Impact of School Finance Reform on Resource Equalization and Academic Performance: Evidence from Michigan

The state of Michigan radically altered its school finance system in 1994. This was a legislature-led reform that took place somewhat unexpectedly and without the intervention of any courts. The new plan, called Proposal A, significantly increased the state share of K-12 spending and entailed large sums of money to the lowest spending districts. These districts were also allowed to increase their future spending at a much faster rate than others. Concurrently, Proposal A ended local discretion over school spending. Using panel data on K-12 districts from 1990 to 2001 I investigate the impact of Proposal A on distribution of resources and educational outcomes in Michigan. In the process this paper offers a first detailed look at the effectiveness of a legislature-led school finance reform, something which has been debated recently in the literature. I first look at the effect on equalization of school spending. The program was quite successful on this count - by the end of the decade the lowest spending districts had witnessed large increases in spending. The gap between the highest and lowest spending districts had considerably narrowed down. The magnitudes look particularly impressive when compared to the corresponding estimates from court-mandated reforms, even large comprehensive ones like Kentucky (1989). The results are similar for other important indicators – e.g. while at the time of the program there was a large positive relationship between median income in a school district and its K-12 expenditures, this has been significantly weakened post-reform. Next I look at the trends in academic performance. I employ various strategies, including using the changes in state aid formula as instruments for actual spending, to estimate whether the lowest spending districts, the chief beneficiaries, witnessed any additional improvements. The results based on tests administered by the state show significant test score gains by these districts. These gains are robust to alternative control groups, and hold good when I look at the experience of two neighboring states, Indiana and Ohio. However, there is not much evidence of any improved performance by these lowest spending districts in college preparation test (ACT). There is also not much relative improvement, particularly at the lower half of the distribution, in nationally-conducted NAEP (National Assessment of Educational Progress) tests. These findings have significant policy implications. First, these show that state legislatures can initiate and implement a comprehensive school finance reform, even one which is largely redistributive in nature. Second, it is interesting to note the significant academic progress registered by the lowest spending districts in the post-reform period. While not ruling out substantial inefficiencies in the utilization of additional funds, it seems that a lack of resources was partially responsible in holding down achievement in some districts. However, and third, the gains in student achievement look relatively modest, particularly when compared to the large increases in spending. It seems that even complete equalization of school resources across districts will not be enough to ensure complete equality in school outcome measures. One may have to look beyond school financing to issues of school effort and favorable peer group quality.