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 makers.

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

District	Pupils	Property Value Per Pupil	Household Income	Property Tax Rate (mills)	Local Revenue Per Pupil	State Revenue Per Pupil	Total Revenue Per Pupil
A	10,040	$36,670	$14,435	30.43	$1,116	$978	$2,094
B	7,028	$46,845	$15,674	28.33	$1,327	$888	$2,215
C	7,985	$55,203	$17,229	26.86	$1,483	$794	$2,277
D	4,152	$64,875	$16,290	25.61	$1,661	$620	$2,281
E	5,148	$71,762	$17,074	24.39	$1,750	$572	$2,322

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.

State	Education Clause	Case
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)
Kentucky	"…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 student performance
• 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 spending programs.

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 making.

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?

The demographics

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 1 below)

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 2).

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 elderly.

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.

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 taxable income.

Table 3: Real Per Capita Potential Taxable Income (Wages & Salaries)

	1979-1993	1993-2000	2000-2005	2005-2010	2010-2025
U.S.	0.93%	1.43%	1.08%	0.88%	0.52%
New England	1.68%	1.47%	1.05%	0.84%	0.49%
Mid-east	1.45%	1.33%	1.05%	0.84%	0.48%
Great Lakes	0.59%	1.46%	1.09%	0.89%	0.52%
Plains	0.74%	1.61%	1.12%	0.91%	0.52%
Southeast	1.26%	1.58%	1.15%	0.93%	0.55%
Southwest	0.40%	1.48%	1.11%	0.92%	0.57%
Rocky Mountain	0.73%	1.47%	1.11%	0.93%	0.58%
Far West	0.39%	1.32%	1.06%	.088%	0.54%

Source: Bureau of Economic Analysis, 1995.

Table 4: Real Per Capita Non-taxable Income (Transfer Payments)

	1979-1993	1993-2000	2000-2005	2005-2010	2010-2025
U.S.	3.61%	0.75%	1.29%	1.68%	2.82%
New England	3.79%	0.48%	1.16%	1.56%	2.71%
Mid-east	3.79%	0.57%	1.14%	1.55%	2.70%
Great Lakes	4.06%	0.82%	1.36%	1.73%	2.87%
Plains	3.81%	0.96%	1.38%	1.75%	2.89%
Southeast	3.80%	0.94%	1.41%	1.78%	2.91%
Southwest	3.94%	0.99%	1.45%	1.81%	2.955
Rocky Mountain	3.59%	0.76%	1.375	1.75%	2.88%
Far West	2.64%	0.70%	1.25%	1.65%	2.78%

Source: Bureau 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.

V. Recommendations

Our recommendations to educational policy makers to address this issue include:

1. Revise revenue instruments to avoid structural deficits in the future in the funding for public education.
2. Explore the feasibility of implementing state-controlled full funded systems
3. 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
4. Replace revenue sources from local sources to state sources of funding
5. Pursue non-tax sources (McGuire, 1995) for school funding by:
   • participation fees
   • non-profit foundation
   • enterprise activities
6. Reduce preferential treatment for retirement income, retired persons property taxes, and other age related income exclusion
   

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