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Despite the infusion of hundreds of million federal, state and local dollars there still exists a large achievement gap between children from low income and non-poor families. After studying How money matters for schools address the following issues:

  1. Analyze Baker’s research brief on the importance of adequate funding and share your thoughts on equity and equality with regards to students from low-income families and districts.
  2. Does your state education finance plan allocate additional funds to districts and schools who service students from low-income communities?
  3. You are a principal of a low-performing school in a poverty-stricken community. At your July budget conference, you received an unexpected $250,000.00 from your district’s discretionary budget. How would you spend these additional funds to ensure improved student achievement and a significant return on the district’s investment?

APA format 

2 references

DECEMBER 2017

How Money Matters
for Schools

Bruce D. Baker

S C H O O L F I N A N C E S E R I E S

How Money Matters
for Schools
Bruce D. Baker

Acknowledgments

Thank you to LPI colleagues Titilayo Tinubu Ali, Peter Cookson, and Linda Darling-Hammond for
assistance in developing this document. Thanks also to Bulletproof Services, Gretchen Wright,
and Aaron Reeves for their editing and design contributions to this project, and Lisa Gonzales for
overseeing the editorial and production process.

This report draws in part upon my earlier report Does money matter in education? I thank the
Shanker Institute for its support of that report and Matt DiCarlo for his research assistance.

With LPI, I also would like to acknowledge the generous support of the Raikes Foundation for this
work and the series of reports as a whole, along with general operating support from the Ford
Foundation, the William and Flora Hewlett Foundation, and the Sandler Foundation. This work does
not necessarily represent the views of these funders.

External Reviewer
This report benefited from the insights and expertise of Rick Simpson, Vice Chair, California
Commission on Judicial Performance, and the former Education Adviser to nine Speakers of the
California Assembly. We thank him for the care and attention he gave the report. Any remaining
shortcomings are my own.

The appropriate citation for this report is: Baker, B. D. (2017). How money matters for schools. Palo
Alto, CA: Learning Policy Institute.

This report can be found online at https://learningpolicyinstitute.org/product/
how-money-matters-schools.

This work is licensed under the Creative Commons Attribution—Noncommercial 4.0 International
License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc/4.0/.

LE ARNING POLICY INSTITUTE | HOW MONE Y MAT TERS FOR SCHOOLS iv

Table of Contents

Acknowledgments………………………………………………………………………………………………………………….. iv

Preface …………………………………………………………………………………………………………………………………… vi

Abstract…………………………………………………………………………………………………………………………………. vii

Introduction ……………………………………………………………………………………………………………………………..1

Linking Money to Real Resources…………………………………………………………………………………………….2

The Goals of State School Finance Formulas ……………………………………………………………………..3

What About the Arguments That “Money Doesn’t Matter”? ………………………………………………….4

Studies of the Outcomes of School Finance Reforms ………………………………………………………………6

National Longitudinal Studies of School Finance Reforms……………………………………………………6

State-Level Studies of School Finance Reforms ………………………………………………………………….7

The Costs of Common Outcomes ………………………………………………………………………………….. 10

How Money Is Used Matters………………………………………………………………………………………………….. 11

Conclusions ………………………………………………………………………………………………………………………….. 14

Endnotes ………………………………………………………………………………………………………………………………. 16

About the Author ………………………………………………………………………………………………………………….. 21

List of Tables and Figures
Figure 1: Conceptual Map of the Relationship of Schooling Resources to Children’s

Measurable School Achievement Outcomes ………………………………………………………….2
Figure 2: Revenue of High-Poverty Districts in Massachusetts 1995–2015…………………………..8
Figure 3: Progressiveness of Funding in Massachusetts 1995–2015 …………………………………..9

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Preface

Schools in the United States are among the most inequitably funded of any in the industrialized
world, with those serving the most affluent students often much better resourced than those
serving the poorest. These inequities in funding create dramatically different educational
opportunities for children and contribute to differences in access to key educational resources—
expert teachers, personalized attention, high-quality curriculum, good educational materials, and
plentiful information resources—that support learning at home and at school.

