School Finance Systems and Their Responsiveness to Performance Pressures: A Case Study of North Carolina

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April 2007
Janet S. Hansen, Gina S. Ikemoto, Julie Marsh, Heather Barney

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SFRP Working Paper 15

New accountability systems require that states and districts accomplish something never accomplished before—ensuring that all students meet state standards. To improve student performance to the requisite levels, “business as usual” approaches to public education are likely to be insufficient. Along with other elements of education policy such as standards, accountability, curriculum, and teacher training, school finance must be rethought. To explore how these heightened state and national performance expectations have altered educational resource decisions, the School Finance Redesign Project (SFRP) conducted interviews of state, district, and school leaders in four states, asking these leaders about their efforts to improve student performance and the constraints they face in implementing improvement reforms. This report presents the findings of state, district, and school interviews conducted in the state of North Carolina.

Decisions about funding North Carolina schools were being made in the context of demographic, political, economic, and judicial developments. The population was growing rapidly and becoming more diverse. There were questions about whether the state’s tax system was structurally adequate to keep pace with the state’s growing education needs. A more competitive political environment appeared to exert a restraining influence on the adoption of new initiatives, especially costly ones. Finally, policy makers had been operating for nearly a decade under the shadow of a 1994 court case challenging the constitutionality of the state’s provision of education. Initially centered on funding, the case came to focus as much on the quality of educational services, especially at the high school level. In spite of a state Supreme Court ruling against the state, the school finance system remained largely unchanged. The state had embraced a number of education reforms over the years aimed at improving public education and better preparing children for school, but these did not alter the state’s basic resource allocation mechanisms.

In North Carolina, funding for public education comes more heavily from the state level than in most other states. An unusual mechanism—position allotments—is used to transfer two-thirds of state education funding to districts. This mechanism has two key effects: the state plays a large role in determining staff composition and a financial advantage is given to districts employing more experienced and higher-credentialed teachers, since the state pays the actual salaries of those occupying state-funded positions.

Our interviews at the local level indicate that all case study districts were aware of the need to improve student performance and were able to reference a broad range of reforms and innovations they were pursing to meet new objectives. Many of these reforms and innovations involved using resources in new ways, such as:

• focusing additional resources on high-need schools;
• providing bonuses or other incentives to attract teachers and encourage them to teach in hard-to-staff schools;
• becoming more oriented to data use in decisionmaking; and
• adopting other new approaches to governance and management designed to improve the effectiveness of resource decisions.

The presence and intensity of such reforms, however, varied among the study districts. In no district did reforms involve fundamental changes in (rather than add-ons to) traditional resource allocation mechanisms such as the single-salary schedule for paying teachers, the staff-based model of allocating resources to schools, or the centralization of major resource allocation decisionmaking in the district office.

District- and school-level personnel gave limited and district-specific answers to questions about factors enabling them to use resources differently. The main factors mentioned were flexibility and support, illustrated by a reduction in categorical state programs and a willingness of central office administrators to support individual school needs and decisions.

There was more consistency in responses across the study districts to questions about factors constraining changes in resource use. “State interference” was frequently cited. Examples included a new state mandate about when the school year must start and end and the specificity of position allotments provided by the state. Likewise, local personnel felt constrained by state and federal strings on resource use. The position-allotment system, state rules on class sizes, and various categorical funding programs were perceived as leaving little room for creative resource use. Although state policymakers argued that there was actually more flexibility in state rules than local officials often realized, the history of strong state involvement in resource allocation decisions appeared to have created a culture of rule-following that was sometimes difficult to overcome at the local level. Finally, the fact that school districts in North Carolina did not have independent taxing authority but were dependent on county commissions for local funding added another layer of decisionmaking to an already multilayered education finance system. These factors were mentioned by local officials more prominently than funding levels in attempting to explain what kept them from deploying resources as they thought best to meet their students’ needs.

At the time of our study, both political and economic considerations seemed to encourage a “status quo” orientation of state policymakers toward their school finance system. The basic position-allotment mechanism was described by state officials as “so much a part of the fiber of the state” that it was left unquestioned. Legislators were said to perceive differentiated pay as “radioactive” because of opposition from teachers. Increases in state categorical funding for at-risk students had been hard to come by. Business involvement had withered. Helping to explain the absence of champions for finance reform was a perceived absence of compelling reform strategies or, as one interviewee put it, “new models to chew on.” North Carolina policymakers found themselves up against both analytical and political difficulties in attempting to answer the difficult question of how to provide a sound basic education and how to design a school finance system to accomplish this objective.

Our findings shed light on the problems that ground-level administrators and policymakers face in implementing educational change within the current finance system and illustrate why progress is slow, despite well-intentioned efforts. We hope that the findings of this and other SFRP reports will encourage policymakers, practitioners, and the public to overcome historical precedents, politics, and resistance to change in order to create an educational system that truly makes student achievement the ultimate goal.