Smart Money: Public Investment in Public Education

An economic developer’s forecast: Money wisely spent can improve school performance in the poorest neighborhoods by William Schweke

In 1989, the Austin, Texas, Independent District unknowingly and unintentionally conducted a natural experiment when 16 elementary schools were identified as priority sites for additional money, due to a racial discrimination court order. Each school received $300,000 more than its normal school budget with the funds used to reduce absenteeism and raise student scores on state-mandated achievement tests.

After five years, only two schools, Zavala and Ortega, had made improvements. Their attendance rates were among the city’s highest, and their student test scores had risen to the city average. At these predominantly minority schools, there was no “creaming”-- the student body still came from the same poor neighborhoods, where family incomes averaged $12,000 a year.

What did these two schools do differently from the other 14? Most of the schools spent the extra funds on what they always did, while the principals of Zavala and Ortega launched comprehensive reforms in teaching, student requirements, curriculum, goals and parent involvement in addition to reducing the average classroom size. They adopted the district’s reading and math curricula for the gifted and talented students. They put special-needs children into regular classes, where the smaller class size made it easier to give them the attention they needed. Teachers received additional training on how best to use the curriculum to meet the needs of all their students.

With a catalytic push and some help from an Industrial Areas Foundation affiliate, Austin Interfaith, a well-respected community-organizing group that specializes in creating social change alliances among organizations, the schools invested heavily in increasing community and parental involvement in areas such as defining achievement goals for the school and in serving on hiring and budget committees. The faculty and parents lobbied successfully for bringing health services directly into the school so that health problems that affect attendance and access to health care alternatives beyond the hospital emergency room were more easily addressed.

Zavala and Ortega Elementary Schools demonstrate that money well spent on shrinking class sizes, establishing definite and understandable goals, providing high-quality and relevant teacher training, structuring incentives and getting parents involved can really improve school performance, even in the poorest neighborhoods. Parental and faculty agreement that there were real problems, demanding a commitment to real change, provided the leverage and energy that led to success.

Driving Development
These two schools are examples of “smart money,” public dollars that are invested and generate a high societal return, measurable in real, quantifiable results for workers, businesses and society.

If people are tied to low-paying jobs and unable to acquire skills needed by employers, productivity grows more slowly. If businesses do not have a workforce that is appropriately educated, they will be less competitive with their overseas rivals. If citizens do not have what it takes to succeed in today’s economy, they will feel threatened by economic change and are much more likely to cycle between unemployment insurance, welfare and poorly paid, insecure employment.

Finally, the prevalence of low-paying jobs breaks a long-standing social contract under which most people work: “If I work hard, I will be able to keep my job, support my family and enjoy a growing income.” Quality education is a critical tool for upholding this implicit social contract.

Indeed, strong economies compete on the basis of high value, not solely on low cost. A nation or a state that offers a skilled labor force, modern infrastructure and a high quality of life, yet has relatively higher taxes, can hardly be called anti-business. The most forward-thinking approach to increasing U.S. competitiveness and reinstating the compact is to equip today’s and tomorrow’s citizens with the skills and attitudes for economic success and civic participation in an increasingly knowledge-based economy.

Yet American states and elected officials are faced with fiscal crises that sometimes lead to cuts in the funding of important public services when, in fact, they will position themselves better if they develop practical, long-term plans for sustained investments that create attractive places to live, work and do business. Education, workforce preparation and retraining are essential to creating those places, and the long-term investments require increased accountability in school spending, reform of the tax systems that finance education and curbs in business tax-incentive programs that siphon away revenues for small public gains.

Money spent on public schools is money well spent. Educational investment is needed to play its role in fostering an approach to economic growth called “high-road economic development.” Also critical is financing both economic development and education reform more rationally via a modernized tax system. Finally, it will take some smart money investments.

Antiquated Focus
At its most basic, economic development is the process by which wealth is created—or how a society increases its level of material and social well-being over time. In a developing economy, employment increases, incomes rise, innovation occurs and productivity grows.

Sadly, the common definition of economic development is one that focuses narrowly on an antiquated and myopic perspective on business climate, one characterized by low taxes, lax regulations and low wages. Unfortunately, this approach to a good business climate is actually a race to the bottom.

A better way to consider economic development is that it balances efforts to enhance profitability with other objectives, such as more equitable place-based growth, broadened asset and business ownership by the disadvantaged, increased middle-class job and career advancement opportunities, more environmentally compatible development and enhanced and new public goods. Ultimately, economic progress is achieved in places where everybody matters and development health is judged not just by profits and patents, but by wages, benefits and the quality of working life. This is the high road to economic development, and its prime imperative is to promote a more widely shared and sustainable standard of living.