In order to remedy these disparities and make the best use of public education resources, state and
district leaders need to understand the costs, benefits, and effectiveness of strategies intended to
address students’ learning needs. Research on school resource adequacy and equity can help inform
lawmakers about the wise and efficient use of resources to ensure that all schools are equipped to
advance deeper learning and student well-being.

To assist policymakers as they seek to address these educational investment issues, the Learning
Policy Institute (LPI) is publishing a series of reports, written by members of LPI’s School Finance
Researcher Network, on topics that aim to increase policymakers’ access to research and data
related to equitable school resources that are wisely used.

The first of these reports is Bruce Baker’s How money matters for schools. The report reviews a
substantial body of research to answer three questions: (1) Does money matter? (2) Do schooling
resources that cost money matter? and (3) Do state school finance reforms matter? The answer to
all three questions is yes.

After a thorough examination of the research, Baker summarizes: “An increasing body of rigorous
empirical evidence suggests that substantive and sustained state school finance reforms matter for
improving both the level and distribution of short-term and long-term student outcomes.”

As Baker points out, a society that invests in its children reaps real and lasting economic and
social benefits.

In the coming months, LPI will publish additional reports on topics such as finance equity and
democracy, promising practices at the state and regional levels, the cost-effectiveness and broader
social benefits of equitable and adequate funding, and how states and localities can address the
out-of-school factors that influence student achievement through investments in community
school models.

In combination, the series will provide a strong evidence-based tool kit for policymakers and
legislators and a road map for understanding that resource equity is more than an aspiration: It can
become a reality, with policies based on evidence and practices informed by the best research.

Linda Darling-Hammond
September 6, 2017

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Abstract

For decades, some politicians and pundits have argued that “money does not make a difference”
for school outcomes. While it is certainly possible to spend money poorly, this viewpoint is
strongly contradicted by a large body of evidence from rigorous empirical research. A thorough
review of research on the role of money in determining school quality leads to the following three
conclusions: (1) on balance, in direct tests of the relationship between financial resources and
student outcomes, money matters; (2) schooling resources that cost money are positively associated
with student outcomes; and (3) sustained improvements to the level and distribution of funding
across local public school districts lead to improvements in the level and distribution of student
outcomes. While money alone is not the answer to all educational ills, more equitable and adequate
allocation of financial inputs to schooling provides a necessary underlying condition for improving
the equity and adequacy of outcomes. This document presents a brief explanation of the goal of
school finance reforms, followed by summaries of the main bodies of evidence that illustrate how
equitable and adequate school funding improves student outcomes. It closes with information
about how certain kinds of specific investments can help to achieve these outcomes.

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Introduction

For decades, some politicians and pundits have argued that “money does not make a difference” for
school outcomes.1 While it is certainly possible to spend money poorly, this viewpoint is strongly
contradicted by a large body of evidence from rigorous empirical research. A thorough review of
research on the role of money in determining school quality leads to the following conclusions:

Does money matter? Yes. On average, aggregate per-pupil spending is positively
associated with improved student outcomes. The size of this effect is larger in some
studies than in others, and, in some cases, additional funding appears to matter
more for some students than for others—in particular students from low-income
families who have access to fewer resources outside of school. Clearly, money must
be spent wisely to yield benefits. But, on balance, in direct tests of the relationship
between financial resources and student outcomes, money matters.

Do schooling resources that cost money matter? Yes. Schooling resources that
cost money are positively associated with student outcomes. These include smaller
class sizes, additional instructional supports, early childhood programs,2 and more
competitive teacher compensation (permitting schools and districts to recruit and
retain a higher quality teacher workforce). Again, in some cases, these resources
matter more for some students and in some contexts. On the whole, however,
educational resources that cost money benefit students, and there is scarce
evidence that one can gain stronger outcomes without these resources.

Do state school finance reforms that provide more equitable and adequate
funding matter? Yes. Sustained improvements in the level and distribution of
funding across local public school districts lead to improvements in the level and
distribution of student outcomes. While money alone may not be the answer,
more equitable and adequate allocation of financial inputs to schooling provides a
necessary underlying condition for improving the equity and adequacy of outcomes.
The available evidence suggests that appropriate combinations of more adequate
funding with more accountability for its use may be most promising.3

This document presents a brief explanation of the goal of school finance reforms, followed by
summaries of the main bodies of evidence that illustrate how equitable and adequate school
funding improves student outcomes. It closes with information about how certain types of specific
investments matter—especially when it comes to achieving these outcomes. (For a longer and more
complete version of this report, see Does money matter in education?4)

LE ARNING POLICY INSTITUTE | HOW MONE Y MAT TERS FOR SCHOOLS 1

Linking Money to Real Resources

Figure 1 provides a simple model of the relationship of schooling resources to children’s school
achievement. First, the fiscal capacity of states—their wealth and income—does affect their ability
to finance public education systems. But the effort put forth in state and local tax policy plays an
equal role.

