In this bill, there is cetainly language which gives the Commissioner of Education very broad prerogatives. Of particular concern in 1138 is the provision, Section 104(a), which requires that in order to participate a State agency must submit an application 'in such detail as the Commissioner deems necessary.' It might be well for the committee to more carefully describe what the application is to entail. This power given the Commissioner narrowly interpreted might mean little or no Federal encroachment. However, more broadly interepreted it might be viewed as involvement of the Federal Government to the extent of planning for use of all local funds. The third element of an equitable program is equal educational opportunity. In equal educational opportunity there are two aspects, fiscal equality and educational need equality. As the bill is now written, local community discretion and fiscal effort would be greatly limited because there is only one measure of attainment of neutrality, the expenditure test. This may mean that in order to accommodate the requirements of this legislation, that a State would have to adopt a minimum foundation program or a program with minimums and maximums, with cap-offs or limitations on millage on local school districts in order to meet this expenditure test. It might be, again, well for the committee to consider the alternative tests which are used now in the impact aid law. Under that, you have a fiscal neutrality as well as an expenditure test. With the fiscal neutrality test you would add the option for a State to have some local prerogative in adjusting local millage rates, and having that equalized. The second test or the second aspect of fiscal equalization is Federal neutrality. Unfortunately, H.R. 1138 does not equalize among the States beyond the minimal impact of a flat grant. Both the basic grants and the equalization grants would have the effect of equalizing intrastate but not interstate. Johns devised a Federal foundation program a few years ago which might be applicable to this particular bill. In this, there is a small charge-back against the personal income of a State. It would equalize the first year the $200 of equalization grants or the funding of the basic grants. Another consideration might be State power equalizing as advanced by Anne Frentz. Should State effort be taken into account? Probably not. The issues concerning State effort and the altenative measures of fiscal capacity are not sufficiently precise, I think, to hold the State accountable for equal fiscal effort, or to have average fiscal effort. There are arguments against tying States to certain amounts of fiscal effort, one being simply that States would not respond. Another is that if they do not respond to higher fiscal effort, the children are penalized and not the taxpayers. Educational need, the other aspect, I believe, is well covered in other categorical aids at the Federal level. There should not, in my opinion be an educational need or cost differential provision in this particular bill. This bill, as I see it, is not intended to subsume other categorical aids, but to supplement them. With the maintenance of the compensatory education programs, vocational, the handicap programs at a high level, the necessity for educational need factors in or cost differentials is obviated. Finally, constitutional restraints, and goes slightly beyond the finance perspective. I believe that in view of the recent court decisions and Federal impetus in areas that you would not have a major question concerning the civil rights issues. However, I do feel that you still have the church-state question in this particular bill, primarily because it is general aid, and in view of Meek v. Pittinger and more recent Supreme Court pronouncements. Finally, I would summarize by saying that this bill, which is general aid in nature, is greatly needed. The genius of the particular legislation derives from its optional value, which gives a State the opportnity to choose an equalization or nonequalization approach with a major fiscal incentive for those choosing to tackle the pervasive problems of fiscal neutrality within their States. The basic grants provision advances the laudable and reasonable goal of educational need assessment. However, on the other hand, I believe that the effectiveness evaluation which is entered into the basic grant provision might be questionable in terms of current State technological devleopment. Finally, I would say that the intrastate equalization provision in the bill would probably increase and promote or be substantial incentives for States to equalize. I do believe that States should be given credit in the bill for equalization with a fiscal neutrality provision, and not just the expenditure test. Finally, I would say that I believe that this bill in particular should have an interstate equalization provision. Thank you, Mr. Chairman. Mr. MOTTL. Thank you, Dr. Alexander. We will next hear from Mr. Allen Odden, Director, Education Finance Center, Education Commission of the States. STATEMENT OF ALLEN ODDEN, DIRECTOR, EDUCATION FINANCE CENTER, EDUCATION COMMISSION OF THE STATES Mr. ODDEN. Thank you very much. Mr. Chairman, and members of the committee, I would like to have my statement submitted for the record. I will try to summarize it. Mr. MOTTL. It will be so submitted. Mr. ODDEN. Thank you. [The statement of Mr. Odden follows:] TESTIMONY TO THE SUBCOMMITTEE ON ELEMENTARY, SECONDARY The Honorable Carl D. Perkins, Chairman September 28, 1977 By Allan Odden, Director 1860 Lincoln Street Denver, Colorado 80295 Mr. Chairman and