A PUBLICATION OF THE kENTUCKY LONG-TERM POLICY RESEARCH CENTER VOL. 10 NO. 1 2003

By Dennis Jones

After almost a decade of good economic conditions and strongrevenue growth, most states entered fiscal year 2003 facingsharply reduced revenues, and are now struggling to constrainexpenditures. Unfortunately, this situation is unlikely to changeany time soon, according to projections developed for theNational Center for Higher EducationManagement Systems by DonaldBoyd of the Rockefeller Institute onGovernment. Even if statesexperience normal economic growthover the next eight years, all but ahandful of states will find itimpossible, given their existing taxpolicies, to continue funding theircurrent level of public services.

Maintaining funding for the widerange of existing state services willplace enormous pressure on statelegislatures to continue the recentpractice of sharply reining in, if notreducing, their appropriations tohigher education. This trend is in starkcontrast to state actions during muchof the 1990s, when most statessubstantially increased their supportfor higher education. This boom-and-bust cycle has become a traditionalstate pattern of treating colleges anduniversities disproportionately wellduring prosperous timesanddisproportionately poorly in tightbudgetary circumstances.

State actions during the good economic times of the ninetiesare likely to exacerbate the fiscal challenges that lie aheadparticularly for higher education. This is because, during thestrong fiscal conditions:

S T A T E S H O R T FA L L S P R O J E C T E D T H R O U G H O U T T H E D E C A D EHigher Ed BudgHigher Ed BudgHigher Ed BudgHigher Ed BudgHigher Ed Budget L iket L iket L iket L iket L ikelelelelely to Fy to Fy to Fy to Fy to Feel Cont ineel Cont ineel Cont ineel Cont ineel Cont inued Squeeued Squeeued Squeeued Squeeued Squee zzzzzeeeee

1. States funded popular new programs that will now competewith higher education for funding in both good times and bad;and

2. Many states reduced tax rates, and many did so in waysthat will require explicit action to increase them again whichlawmakers are very reluctant to do.

Further, due to demographic andeconomic factors in most states, theclaims on the public purse will begreater for other programs than forhigher educationcontinuing thetrend that results in colleges anduniversities getting a consistentlysmaller slice of the state appropriationspie.

If economic growth is slower thannormal, if states continue to cut taxes,or if states increase spending in areasoutside of higher education, then theoutlook for support of public highereducation will be even worse.

Fiscal Outlook fFiscal Outlook fFiscal Outlook fFiscal Outlook fFiscal Outlook for Staor Staor Staor Staor Statestestestestes

The analysis by the RockefellerInstitute suggests that even if stateand local governments close theircurrent budget gaps with recurringactions rather than gimmicks thatprovide only temporary relief, moststates will continue to face difficultyfinancing current services throughexisting revenue structures; they will

not have resources for real increases in spending. This wouldmean either:

Mr. Jones is the President of the National Center for Higher EducationManagement Systems.

I n s i d eDo Resources Produce Results? ..................................6Scanning Kentucky ........................................................................................................................................................................................................................................................................................................................................................................ 10

I N B R I E F . . .I N B R I E F . . .I N B R I E F . . .I N B R I E F . . .I N B R I E F . . .Primary FindingPrimary FindingPrimary FindingPrimary FindingPrimary FindingStates, and higher education in particular, arelikely to face very tight budget conditions forthe next decade.

Other KOther KOther KOther KOther Keeeeey Findingsy Findingsy Findingsy Findingsy FindingsAll but a handful of states will find it impos-sible to maintain current levels of public ser-vices with their existing tax structures. Just tomaintain current services, state spending forhigher education would have to increase fasterthan state spending in other areas.

About About About About About TTTTThesehesehesehesehese PrPrPrPrProjectionsojectionsojectionsojectionsojectionsThese projections were developed for the Na-tional Center for Higher Education Manage-ment Systems by the Rockefeller Institute onGovernment. The full report, as well as moredetailed state-by-state data, can be obtained at

www.higheredinfo.org.These projections also build upon an earlierstudy by Harold Hovey called State Spendingfor Higher Education in the Next Decade: TheBattle to Sustain Current Support, available at

www.highereducation.org

Page 2 Foresight Vol. 10 No. 1 2003

Mary Lassiter, ChairPaul B.Cook, Vice Chair

EXECUTIVE BRANCHEd Ford; Diane Hancock; Donna B. Moloney

LEGISLATIVE BRANCHSen. Walter Blevins; Sen. Lindy Casebier;Sen. Alice Forgy Kerr; Rep. Steve Nunn

AT-LARGE MEMBERSRon Carson; Daniel Hall; Jennifer M. Headdy; Sheila Crist Kruzner;

Penny Miller; Robert Sexton; Brian Van Horn

EXECUTIVE DIRECTORMichael T. Childress

Editor: Michal Smith-MelloSCAN COORDINATOR: Billie M. Sebastian

LAYOUT: Suzanne King

Printed with state funds. Available in alternative formats upon request.

111 St. James Court, Frankfort, Kentucky 40601-8486Phone: 502-564-2851 or 800-853-2851

Fax: 502-564-1412 or 800-383-1412E-mail: info@kltprc.net

www.kltprc.net

B O A R D O F D I R E C T O R S

KENTUCKYLONG-TERM POLICY RESEARCH CENTER

TABLE 1

Eight years from now, given a return to normal (thatis, better) economic conditions:• Which states have a structural fiscal surplus?• Which states have a structural fiscal shortfall?• How big is the surplus or shortfall, as a

percentage of revenues?

