Abstract: This paper outlines
the possible future conflict between the aging population of the
United States and the funding of public education. The context
and the forces driving the issue are discussed as it describes
how education is funded and the role of equity in state funding
formulas. In defining where the issue is going, demographic trends
with respect to age are examined, as they indicate a growing percentage
of retired people in the United States. At the center of the issue
is a shortage in state revenue that may accompany this growing
percentage of retirees. The shortage would be due to a shift in
the composition of personal income from taxable to non-taxable
sources. Also contributing to the issue will be an increase in
demand for public services by the elderly. |
I. The Issue
Between 1993 and the year 2000, it is estimated that the number
of persons age 65 and older will have increased by 40% in the
United States (Winkfield, 1993). Will an older America de-emphasize
the importance of education as the constituency of those without
school-age children grows? Are states' school funding formulas
prepared for the forthcoming drought in revenue that will accompany
an aging population? As a larger population chases increasingly
limited resources, will the competition for those resources become
more acute, pitting our nation's educational needs against care
for our elderly? These conflicts comprise the core of the issue:
Funding Education in an Older America. In exploring these questions
we will discuss the background and context of the issue along
with the forces driving it. We will also address where the issue
is going, as well as its prospects. In this paper, we will present
an overview of how education is funded, how those funds are allocated,
the key role played by equity in school financing, an analysis
of demographic data illustrating this important aging trend and
an analysis of the impact of this trend on state and local governments'
revenue sources. This analysis will reveal a decrease in potentially
taxable dollars that will correspond with an increasing number
of retirees in America. Finally, we will explain implications
of the issue and pose recommendations for administrators and policy
II. Background and forces driving the issue
How is education funded?
Educational expenditures constitute the largest portion of most
state and local government budgets. Historically, the responsibility
for funding public education has been on the shoulders of state
and local governments as they provide over 91% of all revenue.
(Odden & Picus, 1992)
School funding in the United States is achieved through the combined
efforts of all three levels of government: local school districts,
each of the states, and the federal government. It is principally
concerned with raising, distributing, allocating, and using revenues
for the purpose of educating children. ( Odden & Picus, 1992)
The major task of policy makers has been to create school funding
formulas that will promote fiscal equalization, incorporate intergovernmental
grants, and uphold school finance values.
The main sources of funds for our schools are local property taxes
and state revenues. Put in the simplest of terms, the ability
of a local government to pay for the education of its children
depends mostly on property values and the number of pupils in
the district, or property value per pupil. The table below
provides a funding formula applied to five hypothetical districts.
Table 1 illustrates the relationship between local
funding (based on property value per pupil) and state funding.
The purpose of the supplement of state revenue is to achieve equity
or a minimum level of expenditure per pupil. Note that as property
value pupil decreases, state revenue per pupil increases.
Table 1: Five District Sample School Funding Formula
|Property Value Per Pupil
|Property Tax Rate (mills)
||Local Revenue Per Pupil
||State Revenue Per Pupil
||Total Revenue Per Pupil
Source: Odden & Picus
Equity in school funding
The state's role is to supplement needed revenue to maintain an
equitable system, or at least a minimum level of expenditure per
pupil. More specifically, it is the state's responsibility to
provide a system of education that measures up to that which is
enumerated in most state constitutions. Most state constitutions
define that measure with clauses like, "thorough and efficient"
(Md. Const. Art. VIII, Sec. 1), "suitable and efficient"
(Ark. Const. Art. 14, Sec. 1) or "a uniform
system" (Fla. Const. Art. IX,)
Sec. 1). Indeed, there is currently a trend toward equity in school
finance as a number of state supreme courts have found education
funding systems to be unconstitutional. (Van Slyke, et al 1995)
(See Table 2 below).
Table 2 indicates school finance equity cases in which the states'
system of funding schools was found unconstitutional.