The amount of state and local revenue raised drives the majority of current spending by local
public school districts, because federal aid constitutes such a relatively small share—only about
9%, on average. Furthermore, the amount of money a district is able to spend on current operations
determines the staffing ratios, class sizes, and wages a local public school district is able to pay.
Indeed, there are trade-offs to be made between staffing ratios and wage levels: If all else is equal,
the more teachers are hired, the less each can be paid. Finally, a sizable body of research has
illustrated the connection between staffing qualities and quantities and student outcomes.

Figure 1
Conceptual Map of the Relationship of Schooling Resources to Children’s
Measurable School Achievement Outcomes

State & Local
Wealth & Income

State & Local
Fiscal Effort

Student
Outcomes

State & Local
Revenue

Staffing Quantities
(Pupil-to-Teacher Ratios

& Class Size)

Staffing Quality
(Competitive Wage)

Current
Operating

Expenditure
Trade-offs

The connections laid out in this model seem rather obvious. The amount a district raises dictates
how much it can spend. How much you spend in a labor-intensive industry dictates how many
individuals you can employ, the wage you can pay them, and in turn the quality of individuals you
can recruit and retain.

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The Goals of State School Finance Formulas
Modern state school finance formulas—aid distribution formulas—typically strive to achieve two
simultaneous objectives:

1. Accounting for differences in the costs of achieving equal educational opportunity
across schools and districts.

2. Accounting for differences in the ability of local public school districts to cover
those costs.

In most cases, local district ability to raise revenues is a function of both local taxable property
wealth and the incomes of local property owners, thus their ability to pay taxes on their properties.
Without sufficient targeted investments from the state, then, school revenues vary by the wealth of
those who live in different districts—with wealthier districts having more money to spend than poor
ones. States try to offset these inequalities, although they succeed to varying degrees depending
on how much money they put into the system and how they allocate it across functions (e.g.,
foundation aid, transportation costs, facilities) and different districts.

A typical state school finance formula implies that some basic funding level should be sufficient
to produce a given level of student outcomes in an average school district. Logically, then, if one
wishes to produce a higher level of outcomes, the foundation level should be increased. It costs
more to achieve higher outcomes, and the foundation level in a state school finance formula is the
tool used for determining the overall level of support to be provided.

As a rule of thumb, for a state school finance system to provide equal educational opportunity,
that system must provide sufficiently higher resources to ensure adequacy and equity in higher
need (e.g., higher poverty) settings than in lower need settings. Such a system is called progressive.
By contrast, many state school finance systems barely achieve “flat” funding between high- and
low-need settings, and still others remain regressive, spending more money on the education of
more affluent students than on those who have greater needs.

To secure the same quality of education across districts, resource levels may need to be adjusted to
permit districts in different parts of a state to recruit and retain teachers of comparable quality; that
is, the wages paid to teachers affect who will be willing to work in any given school. In other words,
teacher wages affect teacher quality, and in turn, they affect school quality and student outcomes.
This is plain common sense, and this teacher wage effect operates at two levels.

1. In general, teacher wages must be sufficiently competitive with other career
opportunities for similarly educated individuals. The overall competitiveness
of teacher wages affects the overall academic quality of those who choose to
enter teaching.

2. The relative wages for teachers across local public school districts determine the
distribution of teaching quality. Districts with more favorable working conditions
can pay a lower wage and attract the same teacher.

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Finally, adjusting funding based on student need in state school finance formulas assumes that the
additional resources can be leveraged to improve outcomes for students from low-income families
or students with limited English language proficiency. First, note that some share of the additional
resources is needed in higher poverty settings simply to provide for “real resource” equity—or to
pay the wage premium for doing the more complicated job, under less desirable working conditions.
Second, resource-intensive strategies such as reduced class sizes in the early grades, high-
quality early childhood programs, intensive tutoring, and extended learning time programs may
significantly improve outcomes of students from low-income families. And these strategies all come
with significant additional costs.