States with Surplus Surplus as a % of Revenues

Vermont 3.1North Dakota 2.2Maine 1.3New Jersey 0.6Delaware 0.2

No Surplus or ShortfallSurplus /Shortfall as a % of Revenues

Wisconsin 0.0

States with Shortfall Shortfall as a % of Revenues

Kansas -0.3Montana -0.4Maryland -0.5New Hampshire -0.6Arizona -0.7Massachusetts -0.8Utah -0.8Oklahoma -1.3Oregon -1.3Nebraska -1.4Ohio -1.4Michigan -1.7South Dakota -1.7Minnesota -1.9Rhode Island -1.9Colorado -2.3Alaska -2.4California -2.5Connecticut -2.9Pennsylvania -2.9West Virginia -2.9Virginia -3.0Georgia -3.2U.S. Average -3.4Kentucky -3.4Arkansas -3.5Hawaii -3.6New Mexico -3.6Iowa -3.7New York -3.8Illinois -4.2Missouri -4.7Washington -4.9Idaho -5.0Indiana -5.2North Carolina -5.6Florida -5.7Texas -5.7South Carolina -6.3Wyoming -7.8Mississippi -8.6Louisiana -8.8Alabama -9.2Nevada -9.2Tennessee -9.7

Source: Donald Boyd, State Spending for Higher Education in the ComingDecade (Boulder, Co: NCHEMS-2002).

State residents would have to scale back their appetite forpublic services. This would be a reversal of a long-term trend;each of the past five decades has witnessed significant increasesin real per-capita expenditures by state and local governments.

or State residents would have to accept tax increases to financenew growth. Support for this option likewise appears problem-atic.

These findings are based on projections, over the next eightyears, of the revenues and expenditures that would be requiredin each state (1) to maintain current public service levels(2) given the current tax structures and (3) given conservativeestimates of expenditures, (4) if state economic conditions wereto improve to their average, that is, normal, conditions.

Based on these projections, five states face a structural sur-plus by year eight (see Table 1). Forty-four states face a struc-tural shortfall. Twelve states face shortfalls of 5 percent or more.These projected shortfalls are smaller than the crisis-inducedbudget gaps that many states face today. They suggest, how-ever, that state and local governments will continue to face fis-cal stress even after their economies strengthen.

The primary reasons for these continuing fiscal difficultiesare twofold, one concerning revenues and the other dealingwith spending requirements. First, state and local tax revenuesare unlikely to grow as fast as state economies because: Economic growth is projected to be more balanced than inthe late 1990s, which generated extraordinary surges in capitalgains income. Increases in sales tax revenues are projected to slow signifi-cantly due to (a) continued shifts in consumption from goods

Foresight Vol. 10 No. 1 2003 Page 3Page 3Page 3Page 3Page 3

to lightly taxed services and (b) the inability to collect salestaxes on Internet-related transactions. State revenue dependence on excise taxes is growing, and Growth in these revenues lags behind overall economic growth.

On the expenditure side, many states will need to rapidly in-crease their outlays for Medicaid, the health insurance programfor the poor and medically needy. According to the experts,Medicaid spending is expected to grow by about 10 percent ayear, which will drive up overall spending considerably.

IIIIImmmmmpact pact pact pact pact ooooon n n n n HHHHHigher Educationigher Educationigher Educationigher Educationigher EducationTTTTThe he he he he TTTTT rrrrrendendendendend

During the 1990s, the share of state budgets devoted to highereducation decreased, as Harold Hovey noted in State Spend-ing for Higher Education in the Next Decade: The Battle toSustain Current Support (1999): Over the past decade the per-centage increases in state support for higher education havebeen smaller than the percentage increases in total state bud-gets. . . In other words, higher education isnt competing suc-cessfully with the attentions of other forms of state funding.

Stated another way, higher educations share of the overallpie continues to get smaller, both nationally and in most states.The size of the pie increased significantly in the nineties. Thisprovided additional revenues for higher education, but it maskedthe reality that in most states the share continued to shrink.

TTTTThe Prhe Prhe Prhe Prhe Prospectsospectsospectsospectsospects

These projections suggest that the fiscal prospects for highereducation are not rosy. The pie is no longer expanding; insome states it is shrinking. As higher education receives a smallershare of a smaller piea likely short-term scenariocollegesand universities and the students who enroll in them will faceparticularly difficult financial positions.

Even if state economies were to rebound to normal levels,however, higher education would continue to face strong com-petition for resources from other state-supported programs. Inonly eight states are higher educations requirements expectedto grow more rapidly than the needs of other state and localprograms (see Table 2). The rapidly escalating costs of Medic-aid, more than anything else, explain why total state and localspending is projected to grow faster than spending for highereducation in most states.

WWWWWhahahahahat t t t t WWWWWould Haould Haould Haould Haould Happen Ifppen Ifppen Ifppen Ifppen If . . . . . . . . . . . . . . . ? ? ? ? ?

The data in Table 2 reflect an assumption that services wouldcontinue at current levels (called current servicesfinancing). That is, Tables 1 and 2 present the funding pictureif no real growth in expenditures occurs for any program.

TABLE 2Over the next eight years, just to maintain current levels of allpublic services (given current spending patterns):

• Which states will face greater funding requirementsfrom other services than from higher education?

• Which states will face greater funding requirementsfrom higher education than from other services?

• How much additional % growth in spending isrequired to fund either the other services or highereducation?

States that will face greaterfunding requirements fromhigher education than fromother services*

Extra annual % growth inspending required

for higher educationcompared to all services

Nevada 1.9New Jersey 1.3Virginia 0.6Connecticut 0.4Arizona 0.3Illinois 0.3Massachusetts 0.3Pennsylvania 0.1

*(given current spending patterns)

States that will face greaterfunding requirements fromother services than from highereducation*

Extra annual % growthin spending required

for all services compared tohigher education

Delaware 0.1Colorado 0.2Maryland 0.2Rhode Island 0.2California 0.3Michigan 0.3North Carolina 0.3Florida 0.6New York 0.6U.S. Average 0.7Alaska 0.7Missouri 0.7New Hampshire 0.7Ohio 0.7Tennessee 0.9Georgia 1.0Indiana 1.0Kentucky 1.1Wisconsin 1.1Texas 1.2South Carolina 1.4Iowa 1.5Minnesota 1.5Washington 1.5Arkansas 1.7Kansas 1.7Oklahoma 1.7Hawaii 1.9Oregon 1.9Alabama 2.0West Virginia 2.0Nebraska 2.1Utah 2.1Idaho 2.2Maine 2.2Mississippi 2.2Montana 2.2Louisiana 2.7Vermont 2.9New Mexico 3.0South Dakota 3.2North Dakota 3.3Wyoming 4.5*(given current spending patterns)

Source: Donald Boyd, State Spending for Higher Education in the ComingDecade (Boulder, Co: NCHEMS-2002).

