School Spending Raises Property Values

Summary of working paper 9054
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A $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure.

An enduring question in education policy is whether spending additional public resources improves schools. Those who argue against strategies to increase public spending argue that current spending levels are too high and that public schools spend their current revenues inefficiently.

In Using Market Valuation to Assess Public School Spending (NBER Working Paper No. 9054), co-authors Lisa Barrow and Cecilia Rouse first examine whether an additional dollar of public money spent on schools increases residential property values. If it does, then consumers presumably value the additional spending because it increases school quality. Further, the authors evaluate whether the current level of spending is too high.

School expenditures are financed with both state and local contributions. Each state has a financing formula for determining the state aid to each district, and these formulas are revised periodically. The state portion of the contribution often is negatively related to property values because states try to equalize expenditures across rich and poor districts. Thus, it is difficult to assess directly the effects of an increase in state aid on school quality as it may reflect a worsening of other conditions in the local district that also affect school quality. To overcome this difficulty, the authors examine 1980-to-1990 changes in property values resulting from changes in state aid for schools that arise solely from changes in state financing formulas -- they control for an extensive list of district and county characteristics that may also affect property values.

Their results suggest that, overall, a $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure. Further, their results suggest that some of the increase in value reflects lower local tax burdens, but most reflects increases in total per pupil district expenditures. Finally, they conclude that there is no evidence that school districts are overspending, on net.

However, this overall result may mask important differences, because some school districts may operate more efficiently than others. Specifically, the authors note that because households with greater income can afford to consider a wider range of schooling and housing options, school spending in districts with wealthier residents may be more efficient. Similarly, the degree of external competition that a school district faces (from having many neighboring districts) or the district's size may also affect the efficiency of school spending.

To test whether wealthier and more educated school districts spend their revenues more efficiently, the authors categorize school districts by average household income and education level of the adult population, as well as by the degree of competition faced by the district, and the district's size. Although potential district residents on average value additional state revenues, the authors find that "large school districts, and those areas with fewer homeowners and in areas in which residents are poor or less educated" are more likely to overspend.

-- Linda Gorman