What About the Arguments That “Money Doesn’t Matter”?
There has been a long-standing debate about whether increased resources actually improve student
achievement. The debate began in the 1960s with the influential Coleman report (1966), which
found a strong effect of student backgrounds on student achievement. Although the report did not
conclude that resources don’t matter, it was widely interpreted as suggesting that resources have
trivial effects on outcomes in comparison to student socioeconomic status.

After the release of the Coleman report, numerous scholars conducted studies to probe these
findings further. In 1986, 20 years after Coleman, economist Eric Hanushek published a paper
looking at these studies, which became one of the most widely cited sources for the claim that
money doesn’t matter.5 Hanushek tallied the findings of those studies. Some found a positive
relationship between spending and student outcomes, while others did not. He came to the
following conclusion: “There appears to be no strong or systematic relationship between school
expenditures and student performance.”6

This finding echoed for many years through the halls of state and federal courthouses, where school
funding is deliberated. However, many of the studies originally reviewed by Hanushek, published
in the 1960s and 1970s, had serious methodological flaws and would no longer pass muster, given
advances in data quality and statistical techniques.

The most direct rebuttal to Hanushek’s conclusion came in a series of re-analyses by University
of Chicago scholars Rob Greenwald, Larry Hedges, and Richard Laine,7 who gathered the studies
originally cited by Hanushek in 1986 and conducted meta-analyses of those from the U.S. that met
research quality parameters such as peer review and use of proper statistical controls. They found
that, among statistically significant findings, the vast majority of study findings were positive (11:1)
as were most of the non-significant findings. They concluded:

“Global resource variables such as PPE [per-pupil expenditures] show strong and
consistent relations with achievement. In addition, resource variables that attempt
to describe the quality of teachers (teacher ability, teacher education, and teacher
experience) show very strong relations with student achievement.”

Digging deeper and exploring the relationship between a variety of resource and student outcome
measures, Greenwald, Hedges and Laine came to the conclusion that “a broad range of resources
were positively related to student outcomes, with ‘effect sizes’ large enough to suggest that moderate
increases in spending may be associated with significant increases in achievement.”8

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Other researchers looked with greater precision
at the measures of financial inputs to schooling
that are most strongly associated with variations
in student outcomes. For example, Harold
Wenglinsky found that “per-pupil expenditures
for instruction and the administration of school
districts are associated with achievement
because both result in reduced class size, which
raises achievement.”9 Ron Ferguson found that

Recent studies have invariably
found a positive, statistically
signifcant relationship between
student achievement gains and
fnancial inputs.

investments in teacher quality were particularly
effective in raising achievement.10

More recent studies have added improvements, such as adjusting for regional cost differences11

and making other statistical corrections to measure inputs more precisely.12 These studies have
invariably found a positive, statistically significant relationship between student achievement gains
and financial inputs.13

To summarize this discussion of whether resources matter, it is important to recognize that
Hanushek’s original conclusion from 1986 was merely a statement of “uncertainty” about whether
a consistent relationship exists between spending and student outcomes—one that is big enough
to be important. His conclusion, based on many studies with methodological flaws, was that the
relationship was inconsistent. By the early 2000s, the cloud of uncertainty had largely lifted with
the more rigorous studies that followed, conducted by many finance scholars using detailed datasets
to examine more finely grained relationships between money and student outcomes. We review
some of these studies showing how money matters.

Summing It Up

Since the Coleman report, some have said that “money doesn’t matter” because of the strong
effect of student backgrounds on student achievement, plus early studies with inconsistent results.
However, this position is no longer well grounded because:

• Older studies were methodologically limited.

• New data analyses using advances in data quality and statistical techniques consistently
show that money makes a difference.

∘ National studies in the early 2000s conducted by fnance scholars using detailed
datasets found positive relationships between school funding reforms that increased
spending on students from low-income families and student outcomes.

∘ Similar fndings pertain to reforms in Kansas, Massachusetts, Michigan, and Vermont
(see pp. 6–10 for more details).