Projections for the data in Table 2 are based on assumptionsthat:1) State revenue structures in place in fiscal year 2000 willcontinue. The projections incorporate assumptions about howtaxes respond to economic growth and about the impact ofInternet-related transactions on sales tax revenue.2) State and local governments will increase spending basedon inflation, population changes, etc., but will not increaseexpenditures per unit (per student, per Medicaid recipient,etc.) more than inflation.

Page 4Page 4Page 4Page 4Page 4 Foresight Vol. 10 No. 1 2003

Mark your calendar forNovember 18, 2003

Prospects for KentuckysEducational Future

CO N F E R E N C E SP O N S O R E D B Y

CO-SPONSORED BY

Council on Postsecondary Education; Department for Adult Education and Literacy;Education, Arts and Humanities Cabinet; Kentucky Chamber of Commerce; Kentucky Department of Education;

Office of Early Childhood Development; and the Prichard Committee for Academic Excellence

SP E A K E R S I N C L U D E

differ across states. There would be an average shortfall of 6percent, and 49 states would face a shortfall.On the other hand, if states were able to immediately stemsales tax losses related to Internet taxation, the average short-fall would decrease from 3.4 percent (see Table 1) to 2.4 per-cent, and 39 (rather than 44) states would face shortfalls.Finally, if Medicaid growth were slower by one percentagepoint across the board than assumed, then the average stateshortfall would be reduced from 3.4 percent (see Table 1) to2.1 percent; 37 (rather than 44) states would face a shortfall;and the worst shortfall would be in Nevada (8.0 percent).

However, history suggests that this kind of restraint would bemost unusual. It is reasonable to assume, for example, thatconsiderable public support exists for increasing real spendingon K-12 education (for instance, to reduce class sizes, raisestandards, raise requirements for teacher qualifications, andreduce social promotion).

Changing some of the key assumptions about current ser-vices funding would paint a differentand, in most cases, agloomierpicture of the state fiscal environment. For example:

If state and local governments were to increase real per-pupilspending for K-12 education by 1.5 percent annually (ratherthan 0 percent, as assumed in the current projections), then theaverage projected structural fiscal shortfall would increase from3.4 percent (see Table 1) to 6.2 percent; 49 of 50 states wouldface a shortfall; and Tennessee would face the worst shortfall,at 12.4 percent of revenue. If states were to increase real per-pupil spending for both K-12education and higher education by 1 percent, then the resultswould be similar to the above case, but the distribution would

$

V irginia B. EdwardsPresident, Editorial Projects in Education

Editor, Education Week and Teacher Magazine

David A. LonganeckerExecutive Director,

Western Interstate Commission for Higher Education

This article was originally published February 2003 by the NationalCenter for Public Policy and Higher Education, which is anindependent, nonprofit, nonpartisan organization. It is not affiliatedwith any government agency, political party, or college or university.The National Center conducts policy research and fosters publicawareness and discussion of public policy issues affecting educationand training beyond high school. The purpose of the NationalCenters studies and reports is to stimulate public policies that willimprove the effectiveness and accessibility of higher education.

Kentucky International Convention CenterLouisville, Kentucky

LONG TERM-POLICY RESEARCH CENTER

Foresight Vol. 10 No. 1 2003 Page 5Page 5Page 5Page 5Page 5

improvement. The continued lowering of federal drinkingwater standards is also forcing systems to look at moreadvanced (and expensive) treatment technologies to stayahead of the standards. Also, Kentuckys population growthand continuing expansion into unserved areas add to ourneed for expensive expansions and improvements.

So, where does Kentucky stand in regards to providingsafe drinking water to its citizenry? Public drinking waterin the United States is the highest quality, it is the mostaffordable, and is more widely available than in any countryin the world. According to the EPA, approximately 73percent of Americans are connected to community watersystems. While many might assume that Kentucky wouldfail to meet the US average, as we often do in nationalrankings, this is certainly not the case. As stated earlier,approximately 87 percent of Kentuckians are served bycommunity water systems. Kentucky ranks among the toptwo or three states nationwide in this category!

Kentucky still has counties where a large percentage ofthe population is not served by public drinking water,primarily in eastern Kentucky and in areas wheregroundwater supplies are plentiful. However, these aregenerally exceptions to the rule. In many counties, watersystems have progressed to the point where public drinkingwater is available to nearly all residents, urban or rural.According to my research, more than 85 of Kentuckys 120counties exceed the national average of 73 percent servedby CWSs.

Why has Kentucky fared so well in this important measureof public health? And, why have we been able to avoidsituations like the one mentioned in Walkerton, Ontario?For many years, our state regulatory agency has beenrequiring direct filtration for surface water plants andgroundwater plants that are under the influence of surfacewater. In Walkerton, managers and operators were foundto be negligent in ensuring proper levels of disinfectionafter a flood event washed animal feces into the systemswells. This is a prime example of groundwater being underthe influence of surface water.

