STATEMENT OF DR. MICHAEL KIRST, STANFORD UNIVERSITY

Dr. KIRST. The first point that I wish to make, Congressman, is that a number of us now have been studying the problems of school financing and this committee has heard a lot about the problem. My objective this morning is to talk about some of the solutions and to lay out for the committee the pros and cons of the various possible solutions to the problems.

As you know, there is no perfect solution and each one has some attributes and some drawbacks. I thought it was imporant for the committee to get a view of the alternatives so they can consider them and evaluate them on the merits.

One thing I think is not equivocal, at least not in my mind, that is the need for a new Federal role in using Federal aid to get leverage or provide an incentive for improving State finance systems. In the past, we have ignored the underlying problems of the State finance systems and concentrated on Federal categorical assistance that merely supplements 7 percent of total State and local expenditures. Even now we hear the Nixon administration proposing to spend $300 more for disadvantaged pupils, but what if a low wealth district with many minority children taxes itself hard and raised $600, while the wealthy neighborhood raised $1,200. The $300 in additional Federal compensatory funds now results in closing the gap to $900 for the poor districts and $1,200 for the wealthy, yet many additional commentators continue to say that the poor will get more spent on them because of Federal compensatory

aid.

This is my major objection to Federal general aid that leaves an unequal and irrational State financing system undisturbed.

Indeed, large-scale Federal general aid would likely result in only propping up an outmoded financing system that should be scrapped. Consequently, I oppose H.R. 7796 and H.R. 12695. When I read these bills, Congressman, I looked in there for what the incentives or what the plans were to use this Federal money to reorient the State aid systems, and to my distress, I did not see anything. I think it is absolutely crucial that the money be used and be distributed to the States only after they have met certain standards for equity. That is my first general point as far as the plans in these bills.

My second general point is that my own studies have led me to deep understanding of the different traditions of the various States in this country and the fact that the States start from very different points with their financing systems. They are indeed going to make different choices about this finance reform.

Some of the States will want to go to full State assumption and some, I think, will not. We have studied the New England States extensively and they don't care for a lot of State control. I am proposing in this statement some options which would be alternatives to full State funding. I, myself, prefer full State funding, but I would like the States to be able to take their choice as long as they meet certain standards of equity.

My third point is, and a major point, is that you can set up general standards in the Federal aid legislation, but need not require all States to assume all aspects of financing education or to eliminate the property tax.

As you know, the plan the administration has asked the Advisory Commission on Intergovernmental Relations to study would force als the States to full State assumption and would end the use of residential property tax for education.

What I am saying is that under a plan I am proposing, the Federa! Government would monitor expenditure disparities caused by differ ences in school district wealth rather than differences caused by local choice under the district power equalizing scheme I will discuss late. If the wealth disparities become too large, Federal general aid would be reduced or eliminated.

Such a scheme would permit the States to choose either full State assumption, which would force all of the school costs to be paid by the State and all revenue to be raised by the State, or district power equaliz ing, which allows local choice on the amount of tax rates and expendi tures that the school districts choose to pay and still qualify for a maximum amount of Federal aid.

Now, that is the gist of the statement, Mr. Chairman, and in support of that I guess I would like to go back and start through on pag 2 and talk about the two alternatives, district power equalizing ani full State assumption, stressing and pointing out in the statement that each of these plans has its pros and cons. I think each alternative will appeal to different States and some will choose more of one an some more of the other. What I am saying is you can set up legisla tion that will allow States to do this and you would get out of the bind of having to force all States to provide full State assumption in order to receive Federal aid.

If you would like, I will proceed with a description of those two remedies.

Mr. PUCINSKI. Yes.

Dr. KIRST. There are two primary routes the States can use to conform to recent court decisions and remedy the major problem a prior subcommittee witness stressed. These are major problems of inequity and rationality, inelasticity and insolvency of the present State and local educational finance systems.