∘ Often, moderate increases in spending are associated with signifcant increases in
achievement and graduation rates.

∘ Investments in teacher quality (teacher ability, teacher education, and teacher
experience) are particularly effective in raising achievement.

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Studies of the Outcomes of School Finance Reforms

Investments in more adequate and equitable approaches to school funding have been delayed for
some time by both revenue challenges and the widely held view that “money doesn’t matter” when
it comes to educational outcomes. The question to be answered, however, is an empirical one:
What happens when states adjust their school funding systems to take pupils’ needs into greater
account? We now have two kinds of studies that answer this question: large-scale, cross-state
studies that look at the effects of reforms nationwide, and state-specific studies that look at changes
in outcomes over time as a function of school funding reforms. Both show positive outcomes for
students of more progressive school funding changes.

National Longitudinal Studies of School Finance Reforms
An increasing body of rigorous evidence, including multistate analyses over time, suggests that
substantive and sustained state school finance reforms are important for improving both the
level and distribution of short-term and long-term student outcomes. One such study found
“evidence that equalization of spending levels leads to a narrowing of test score outcomes across
family background groups.”14

Access to increased longitudinal data on both local district level school finances and student
outcomes has enabled a new wave of research on the topic.15 One such analysis evaluated the long-
term effects on high school graduation rates and eventual adult income of substantial infusions of
funding to local public school districts through school finance reforms of the 1970s and 1980s.16

This study linked the presence of reforms to changes in the distribution of dollars and other
resources across schools and children, and the outcome effects of those changes. The researchers
found that “the estimated effect of a 21.7% increase in per-pupil spending throughout all 12
school-age years for children from low-income families is large enough to eliminate the education
attainment gap between children from low-income and non-poor families.” This size investment
led to a 20-percentage-point increase in graduation rates and, on average, an additional year of
educational attainment for these children.

Even lower levels of investment made a
sizable difference. The researchers found that
“increasing per-pupil spending by 10% in all 12
school-age years increases the probability of
high school graduation by 7 percentage points
for all students, by roughly 10 percentage
points for low-income children, and by 2.5
percentage points for non-poor children.” They
also observed positive effects on adult wages,
with a 9.6% increase in adult hourly wages, and
a substantial decrease in adult poverty rates
resulting from this size investment.17

“A 21.7% increase in per-pupil
spending throughout all 12
school-age years for children
from low-income families is
large enough to eliminate the
education attainment gap
between children from low-
income and non-poor families.”

A recent study evaluated the influence of adequacy-oriented school funding reforms during
the 1990s and 2000s.18 Using data from the National Assessment of Educational Progress, the
researchers found that “reforms cause gradual increases in the relative achievement of students

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in low-income school districts, consistent with the goal of improving educational opportunity for
these students. The implied effect of school resources on educational achievement is large.”19

Another national longitudinal analysis found
that states with greater overall investment in
education resulting in more intensive staffing
per pupil tend to have higher outcomes for
children from low-income families, higher
performance in schools serving children from
low-income families, and smaller disparities
between schools serving children from low-
income families and schools serving more
advantaged populations.20

And most recently, a study found that there is a
strong relationship between state school finance
reforms and graduation rates. Seven years after
the reforms, the poorest districts showed an
average 12% increase in per-pupil spending and
increases in graduation rates of between 6 and
12 percentage points.21

States with greater overall
investment in education resulting
in more intensive staffng per pupil
tend to have higher outcomes
for children from low-income
families, higher performance in
schools serving children from
low-income families, and smaller
disparities between schools
serving children from low-income
families and schools serving
more advantaged populations.

Collectively, these studies provide compelling
new evidence of the large-scale achievement and economic benefits of substantive and sustained
additional funding for schools serving higher-poverty student populations.

State-Level Studies of School Finance Reforms
Over the years, several state-specific studies of school finance reforms have validated the positive
influence of those reforms on a variety of student outcomes. Massachusetts and Michigan reforms
of the 1990s are among the most studied. Both states implemented significant reforms to their
school finance systems in the early to mid-1990s, and maintained them for a decade or more,
although Massachusetts reforms have waned over the past decade and Michigan reforms have
largely collapsed.22 Even the …