In Kentucky, we have been blessed with political leaderswho have been able to secure much-needed funding forwater and wastewater utility expansions through theyears. We also have one of the most effective USDARural Development state offices in the United States.These are the folks (formerly called the Farmers HomeAdministration) who have contributed so much to theexpansion of rural water systems since the 1960s.Finally, we have many excellent water systems, largeand small, that have acquired the necessary training andexperience to successfully manage and operate efficientpublic utilities. Andy Lange

Letter to the E d i t o rLet me start by stating that I enjoy and support the work

of the Kentucky Long-Term Policy Research Center. I dohave to take slight exception to the tone and content of oneof your most recent articles in the latest issue of Foresightin the Scanning Kentucky section (Vol. 9 No. 4 2003). Thearticle titled, Water Infrastructure May Require $1Trillion, takes a bit of a gloom and doom approach tothe long-term infrastructure needs of the nations drinkingwater industry.

First, 237,600 water main breaks per year may sound likea large number, but if you divide that number by the numberof public water systems in the US (165,471 in 2001,according to EPA) it comes to less than two per system peryear. Even if you divide this number by the number of publicwater systems classified as Community Water Systems(CWS) by EPA, the average number of main breaks onlyincreases to roughly 4.4 breaks per system per year. Theuse of this number, by itself, doesnt seem to indicate thata problem exists. Community water systems are the utilitiesfrom which most people get their drinking water. InKentucky, these are the nearly 220 municipalities, 123 waterdistricts, 22 water associations, and a handful of privately-owned utilities that currently serve approximately 87percent of the population.

In fact, the number cited by EPA seems to me to be verylow. Water main breaks are common occurrences for waterutilities. They do occur more frequently on older lines, butfactors such as quality of pipe material, original installationpractices, and weather are all probably more important.Most of the community water systems mentioned aboveemploy trained professional operators who react quicklyto instances where mains break to repair them in a timelymanner according to established standards that ensure thatany potential contamination is isolated and treated beforeplacing the main back into service.

Secondly, you cite the recent lowering of the standardfor arsenic by EPA. The standard was actually lowered from50 parts per billion to 10 parts per billion, not ppm (partsper million). While some scientists have argued for evenlower standards, there have been no scientific studies thatI am aware of showing any correlation or connectionbetween arsenic in drinking water and adverse health effectsin the United States. More importantly to Kentuckians, ourKentucky Division of Water has determined that few, if any,water systems in Kentucky will have problems meeting thenew standard of 10 ppb.

I dont want to downplay the importance of maintainingour drinking water infrastructure, or the expense associatedwith repairs and upgrades to an aging system. Many of ourwater treatment facilities are in need of expansion and

Andy Lange is the Assistant Director of the Kentucky Rural Water Association (KRWA) and has been employed atKRWA since 1989. Andy is a native of Dallas, Texas, and has lived in Bowling Green since 1962.

He can be reached at a.lange@krwa.org or 270.843.2291.

Page 6Page 6Page 6Page 6Page 6 Foresight Vol. 10 No. 1 2003

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By Phillip W. Roeder

In 1989, the Kentucky Supreme Court found the states public school system unconstitutional for failing to provide all chil-dren an equitable and adequate education. To comply with thatdecision and provide an adequate education will cost about anadditional $1 billion, according to a recent study sponsored bythe Council for Better Education (CBE), Inc.1 Raising thisamount would not only require an immediate increase in edu-cation funding of about 23 percent to 25 percent, it would alsoincrease the budget base by that amount for future funding. Inall likelihood, the state will have to bear the burden of findingthis additional money. The federal government has never beenmore than a modest source of funding for elementary and sec-ondary education. Furthermore, the No Child Left Behind Actenacted by President Bush and the Congress in 2001 providesmore mandates than monies for the states. At the local level,many Kentucky communities areproperty poor and therefore un-likely to be able to increase their lo-cal share of education funding. Thisimplies that much of the proposed $1billion increase would have to comefrom a state budget with a generalfund of about $7 billion per year andlittle likelihood of increased revenueover the next several years.

For these and other reasons, someeducation advocates argue that onlymajor reform of the existing state taxsystem can produce the necessary dol-lars to provide adequate funding forpublic schooling. They may be right.But before the state undergoes a ma-jor tax reform to generate additional resources for education, itis reasonable to ask whether it is likely that a significant invest-ment of tax dollars will lead to higher student achievement andimproved district and school performance.

All adequacy models, including the one used in the CBEstudy, assume strong and independent relationships betweeneducation resources (tax revenue and the human capital, pro-grams, and services it buys) and organization performance. Inother words, the models assume that resources produce results.

But is this a reasonable assumption? Research that system-atically and empirically links education resources to results isin short supply. To help shed some light on this issue, I exam-ine some available data about Kentucky school district perfor-mance. I begin with a comparison between the best- andworst-performing school districts on the 1999-2000 CATS ac-countability scores, taking into account the amount of resources

available. I also consider other performance indicators such asdrop-out and attendance rates and the number of students whogo on to college, again within the context of resources avail-able. I next take a longer look, determining how performanceand resources have changed in all districts from 1993 to 2001.Finally, I take a prospective look, exploring how districts areprojected to perform and how organization needs and resourcesrelate to that expected performance.

A Weak Link?

Table 1 compares resources for the top- and bottom-perform-ing school districts in Kentucky based on 1999-2000 CATSaccountability scores. The table shows that although in 1999the top-performing districts on average have more than doublethe amount of local revenue per pupil than the worst-perform-ing districts, the worst-performing group has considerably morestate and total revenue. These comparisons of the best- and

worst-performing districts suggest a negative relationship be-tween total revenue per pupil and performance on the CATSaccountability (i.e., top performers have less total revenue),while the relationship between local revenue per pupil and per-formance is positive (top performers have more local revenue).Analysis of data for all 176 districts supports these two hy-potheses in that the simple correlation coefficient between dis-trict local revenue per pupil and CATS score in 1999 ismoderately strong and positive (r = .56; r is a statistical mea-sure of how well one thing correlates with another, with 1.0indicating perfect correlation and 1.0 indicating none), whilethe correlation between total revenue and CATS score is some-what weaker and negative (r = -.26). Comparing these two co-efficients, it is important to observe that on average total revenueper pupil is about four times the amount of local revenue perpupil ($6,469 versus $1,651 in 1999).

