Impact of School Finance Reform on Resource Equalization and Academic Performance: Evidence from Michigan

This paper investigates how the Michigan school finance reform affected educational performance in that state. In 1994, somewhat unexpectedly and without the prodding of any courts, Michigan radically altered its school financing system. The new plan, Proposal A, significantly increased state aid to the poorer districts and limited future increases in spending in the richest ones. In the process it largely ended local control over school spending. I find that Proposal A was quite successful in reducing inter-district spending disparities. There were also significant gains in achievement in the poorest districts, as measured by success in state tests. However, as yet these improvements do not show up in nationwide tests like NAEP and ACT. These results are largely unchanged when I use Indiana and Ohio as control states for Michigan. I am grateful to Jeffrey Kling and Cecilia Rouse for helpful comments, suggestions and constant encouragement. I would like to thank Roland Benabou and Melissa Clark and participants at the Princeton University Labor Lunch for useful comments and discussions. Thanks are also due to Glenda Rader and Jim Brown of the Michigan and Ohio Departments of Education for providing me with important data. All errors are my own. Department of Economics, Princeton University, Princeton, NJ 08544, email: [email protected]