|Arkansas||"(T)he State shall ever maintain a general, suitable and efficient system of free schools whereby all persons in the State between the ages of six and twenty-one years may receive gratuitous instruction" (Ark. Const. Art. 14, Sec. 1)
||Shofstall v. Hollins (1973)
|Connecticut||"There shall always be free public elementary and secondary schools in the state" (Conn. Const. Art. B., Sec. 1)
||Horton v. Meskill (1977)
|Kansas||"The legislature shall provide for intellectual, educational, vocational and scientific improvement by establishing and maintaining public schools" (Kan. Const. Art. 4, Sec 1)
||Knowles v. State Board of Ed. (1976)
to provide an efficient system of common schools throughout the commonwealth" (Kent. Const., Sec. 183)
||Council for Better Education, Inc. v. Wilkinson, No. 85-CI-1759 (1988)
|Montana||"The Legislature shall provide a basic system of free quality public elementary and secondary schools" (Mont. Const. Art. X, Sec. 1)
||Helena School District #1 et al. V. State of Montana et al (1989)
|New Jersey||"The Legislature shall provide for the maintenance and support of a thorough and efficient system of free public schools for the instruction of all the children in the State between the ages of five and eighteen years." (Art. 7, section 4, par. 1)
||Robinson v. Cahill (1973 & 1976)
Abbott v. Burke (1991)
|Washington||"The legislature shall provide for a general and uniform system of public schools" (Wash. Const. Art. IX, Sec. 2)
||Seattle School District No. 1 of King County v. State No. 81-2-1713-1 (1978)
|West Virginia||"The legislature shall provide, by general law, for a thorough and efficient system of free schools" (W. Va. Const. Art. XII, Sec. 1)
||Pauley v. Kelly (1979)
|Wisconsin ||"The legislature shall provide by law for the establishment of district schools, which shall be as nearly uniform as practicable; and such schools shall be free and without charge for tuition to all children between the ages of 4 and 20 years" (Wis. Const. Art. 10, Sec. 3)
||Buse v. Smith (1976)
|Wyoming||"The legislature shall provide for the establishment and maintenance of a complete and uniform system of public instruction, embracing free elementary schools of every kind and grade" (Wyo. Const. Art. 7, Sec. 1)
||Washakie Co. School Dist. #1 v. Herschler (1980)
Source: Odden & Picus
Although "perfect equity" is not possible, five principles
are used to guide the development of a state's school funding
formula. (Odden & Picus, 1992) These principles are:
- equal distribution of the objects - horizontal equity
- extra amounts for the object to be distributed for special
student needs-vertical equity
- the object not be related to local fiscal capacity, such as
property value per pupil - fiscal neutrality
- the level and use of resources produce a minimum level of
- allow for local fiscal decision making
Types of funding formulas
As policy makers have worked toward a system that is more fair,
funding methods have evolved over time. Four types of formulas
have developed: (1) flat grants, (2) foundation programs, (3)
guaranteed tax base programs, and (4) combination foundation and
guaranteed tax base programs. Several alternative programs exist
to fund schools and these are full state funding and various state-determined
When a school funding program requires supplemental state funding
(state aid), it may be generated in the form of a "block
grant" where there are no restrictions for "maintaining
local effort". These funds may be used to help decrease local
property tax rates or to increase local education spending. (Odden
& Picus, 1992).
Another type of grant is the "flat grant" which distributes
an equal sum of dollars to each public school pupil in the state,
regardless of the property or income wealth of the local school
districts. Historically, the flat grant program has allowed for
localities to create a school where none existed, and also funded
an "in kind" contribution to those districts which had
already been able to create schools. Both poor and rich districts
benefited from this program. As the number of schools increased
over time, there was a necessary shift in the formula structure
from flat grants per school to flat grants per classroom or per
teacher. As the American landscape changed, and as an industrial
society emerged, the levels of flat grants could not match the
requirements of growing public school systems and so there was
again a shift, this time to a foundation program.
The foundation program (also known as the minimum foundation program)
guarantees a certain foundation level of expenditure for each
student, together with a minimum tax rate that each school district
must levy for educational purposed. State aid is used to make
up for the difference between the minimum tax rate and the foundation
expenditures. This sort of program enhances the state government's
role in educational funding.
A recently developed funding structure, the guaranteed tax base
program (also called the district power equalization program),
addressed one of the fundamental flaws in the more traditional
school funding formulas, that of the unequal distribution of the
local property tax base. In a GTB program the state guarantees
to all districts, regardless of property wealth, the same dollar
yield for the same property tax rate. In poor districts, the state
makes up for the difference between local revenues and what the
state guarantees. In property-rich districts, excess funds may
not be "recaptured" by the state and distributed to
the poorer districts. GTB programs focus on the ability to support
education and empower the local fiscal role in education decision
States are going toward combination foundation and guaranteed
tax base programs. The benefits are that the foundation portion
ensures an above-minimum base spending level, and this base spending
level is financed with a combination of local and state funds.
This remedies a possible flaw of solely relying on GTB programs,
which do not require a minimum spending level.
Until the 1960s, local governments provided the largest proportion
of revenues for public education. However, the last three decades
have witnessed the shifting of the burden onto the shoulders of
state governments. By 1990, state governments' share of all revenues
expended for public education had increased to 49.9% while local
governments' share had declined to 44.3%.
In summary, most of school funding comes from local property taxes.
However, as equity remains a concern, a growing percentage of
dollars comes from the state as it supplements property-poor districts.
Considering that income taxes and sales taxes are the primary
sources of state revenue, we must consider the effects of the
forthcoming increase in the population of retirees. For a large
percentage of retirement income is non-taxable.
III. Where is the issue going?
Among the most influential factors that have led to an aging America
are declining fertility and mortality rates. By the year 1800
life expectancy at birth was about 35 years. By 1900 it jumped
to 47 years; by the year 1950 it increased to 68 years; and to
76 years by 1991. (U.S. Census Bureau, 1995)
The median age in America has increased from 20 years old in 1860
to 34 in 1994. According to the U.S. Census Bureau, the elderly
(those age 65 and older), who comprised only 1 in every 25 Americans
(3.1 million) in 1900, made up 1 in 8 (33.2 million) in 1994.