Since Kentuckys testing and accountability system has facedmuch criticism and undergone many changes, some might ar-

Do Resources Produce Results?Kentucky School Dist r icts and the Adequacy of Funding Adequacy Models

Dr. Roeder is a Professor of Political Science at the University ofKentucky.

Foresight Vol. 10 No. 1 2003 Page 7Page 7Page 7Page 7Page 7

gue that other measures of district performance should be as-sessed. Table 2 provides simple correlations between indica-tors of district resources and additional measures ofperformance. The additional measures are taken from DistrictReport Cards in 2000 and include dropout rate, attendance rate,transition to college, and unsuccessful transitions for the 171districts with high schools. Indicators of resources include sizeor average daily attendance (ADA), local and total per-pupilrevenue, and average teacher salary (all 1999); a composite mea-sure of teaching resources that combines (1) proportion ofclasses taught byteachers with amajor or minor inthe subject area,(2) proportion ofclasses taught byteachers withprofessional de-velopment in thesubject area, and(3) percentage ofteachers with amasters degree or higher; spending per student; and student-teacher ratio.

The first conclusion drawn from an analysis of the data inTable 2 is that almost all of the relationships between resourcesand performance are quite weak. The only moderately strongcorrelations are for local and total revenuelocal revenue perpupil moderately and positively relates to both higher atten-dance rates and more transitions to college, and less local rev-enue relates to more unsuccessful transitions. In contrast, totalrevenue per pupil is moderately but negatively related to atten-dance and transition to collegemore total revenue relates tolower rates of attendance and fewer transitions to college.Teacher salary is related weakly only to transitions to college,while spending per student is related negatively and weakly toboth attendance and transition to collegemore spending isassociated with lower attendance rates and fewer transitions tocollege. Finally, districts with more students per teacher (fewerteacher resources) tend to have slightly higher attendance ratesand transitions to college and fewer unsuccessful transitions,but the relationships are very weak. Overall, except for localrevenue per pupil, there is little evidence that several differenttypes of resources relate positively to performance or results.

One conclusion that could be drawn from Tables 1 and 2 isthat the top-performing districts already have adequate re-sources, and that this amount is less than the worst-performingdistricts. Does this mean that the highest-performing districtsare doing a more effective job with fewer but still adequateresources? Or, conversely, does this mean that the lowest-per-forming districts are much less successful in using and apply-ing their greater resources to education programs and services?Studies with more complex research designs that examine andtest other factors that may be causing these performance differ-ences are necessary to help answer these questions. However,the data in Tables 1 and 2 illustrate some of the difficulties in

attempting to link revenues and resources to education perfor-mance and also suggest the need for caution in accepting esti-mates of revenue adequacy.

Tables 1 and 2 also begin to address the important questionsof what resources are purchased with education revenue andwhether they help produce desired results. Teacher salaries,teacher training and experience, and student-teacher ratios donot appear to make much difference in district performance,despite the fact that personnel expenses comprise a substantialproportion of district spending. Table 1 shows that average

teacher salaries for the top and bottom groups do not differmuch, and Table 2 shows that teacher salary and several othermeasures of teaching resources appear to have little or no posi-tive relationship to performance. This suggests that if the top-performing districts have better teachers and if this teachingexcellence helps explain their outstanding performance, thenhaving higher teacher salaries and more teachers per student,regarded by many as key educational resources, may not sig-nificantly influence district performance.

Tables 1 and 2 examine district performance for one schoolyear; however, the resource-performance relationship also canbe assessed over time by asking whether districts with the great-est improvements in accountability performance since 1993 alsohad the greatest increases in revenues. Table 3 examines rev-enue change for the most- and least-improved school districtsfrom 1993 through 2001. The data show that districts that im-proved the least from 1993 through 2001 had much less localrevenue per pupil from 1990 through 1999, but had somewhatgreater proportional local revenue increases in that period thandid the most-improved districts. In contrast, the least-improveddistricts had almost identical total revenue as the most-improveddistricts in 1990 ($3,364 versus $3,326), somewhat more totalrevenue in 1999 ($6,589 versus $6,234) and a slightly higherrate of total revenue increase than the most improved districts(96 percent versus 87 percent).

These comparisons suggest that for all districts the relation-ship between increased revenue and improved performance isambiguous or nonexistent. In fact, for all districts, the correla-tion between percentage change in total revenue per pupil (1990-1999) and percentage change in accountability score(1993-2001) is -.05, and the correlation between change in lo-cal revenue per pupil and change in accountability score forthese same time periods is .01. These weak correlations indi-cate that, after more than a decade of KERA, improvement in

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district accountability performance has little or no relationshipto increases in local and total revenue per pupil.

Projected School District Performance

The previous three tables examine past and present districtperformance. I next explore how districts are projected toperform and how needs and resources relate to that projectedperformance. Table 4 provides data on projected successful andunsuccessful districts using a simple forecasting model from aprevious paper that compares several models for projectingschool accountability scores.2 The two groups of districts withprojected CATS scores in 2014 and actual score in 2001 arelisted at http://www.uky.edu/~proeder/keraweb.htm. Table 4also provides several measures of needdistrict size andchange in size, and poverty and change in poverty, as well asseveral measures of resourcesper pupil local and total rev-enue and average teacher salary and changes in these indica-tors over time.

