Municipal Land Use and the Financial Viability of Schools

Local schools are primarily funded through local property tax revenues, which are tied to property values and the distribution of value ranges within a community. Values, in turn, depend on the mix of lot sizes and building attributes (improvement characteristics), which are affected by zoning. Since lot size restrictions limit the size characteristics of homes (bedrooms, garages, building square footage, etc), it should constrain the number of school age kids emanating from a given homestead and that a school district services. Each home, depending on lot size, should exhibit differential impacts on school district revenues. Similarly, if lot size and the magnitude of other housing characteristics impact on the number of kids emanating from a home, then each home would generate differential costs on the school district. This paper argues that the number of school age kids from a given home is endogenous to lot size. It therefore posits that an optimal lot size exists within a community that would maximize school district revenues, minimize school district costs or optimize the combination of both. A theoretical framework is developed to guide the specification of net revenue functions for school districts. By applying data from a school district in Michigan, net revenue functions are estimated as functions of lot size and other exogenous factors. The result suggests that net revenue is only feasibly optimal at lot sizes below approximately 0.18 acres. One implication is that school districts, which typically do not engage themselves in the process of local land use decision making, might consider the promotion of density and compact development as being in their best interest.