous and easily related. In the 5 academic years from 1987–88 to 1991–92, each of the five large city
districts experienced a maintenance of effort shortfall
2
at
2
A maintenance of effort shortfall occurs when current rev- enues are less than either the average of the past 3 years’ total
revenue or last year’s revenues multiplied by the ratio of this year’s enrollment to last year’s enrollment. Under this defi-
nition, a shortfall can occur even if a more standard measure of effort, the effective tax rate, has not declined. For example,
if there is an exogenous decline in the real value of property in a locality and thus in the property tax base and if intergovern-
mental aid is unchanged, a shortfall will occur unless both the nominal and the effective tax rates increase.
418 T.A. Downes Economics of Education Review 19 2000 417–429
least once, with an average of two shortfalls in the 5- year period.
3
Since shortfalls occur only if per pupil spending in a year has declined relative to spending in
previous years, the existence of shortfalls signals poten- tial instability in spending in the five large city districts.
In addition, instability in spending frequently occurs at the same time that state aid is increasing. For example,
between 1990–91 and 1991–92, per pupil state aid to the Buffalo City schools increased by over 100 in 1991
dollars.
4
In the same period, total per pupil spending and current expenditures per pupil each declined by
about 600, in real terms. The existence of shortfalls and the apparent absence
of a positive relationship between state aid and spending are all the more troubling in light of relatively low levels
of achievement in the five large city districts. It would seem that the natural conclusion is that either adequate
resources have not been provided in these districts or, if adequate resources have been provided, these resources
have not been used efficiently. Once this conclusion is drawn, arguing for fiscal independence of the five large
city districts seems natural.
Unfortunately, neither the conclusion that fiscal dependence is associated with inadequate or inefficient
spending nor the conclusion that fiscal independence will improve the situation in the five large city districts follow
from the evidence cited above. Take, for example, the above noted case of Buffalo. Claiming that this case sup-
ports the conclusion that state aid increases to five large city districts are not necessarily translated into spending
increases is fallacious for one simple reason: we possess no knowledge of what would have happened to spending
in the absence of increases in state aid. Similarly, by themselves, shortfalls tell us nothing about the adequacy
of spending or the accountability of the schools. In determining if the fiscally dependent status of these dis-
tricts adversely affects the quality of education, it is insufficient to consider these districts in isolation, since
it is impossible to separate the effects of urbanicity from the effects of fiscal dependency. For similar reasons, it
is not enough to compare spending and student perform- ance in these districts to spending and student perform-
ance in the fiscally independent districts in New York state.
The foregoing discussion hints at the approach that will be taken in this paper to assess the impact of fiscal
3
While only New York City is currently subject to the main- tenance of effort requirement, the New York State Education
Department calculates shortfalls for the other five large city dis- tricts under the assumption that they are subject to the same
requirement.
4
These figures, and all revenue and expenditure figures that follow, are drawn from the National Center for Education Stat-
istics’ Common Core of Data CCD. Thus, the figures will not correspond to those drawn from administrative data.
dependence. Specifically, I assemble a data set that includes school districts from the New England and Mid-
Atlantic states. Because this data set includes a mix of fiscally dependent and fiscally independent districts and
a mix of urban, suburban, and rural districts, it can be used to isolate the effect of fiscal dependency on the
level, the growth, and the mix of spending. Before I pur- sue that strategy, in the next section of the paper, I ask
whether there is any reason to believe that fiscal depen- dency would affect the quality of education provided in
the five large city districts.
2. Should fiscal dependency matter?