members of the Committee. I am pleased today to be able to address the Committee on two major concerns related to H.R. 1138 and a federal role in producing greater equalization of elementary and secondary education finance structures. The topic can be divided into two sections: first, equalization of education resources among states and second, equalization of education resources within states. I would like to concentrate my testimony today on ways in which current federal categorical aid programs contribute to or detract from interstate equalization; different definitions of equalization and their implications for different kinds of state and federal policies; the interaction of current federal categorical programs with intrastate equalization objectives; and the nature and effects of current federal efforts to assist states directly in developing equalization programs. The latter includes efforts of the School Finance and Productivity Division of the National Institute of Education (NIE), the use of funds under Section 842 of the Education Amendments of 1974 and other research sponsored by the U. S. Office of Education (USOE). I. INTERSTATE EQUALIZATION Principles of fiscal federalism suggest a major role for the federal government in education financing. Fiscal federalism principles suggest that 1. Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and 97-782 O 77-4 when a governmental function redistributes income from low income to higher income households or when the benefits of the function spill across local or state boundaries the function should be financed in substantial part by the federal government. Education is an activity in which the benefits clearly cross state lines, benefiting the nation as a whole, while it also is a function that tends to redistribute income. The basic reason for state programs of public school equalization aid is that fiscal capacity is distributed very unevenly across school districts in a state and, as a result, expenditures per pupil also vary among school districts. It is not uncommon for wealth and income to differ by factors of five to one and for expenditures to differ by factors of three to one across 2 school districts in many states." These school finance inequities are equalled, and in many instances exceeded, by similar kinds of inequalities across the fifty states. For example, it is estimated that for the 1976-77 school year, expenditures per pupil ranged from a high of $2929 to a low of $1072 across 3 the fifty states, a difference of about three to one. Similarly, fiscal capacity across states, as measured by per capita income, varied from a high 4 of $8815 in 1975 to a low of $4041, a difference of more than two to one." While differing pupil needs and education costs might account for a portion of these differences, they do not account for the wide range of differences. Since 2. 3. 4. See, for example, Allan Odden and Phillip E. Vincent, Analysis of the School Finance and Tax Structure of Missouri: Background Research of the Educational Finance Committee of the Governor's Conference on Education (Denver, Colo.: Education Commission of the States, 1976) and Allan Odden and Phillip E. Vincent, Report of the Task Force on School Finance and South Dakota State Board of Education (Denver, Colo.: Education Commission of the States, 1976). Fall, 1976, Statistics of Public Elementary and Secondary Day Schools, Advance Report, National Center for Education Statistics, U.S. Department of Health, Eduation and Welfare, Washington, D.C.. Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, (Washington, D.C.: Government Printing Office, 1977), p. 253. these expenditure and wealth differences are correlated, the country faces significant inequities across states in the education services made available to public school pupils. Even though education is a function reserved for the states by the U.S. Constitution, only the federal government is able to enact policies to eliminate or reduce these interstate inequalities. There is strong rationale for a federal program of interstate equalization aid from both a theoretical perspective and from the actual inequalities in education services and fiscal ability to provide those services that exist across states. Such a program could be designed on a basis similar to those that states use to equalize intrastate aid. The dollars would flow to states inversely to fiscal capacity and, especially for federal programs, cost of education adjustments would be necessary. Such a program, however, would be very expensive with costs that could run into billions of dollars. Even though the federal government may not be able to meet the costs of interstate equalization at this time, it should develop plans for such a program because only the federal government can eliminate the major inequities in the educational opportunities available to children across states. Interstate Equalization by Federal Categorical Programs A more immediate issue of concern is the redesign of the allocation for many of the current federal categorical aid programs in order to give them some interstate equalization characteristics. Most allocation formulas for the present set of federal education programs allocate a fixed dollar amount on a per pupil basis to each state. No federal allocation formula considers directly the fiscal capacity of states or local school districts in calculating the amount of aid to which a state or district is entitled. Although the allocation formula for Title I of ESEA produces a mild equalizing aid flow among states, relative to income, it does so primarily because the |