Several points should be made about needs and projectedperformance. Not only are projected unsuccessful districts muchsmaller than projected successful ones in 2001 (ADA of 2,007versus 3,970), they also have declined in average daily atten-dance since 1991 (-10.2 percent) compared with a small in-crease in size for the projected successful districts (8.7 percent).Since the projected unsuccessful districts are quite small andhave been getting smaller than the successful ones, does thisindicate more or less need for resources? Another interestingindicator of need is poverty. Projected successful districts hada somewhat greater increase in proportion of children eligiblefor subsidized meals from 1992 through 2001 than unsuccess-ful districts (24.1 versus 16.7 percent); however, the projectedunsuccessful districts had more than double the proportion ofpoor children in 2001 (66.4 percent versus 32.6 percent). Pre-vious research has demonstrated that poverty consistently isthe strongest predictor of school and district performance con-trolling for other plausible determinants, so it is not surprisingthat the projected unsuccessful districts have high poverty rates.

On the other hand, it is interesting to note that the projectedsuccessful districts faced a slightly greater increase in povertyfrom 1992 through 2001 than the projected unsuccessful dis-tricts.

The findings for resources and projected successful and un-successful districts differ very little from those in the previoustables for other groups of districts. Projected successful dis-tricts had much more local revenue per pupil in 1991 and 2001,but a lower rate of increase from 1991 to 2001. Projected un-successful districts had more total revenue per pupil in 1991and 2001 and a slightly higher rate of increase of total revenue

in that period. Average teacher salary and increase in salary donot differ much for the two groups.

This simple analysis raises doubts about the fundamental as-sumption of most school funding adequacy models that a posi-tive relationship exists between resources and results. Severalindicators of district performance and resources for Kentuckyschool districts suggest that money alone does not buy results.The least successful Kentucky districts in 2000 actually havemore revenue per pupil than the most successful ones, and dis-trict improvement in performance over the past decade has norelationship to increased revenues.

Conclusions

What are some possible conclusions from this analysis? Basedon these data as well as many other studies, some will

Foresight Vol. 10 No. 1 2003 Page 9Page 9Page 9Page 9Page 9

conclude that money doesnt matterwhen it comes to organizationperformance. On the other hand, somestudies find relationships betweenresources and performance. Moneymay matter, but demonstrating exactlyhow it matters has not been an easytask for education researchers andadvocates.

An alternative conclusion is thatsubstantially more revenue should beinvested, but only in the worst-per-

forming or most-disadvantaged schools and districts. SinceKentucky has achieved relative equity in financing but someschool systems and individual schools continue to underperformrather substantially, it may be that to boost overall performance,most new state tax dollars should be allocated to the worst-performing districts and schools. But this conclusion still begsthe question of whether the increased resources would likelyachieve intended outcomes. The testing and accountability datacertainly suggest the worst performers need something, per-haps much greater investments than the top-performing sys-tems. But the question of how these increased revenues wouldbe applied requires much more study. Unfortunately for thisalternative, it is doubtful that a majority of policymakers, schoolleaders, and perhaps more importantly, taxpayers are preparedto support such a radical redistribution of resources, even forthe relatively popular goal of equal opportunity.

A third conclusion is that substantially more money shouldbe invested in all Kentucky districts but only for organizationresources and programs demonstrated to be effective. This re-turns to questions about the fundamental assumption of resourceadequacy models that resource configurations/strategies areable to produce desired results. The limited data analyzed inthis paper do not necessarily demonstrate that resources dontproduce desired results, but they do suggest that advocates forsubstantially increased investments in public education basedon the concept of revenue adequacy need to do much morework to show Kentuckians how the investment of $1 billionwill lead to more effective school systems.1 D. Verstegen, Calculating the Cost of an Adequate Education in Kentucky,Feb. 2003.2 See Method C in The KERA Endgame, Nov. 2001, available at http://www.uky.edu/~proeder/keraweb.htm.

& The Road Ahead (2002) The fifth in a series of biennialtrends reports designed to inform policymakers and citizensabout trends that are likely to influence the future of the state.

& Planning for the Future (2002) An analysis of survey dataon the Commonwealths current and coming retirees about,among other things, financial and health care planning,workforce participation, health status, and civic participation.

& Measures and Milestones 2002 (2002) The fourth in aseries of reports from the Centers ongoing Visioning Ken-tuckys Future project, it assesses state progress on 26 goalsfor the future. Includes results of a statewide citizen surveyand a comparative analysis of the results. Measures citizenopinions about the importance and the progress of goals.

4 FORESIGHT Published since 1994, this quarterly fea-tures articles on a variety of topics, from a timely series onstate revenue trends to articles about education, tobacco, in-come distribution, technology, and more. Includes ScanningKentucky, brief summaries of articles, studies, reports, andother news with implications for the states future.

2 Policy Notes Short takesjust two pageson tall subjects,from statewide survey findings to trends in other states, fromhow school technology investments may be paying off for Ken-tucky to how other states are covering prescription drug costsfor elders. Available electronically or by mail.

& Listening to Kentucky High Schools: Why Some HighSchools Miss, Meet, and Exceed Predicted PostsecondaryOutcomes (2002) Case studies of four high schools with wide-ly varying predictedand actualpostsecondary educationoutcomes that seek to identify some of the intangible qualitiesthat help schools succeed.

& Financing State and Local Government: Future Chal-lenges and Opportunities (2001) A collection of articles byleading experts who examine current tax policy, revenue trends,and the pressures for change. The authors discuss the ideal taxsystem, as well as the real course of tax reform in recent years.Further, articles examine the adequacy, fairness, competitive-ness, balance, and future viability of the current system. In-cludes a CD-ROM with related articles and reports andvideotaped interviews and presentations.

& Talking Back: Kentucky High School Students and TheirFuture Education Plans (2001) A report on findings from a2000 survey of Kentucky high school students about their plansfor postsecondary education.

Write or e-mail the Center for your free copy of any available report. Addressesare on page 2. All reports are available electronically at:

www.kltprc.net

Selected Publications and Products from

KentuckyLong-Term Policy Research Center

The debate continues

Our next issue of Foresight will feature an article by Dr.Blake Haselton, Superintendent of Oldham CountySchools and Vice Chair of the Council for Better Education(CBE). Dr. Haselton will respond to Dr. Roeders article andpresent findings from the CBE-sponsored research to whichDr. Roeder refers.