The most complex alternative is something called "district power equalizing" and the other is labeled "full State assumption." These two plans have different assumptions of what is best for our citizens. They involve, it seems to me, different value judgments that would be appealing, as I said, to one State more than the other. Some States will be more comfortable with the full State assumption and others. I think, will prefer some element of district power equalizing. Let me review the plans briefly and in their pure form and evaluate them. District power equalizing assures equal school revenues for equal local district tax efforts and also retains the local school district as the basic decisionmaking unit for determining the tax rates.

The State may provide expenditure and tax rate minimums and maximums, but the specific points within such boundaries are at the discretion of the local school boards and/or voters.

The typical district power equalizing proposal is premised upon retention of some amount of property tax.

The primary feature of a DPE plan is that the State guarantees a local district any expenditure per pupil it selects from a tax rate (pe $100 of assessed valuation). Obviously, State funds must supplement

the local tax base of poor school districts. For wealthy districts, revenues generated in excess of the scheduled per pupil expenditure level revert to the State. "Recaptured" funds are then free to be redistributed by the State to "poor districts." A schedule might look like the following:

Tax rate per $100 of assessed valuation:

$2

3

4

Guaranteed yield per pupil-regardless of local property base

$725

850

975

1, 100

1, 125

5

6

As you can see, a local school district would pick the tax rate it wants. This might vary. Some would want higher tax rates and some would want lower rates. They would get a guaranteed amount from the State no matter what that tax rate yields. Some low income suburbs outside of say Chicago, a $3 tax rate might bring only $600, not $850 which is the guaranteed State yield, but that district would get $850. A $3 tax rate in another suburb may bring in $1,225 and that district would only get $850. So this would let the districts choose the amount of tax rate they want, but it would equalize the yield they get from the State and it would make them all equal in the power to raise rev

enue.

Mr. JENNINGS. Dr. Kirst, as I understand the district power equalizing concept, as you pointed out regarding a wealthy suburb like Winnetka, what incentive would Winnetka have to increase its tax rate if it does not get dollar for dollar back from the State what is paid the State under the prescribed tax schedule?

Are there any examples in the country where power equalizing has been tried and any evidence showing that a wealthy school district will tax itself higher even though it does not get back the full amount it raises from that taxation?

Dr. KIRST. Let me answer it in two parts. One, it seems to me that people like the populace in Winnetka, Illinois, have a high value on education. I don't think they are likely to cut back their expenditures in education just because some of it is being redistributed to other districts. In other words, I can't see Winnetka choosing a school district expenditure rate of a very low amount just because some of it will be recaptured by the State. I think that the citizens there care probably more about preserving the fine school system they have rather than choosing a low tax rate in order to escape some redistribution of their taxation.

Now, as far as its working anywhere, Professor McLoone may be able to help. There are percentage equalizing schemes in some States and they have worked out this kind of problem, as I understand it, of wealthy districts not choosing high amounts.

Dr. McLOONE. The best example would be the State of Utah where there is one school district that, if it levies the tax rate to qualify for the program, it sends approximately 25 percent of its revenue to the State which redistributes the revenue to other districts. Redistribution under power equalizing of the type we are talking about takes place. Dr. KIRST. And the wealthy districts choose high tax rates? Dr. McLOONE. Yes. There only happens to be two.

The other kind of thing I think you have to keep in mind with a State like Maryland, regardless of what kind of scheme we have, Montgomery County will approximately pay $16 to the State even if we had full State funding at $10 per pupil, for instance, Montgomery County would pay $16 and get back $10 in terms of its pupils. So under any kind of scheme, the wealthy districts are putting up the money regardless.

I would not see any reason that power equalization should be different than the different kinds of schemes on State funding. The criticism, if it is valid, will apply just as well to the existing scheme. to 100 percent State support or power equalizing. It may be more obvious in power equalizing, but that is the only difference."

Dr. KIRST. Under full State assumption they pay money to other parts of the State as well.

Mr. JENNINGS. Another part of the problem, as I understand it, is that you just have one tax rate schedule which does not consider circumstances such as a large city where they pay a higher tax rate for other services so the city would have to increase its tax rate for education when it already had a high tax rate for other services.