By the year 2050, as many as 1 in 5 Americans could be elderly.
The elderly population will more than double between now and the
year 2050, to 80 million. Most of this growth should occur between
2010 and 2030, when the "baby boom" generation (those
born in the period from 1945 to the early 1960's) enters their
elderly years. During that period, the number of elderly will
grow by an average of 2.8% annually. By comparison, annual growth
will average 1.3% during the preceding 20 years and 0.7% during
the following 20 years. (U.S. Census Bureau, 1995) (See Figure
Figure 1: Fifteen year growth trend for elderly population
(age 65 and older)
Source: U.S. Census Bureau, 1995
The most rapidly growing age group are those age 85 and older.
Between 1960 and 1994 the U.S. population grew 45%, while the
elderly population in general grew 100%. This is compared to a
274% increase during that period of those age 85 and older. In
raw numbers there were three million Americans age 85 and older
in 1994, making them 10% of the elderly and between one and two
percent of the entire population. When the baby boomers reach
that age by roughly the year 2050, that number will soar to
19 million. Those age 85 and older will then account for 24% of
the elderly and five percent of all Americans. Such a sharp
increase in this age group will mean a correspondingly sharp increase
in demand for services. (U.S. Census Bureau, 1995) (see Figure
With respect to generational trends, the "baby boom"
generation may be the most influential population cohort in our
nations history. Due to its size, its economic influence is unmatched
by any other. Some credit this generation, for example, with the
skyrocketing Dow Jones Industrial Average over the last ten years
as baby boomers reached their thirties and forties and had enough
disposable income to invest in the market. Similarly, this group
will be a potent economic force during its retirement years..
IV. What are the implications for public education?
Increasing Demand for Services for the Elderly
Census Bureau statistics point to the probability that with age
comes an increasing chance of being dependent. (See Figure 2 below)
State and local governments will bear most of the burden of this
cost. This, coupled with the fact that state and local governments
are also responsible for over 91% of educational costs set the
stage for the forthcoming conflict: a seemingly zero-sum competition
for public goods and services between education and the dependent
Figure 2: Indicates the percentage of people
(by age) who will require personal assistance.
Source: U.S. Census Bureau, 1995
Projected Revenue Shortages
Accompanying the trend toward an older population is a decrease
in taxable sources of revenue, resulting in structural deficits.
Structural deficits occur when "the trend growth rates for
state expenditures exceed the trend growth rates of state revenues"
(McGuire, 1995, p. 5). In other words, the population is growing
at a faster rate than that of state tax revenues. In fiscal terms,
growth in income has usually meant growth in tax revenue. Such
is not the case however, in an older population-one with a growing
number of retirees.
Taxable income will decrease correspondingly with the percentage
increase in the population of retirees. The reason for this will
be a shifting composition of personal income. Personal
income is comprised mainly of wages and salaries, and transfer
payments and retirement payments.
Personal Income = wages & salaries + transfer
& retirement payments
Transfer payments go largely untaxed while retirement income is
taxed at a low rate. In short, the net effect on state and local
tax bases of this shift in personal income from taxable wages
and salaries to less taxable and non-taxable retirement income
is that a smaller share of personal income will be subject to
tax. (Wallace, 1995) (See Tables 3 and 4 below)
Average Annual Growth (by region) in Real
Per Capita Potential Taxable Income and Transfer Payments
Tables 3 and 4 indicate that the
growth rate for real per capita transfer payments (which are not
taxable) will be greater than that of real per capita potential
taxable income (wages and salaries). This trend shows an increasing
percentage of non-taxable income and a decreasing percentage of
Table 3: Real Per Capita Potential Taxable
Income (Wages & Salaries)
Source: Bureau of Economic Analysis,
Table 4: Real Per Capita Non-taxable Income
of Economic Analysis, 1995.
Contributing as a possible conflict between education funding
and the interests of a growing elderly population in the U.S.
will be its growing power as a constituency. As a traditionally
politically mobile group, what will be its position on educational
funding? What types of funding formulas and tax structures, for
example, will lobby groups such as the AARP favor? It is in this
policy arena that educational leaders must
focus their efforts. To conclude, it is the convergence of the
aging trend and the trend toward more state responsibility for
funding education and other human services that have serious implications
in the future.
Our recommendations to educational policy makers to address this
- Revise revenue instruments to avoid structural deficits in
the future in the funding for public education.
- Explore the feasibility of implementing state-controlled full
- Broaden revenue bases to incorporate growing sectors of the
economy i.e. increase sales tax base for state and local governments
to include more services and non-taxed goods
- Replace revenue sources from local sources to state sources
- Pursue non-tax sources (McGuire, 1995) for school funding
- participation fees
- non-profit foundation
- enterprise activities
- Reduce preferential treatment for retirement income, retired
persons property taxes, and other age related income exclusion
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