In short, the CBE study found that the Commonwealthwould need to spend an additional $1 billion a year to fullyimplement the Kentucky Education Reform Act and realizeits lofty goals for student achievement.

PPPPPaaaaaggggge 10e 10e 10e 10e 10 Foresight Vol. 10 No. 1 2003

Emerging trends and issues that may affect the Commonwealths future

Scanning Kentuckyresult, somewhere between 1 and 2 million low-income Ameri-cans are expected to lose their health insurance. In addition, thesurvey found that 21 states were freezing or reducing Medicaidpayments to doctors, hospitals, nursing homes, and other pro-viders of care.

Many states are cutting services for adults, including cover-age of dental care, eyeglasses, hearing aids, and physical therapy.But some have found that is not enough. So they are debatingwhether parents or childless adults should be taken off the rollsfirst. A decade ago Washington and Oregon took pride in theirexpansions of Medicaid and other health programs, but bothstates are now wrestling with the unpleasant choice of whetherto cut benefits or end eligibility for some recipients. Washing-ton has eliminated hearing, vision, and dental benefits for adultson Medicaid; ended special payments to hospitals for charitycare provided to uninsured people; and cut off 60,000 of the120,000 low-income childless adults enrolled in a state pro-gram known as the Basic Health Plan.

During the last fiscal year, the cost of Medicaid, which isshared by the federal government and states, rose 13 percent,the biggest increase since 1992. Medicaid provides health carefor more than 40 million low-income people, from elderly nurs-ing home patients to dependent children, at an annual cost ofmore than $250 billion.

Implications for Kentucky. Here again, Kentucky facesa plight shared by the vast majority of states: soaring costsand declining revenue. And Medicaid costs are expected torise at a steady pace over the course of the next few years.Consequently, the question of how best to control costswithout undue harm to some of the states most vulnerablecitizens presents one of the most difficult challengespolicymakers face, even as they are being pressed to ex-pand Medicaid to include prescription drug benefits to se-niors and help various populations of the uninsured.

The challenge of maintaining the long-range viability of thiscritical health care safety net and improving both fiscal andhealth outcomes will demand a programmatic discipline. Suc-cessful state experiments that enable quality care within pre-scribed boundaries must be encouraged, explored, tested, andadopted where applicable. Rising costs and the declining like-lihood of increased federal support are likely to force Ken-tucky and other states to adopt more of the kinds of practicesthat private insurers are employing to contain costs. Managedcare, the demise of which had appearedimminent, or some new version of prac-tices designed to limit unnecessary utili-zation and improve long-term healthoutcomes, may enjoy a resurgence andbecome standard practice for publichealth care.

StaStaStaStaState Leaderte Leaderte Leaderte Leaderte Leaders Fs Fs Fs Fs Face Fiscal Crisisace Fiscal Crisisace Fiscal Crisisace Fiscal Crisisace Fiscal CrisisThe nations 24 new governors faced theworst state financial crisis since at leastWorld War II when they took office thisyear, The New York Times reports. Mo-ments after being sworn in as Illinois firstDemocratic governor in 26 years, Rod R.Blagojevich dropped the budget bomb:the estimate of the deficit he had cam-paigned against had doubled since hiselection, to more than $5 billion. Manycandidates ousted incumbents this year byhighlighting the fiscal mess their states are

in, only to return from election-night victory celebrations tofind gaps much larger than expected.

How these newly elected governors and their colleagues patchtheir states deficits and how voters react to the resulting cuts inservices and tax increases will likely have significant long-termpolitical implications. The extent of state fiscal problems is stag-gering, with the collective shortfall for the current year aloneestimated at $45 billion and a projected gap next year of $60billion to $85 billiondeficits of 5, 12, even 20 percent or moreof the budgets in some states.

Since most states emptied rainy day funds and other one-time sources like the tobacco settlement to balance last yearsbudgets, the new governors have spent their transitions survey-ing ugly options: layoffs, tax increases, new fees, and programcuts. Those who pledged not to raise taxeslike Mr.Blagojevichface doing less with less.

Implications for Kentucky. The Commonwealths newlyelected governor will no doubt face the same fiscal dilemma in2004 that this years new state CEOs have found awaiting them.The budget shortfall is Kentuckys most immediate and argu-ably its most serious problem. Whats more, economic prog-nostications suggest it is unlikely to go away anytime soon.Nothing less than the momentum that Kentucky finally appearsto have gained in regard to educational and economic progressis at stake. However, the incremental progress we have made istenuous at best. If we fail to sustain our commitment to educa-tion and child well-being, the impact of todays shortfalls couldbe felt for decades to come.

States Move to Contain Medicaid CostsTwo thirds of states report that they are cutting Medicaid ben-efits, increasing copayments, restricting eligibility, or remov-ing poor people from the rolls in response to soaring costs andplunging revenues. Specifically, a survey of all 50 states by theNational Governors Association finds that 16 are cutting Med-icaid benefits, 15 are restricting or reducing eligibility, and 4are increasing the copayments they charge beneficiaries. As a

Foresight Vol. 10 No. 1 2003 Page 11Page 11Page 11Page 11Page 11

Tax Cut May Affect State RevenuesPresident Bushs call to eliminate taxes on corporate divi-dends, a centerpiece of his economic plan, is raising alarmamong state and local officials who say it could add to thegrowing budget pressures on states and cities. Budget ex-perts conclude that the provision on dividends would coststate and local governments tens of millions of dollars ayear in lost revenue, The New York Times reports.