Dr. KIRST. I quite agree. This is discussed later in the statement. This is, I think, a really serious drawback of district power equalizing, that it does not, or it bases the tax rates and wealth on school expenditures only. As I point out later in the statement, in the cities, as we know, the amounts spent on other services such as welfare, police, and fire departments, are much higher. So the cities may look like they have a lot of wealth and low tax rates when you just take the education out of their tax burden and don't consider other municipal service.

Yes; this brings us to the heart of the problem. There is no perfect solution, it seems to me. You are going to have some problems with anything anybody trots out in front of you or suggests. My basic feeling is that probably what has to be done is let the States sort out these kinds of considerations. Now, you could compensate, of course, for that city problem, in district power equalizing, which is very real, by increased compensatory funds on top of the basic State expenditure rate which district power equalizing would yield.

Mr. JENNINGS. That would not compensate for it, though, because you would still have a higher tax rate for education.

Dr. KIRST. In the city?

Mr. JENNINGS. Yes, so you would have the city increasing its education tax rate without a diminution in tax rates for other services, so you could give more money for the education of their children, through compensatory aid, but the people in the cities would still be paying more than before in property taxes for education and more than the suburbs in property taxes for other services.

Dr. KIRST. That is right. I think I personally prefer actual State assumption. If you go, however, to some States that do not have big cities, if you went up to, and I lived in the States of Vermont and New Hampshire, and those States are very antistate control

The State of New Hampshire has funded its schools basically from the State Liquor Board and revenue from Rockingham Race Track and does not like State control or funding and does not have any big cities.

Now, the administration's draft that they asked Advisory Commission on Inter-governmental Relations to study would, in effect, force them to full State assumption. My view is those States will not want it and won't buy it and they have two votes in the Senate. We need a bill at the Federal level which is flexible enough to accommodate the variety and complexity and diversity of the States in this country. So I would, I guess, actually prefer full State assumption. On the other hand, I think we are getting ourselves into traps by saying there is only one solution and we can only permit one option.

Essentially, what I say is we should make sure that the States do not have wide disparities for educational expenditures based on wealth, and they can choose a plan to get them there.

There might be, I guess, intense lobbying at the State level to tend to these city problems. It may or may not be convincing to large city congressmen who look at State legislatures with some fear as to what the result will be for the city.

Under a full State assumption the State collects and distributes all money for financing public schools. There is no discretion for local school districts as to tax rates or amounts spent. Under an FSA plan, a decision must be reached as to what will serve as an "allocation unit" and how much money will be appropriated per such unit. Typically, Average Daily Attendance or Average Daily Enrollment are used but it is possible to use classrooms or teachers as allocation units. A price tag is then affixed to a unit that covers the costs for the schooling of every "normal" child (or classroom or teacher). Since we have no research or cost/effectiveness basis for determining this amount, the price depends on conventional education wisdom, economic reality, and political feasibility.

An alternative way to determine the grant level is to calculate the dollar price of raising the statewide per pupil expenditure rate to, for example, the level of the 60th, 70th, or 90th percentile of all such present expenditures in the State. The State would then "level up” each low wealth district to perhaps the 80th percentile.

Full State assumption is not tied to the property tax base as is district power equalizing. The standard FSA proposal envisions that property tax revenues be retained, at least in the short run, and that they should be supplemented with revenues from the State general fund. The property tax under FSA, however, can be more readily levied on a statewise basis since local option is featured in DPE.

That is a drawback of the district power equalizing scheme. It does tend to keep an element of incentive for property tax in the system, whereas in full State assumption, you can move entirely to other bases.

Let me compare the two plans then and put it somewhat in the framework of the proposal which the administration has now asked the Advisory Commission on Intergovernmental Relations to study.

As you notice, this administration proposal would raise $13 billion in revenue through a value added tax and distribute the proceeds to States for education reasons. On the one hand, the proposal is put on a new value added tax and raise $18 billion, give $5 billion back in income tax credit, and distribute $13 billion to the States for education. In order to receive this money, there would be two major conditions. First, no local property tax could be levied for financing schools;