States fear they will lose in two ways. Because state in-come tax laws are tied to federal law, the states will alsostop taxing dividends. In addition, the removal of taxes ondividends makes stocks a more attractive investment vehiclethan traditionally tax-free municipal bonds. Overall, theofficials believe potential losses could far exceed the $10billion in state aid included in Mr. Bushs 10-year plan, muchof which is earmarked to help the unemployed. The NationalGovernors Association issued a statement, saying that be-cause Mr. Bushs plan did not include direct flexible as-sistance to states, it would exacerbate the current statefiscal problem.

Implications for Kentucky. Should this proposal become law,policymakers in already cash-strapped Kentucky may be facedwith the challenge of replacing still more lost revenue.

Health CarHealth CarHealth CarHealth CarHealth Care Spending Soare Spending Soare Spending Soare Spending Soare Spending SoarsssssSpending on health care is increasingat the fastest rate in a decade, reflect-ing greater use of hospitals and prescrip-tion drugs, and the declining influenceof managed care, The New York Timesreports. The steep increase in spendinghas put immense new pressures on con-sumers, employers, and public pro-grams. In 2001, health spending rose8.7 percent, to $1.4 trillion, and ac-counted for 14.1 percent of the totaleconomy, the largest share on record.Spending averaged $5,035 for each

person in the United States. The increase came even as thenation slipped into a recession, exacerbated by the terroristattacks of September 11, 2001.

In a 2001 survey, the U.S. Census Bureau found that rev-enues of the nations health care and social assistance firmstotaled $1.15 trillion in 2001 and increased 8 percent over 2000.Hospital revenues grew to a total of $462 billion in 2001, anincrease of about 7 percent or more than $30 billion. Privateinsurance ($170 billion), Medicaid ($56 billion), and Medicare($48 billion) were the major sources of hospital revenue, repre-senting increases of 9.5, 7.4, and 6.5 percent, respectively.During the same time, the revenues of physicians offices (em-ployer firms only) totaled $219 billion. About half ($106 bil-lion) of these revenues came from private insurance, while$53 billion came from Medicare, an increase of 8.8 percent,and $15 billion from Medicaid, which rose 8.7 percent. Theout-of-pocket payments that patients made to physicians con-tributed $24 billion in revenue and increased 3.3 percent.

Implications for Kentucky. Experts predict that the rapidgrowth of health care costs will likely lead to new efforts torein them in. The steep increase adds to the burden on stateswrestling with severe fiscal problems and businesses strugglingwith a soft economy. It also intensifies pressure on Congress tomove health care to the top of its agenda.

The major reason cited for the increase in health spend-ing is an increase in the amount of medical goods and ser-vices purchased to care for an aging population. But citizensare paying for rising health care costs in other ways as well.In addition to increasingly discomforting out-of-pocket ex-penses, citizens finance two central government entitlementprogramsMedicare and Medicaidthat crowd out re-sources for other vital services and pay higher prices forgoods and services when businesses pass through the sky-rocketing costs of employee and retiree benefits. As costsfor health care rise, the pressure for solutions to this brew-ing crisis will only mount.

Many Women Smoke to Control WeightBillions have been spent on antismoking campaigns.Cigarette taxes were raised in 18 states in 2002 alone,making lighting up a very expensive habit, reportsBusiness Week. Yet every day, the American LungAssociation (ALA) estimates that 4,800 teens taketheir first drag, and of those, about 2,000 goon to become addicted to cigarettes. Mostdisturbing, teen smoking rates rose steadilythroughout the 1990s after declining in the 1980s.

Given that 80 percent of adult smokers develop their habitbefore age 18, researchers are increasingly focusing on the rea-sons why kids start smoking. Their main discovery: nicotinesproven ability to suppress appetite and speed up metabolismhas made it a popular diet tool for girls and women. Studies bythe University of Michigans Monitoring the Future projectfound that 14-year-old girls are twice as likely to try smokingas boys, primarily because of concerns about weight. Numer-ous surveys have found that some 30 percent of teenage girlsand adult women cite weight control as the main reason theysmoke, far greater than any other justification.

Implications for Kentucky. The nations highest smokingrates lie at the root of a host of costly, debilitating, and deadlyhealth problems in Kentucky. These findings offer insight intoways of reducing what have become skyrocketing rates of ad-diction among girls and women. By systematically encourag-ing exercise and a proper diet, starting with our youngestcitizens, we can begin to counter high smoking rates amongwomen and men and, at the same time, reduce obesity, a causeof health problems that is nearly equally as destructive, if notmore so, than smoking.

Whether the sharp hike in the cost of cigarettes in some stateswill prove to be more of a deterrent to smoking among teensthan some antismoking campaigns is yet to be seen. Some stateshave waged aggressive antismoking campaigns aimed at teensthat have achieved measurable results. Cost, however, isthought to be the ultimate discouragement for teenagers.$

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The 2003 Vic Hellard Jr. AwardFor service in the interest of Kentuckys future

Nominations for the 2003 Vic Hellard Jr. Award are now being accepted by the Board of the Kentucky Long-TermPolicy Research Center. Given annually in memory and recognition of Mr. Hellards leadership and service to theCommonwealth, this honor recognizes an individual who, by his or her example and leadership, has advanced citizengoals for the future. Nominating letters should explain how the candidate:

% Demonstrates vision, considering the long-term implications for the public good;

% Demonstrates innovation, finding new approaches while appreciating history;

% Champions the equality and dignity of all;

% Enhances the processes of a democratic society, promoting public dialogue, educating citizens anddecisionmakers, and fostering civic engagement; and

% Approaches work with commitment, caring, generosity and humor.

Letters of nomination must be submitted by September 15, 2003, to:

Mary Lassiter, Chair

K e n t u c k yLong-Term Policy Research Center

111 St. James CourtFrankfort, KY 40601

Or submit your nomination online at: www.kltprc.net/hellardaward.htm

The 2003 Hellard Award will be presented at the Centers 10th annual conference, November 18, 2003,at the Kentucky International Convention Center in Louisville, Kentucky. See conference details on page 4.