A good environment for business growth provides assets, opportunities and incentives for firms — from microenterprises to multinationals — to invest productively, create jobs and expand. Firms, as well as their industries, supply chains, locations and expansion decisions, and the workings of the product cycle, ranging from research and development to commercialization, should be squarely at the center of policy analysis and policymaking. Governments play a large role in shaping the attractiveness of a community through education, property rights, governance, tax laws, physical infrastructure and the predictability of the investment climate. Public action should address the twin goals of minimizing costs and risks and creating the conditions for competition, innovation and productivity.

Why It Matters
Education funding has been losing ground over the past several years when our knowledge-based economy has been demanding a different and higher set of skills than those traditionally provided by public education. A compelling body of research links primary and secondary education to economic development and growth, showing that people provide an economic asset, human capital, and that increased investment in health, skills and knowledge provides future returns to the economy through increases in labor productivity. Education increases workers’ average earnings, reduces the incidence of social problems, such as drug abuse, crime and welfare dependency, and increases access to medical care.

The benefits of education accrue to individuals as well as to society and the economy. The following examples, drawn from more than 180 studies, books and articles, are illustrative.

  • Benefits to individuals. A strong and undisputed relationship exists between years of schooling and earning power. The more formal education an individual has, the greater his or her earnings.

Post-secondary education attainment differences produce startling contrasts in lifetime earning. A worker with a bachelor’s degree can expect to earn $650,000 more over her lifetime than somebody with only a high school diploma. A master’s degree raises that difference to $1 million and a doctorate to $1.6 million.

  • Societal benefits and costs. More than 80 percent of those in American prisons are high school dropouts. It costs about $20,000 annually to maintain each prisoner, demonstrating one cost of low educational attainment.

In contrast, investing $4,800 per child in preschool education can reduce teen-age arrests by 40 percent. The United States spends about 2 percent of its gross domestic product on crime control, and another 2 percent of GDP is lost to crimes that occur, according to Richard Freeman, a Harvard and London School of Economics professor.

  • Economic benefits. The classic Edward Dennison study for the Brookings Institution found that between 1929 and 1982, 41 percent of U.S. economic growth could be attributed to improvements in schooling and the increase in years of schooling, making education the largest determinant of growth — surpassing even physical capital investments.

Other investigations of large economy-wide payoffs of better schooling and human capital include: economist Eric Hanushek’s research that shows that countries whose students do better on international science and math tests grow faster; other research documenting the correlation of education spending with state economic growth; and numerous studies by researchers supporting the link between education and training to higher business productivity.

Better educational outcomes are also a way to achieve growth with equity. Consider these facts: Increasing minority students’ enrollment in college to the same proportion as white students would generate an additional $231 billion in GDP and at least $80 million in tax revenues. And if American literacy levels were comparable to Sweden’s, the GDP would increase by about $463 billion and tax revenues would rise by $162 billion.

Money Source?
Who will pay for these education initiatives? Most states face fiscal challenges that make it difficult, but not impossible, to secure funding. Federal and state governments need to take a long-term perspective by considering the significant return on investment that good public services, including a productive education and training infrastructure, can bring. Furthermore, building a sound infrastructure and improving public services imply a long-term and forward-thinking perspective that demands courageous reforms in the tax system.

These tax reforms do not come at the expense of economic growth. Research reveals that taxes are not a major factor in state economic development. Some studies have even found negative effects (job losses) when cutbacks in certain public services are factored in. Business executives consistently point to factors other than taxes as the major items that they consider when making location decisions. These include access to markets, availability of suitable labor and materials, local amenities and quality of life, infrastructure (ports, roads, broadband) and synergies with other firms and facilities.

Sound, sizable investments in education will require taking the following steps:

  • reducing the reliance on local property taxes for financing K-12 education;


  • defeating overly restrictive ballot measures to cut taxes;


  • curbing the use of profligate business incentive programs, including the use of tax-sheltering loopholes by corporations, which erode state revenues; and


  • modernizing state (and local) revenue systems.

The first of these is important and well-documented, allowing us to focus on the other suggestions.

Despite the common-sense appeal of the idea, state tax and spending limit laws are not good ways to manage tax-and-spend decisions. A number of states have enacted strict tax and spending limits. Policies that limit taxes and spending are blunt instruments that limit a state’s ability to manage its finances with subtlety. They often lead to radical spending cuts in higher and K-12 education that have serious implications for the quality of services.

Colorado’s Taxpayer Bill of Rights, or TABOR, the most prominent example of a spending limit law, has had negative effects on its educational system and outputs, including lower state rankings for teacher pay and for educational spending as a share of state income, and a decreased high school graduation rate. Fortunately, both Colorado Republicans and Democrats recently agreed that TABOR was just too constraining and have lifted its restrictions on fiscal growth for the foreseeable future.

Poorly designed and profligate business-incentive programs can negatively affect education and other workforce development strategies by diverting monies from state educational and training initiatives and by undermining the local property tax base of school financing. The business incentive “arms race” between states and localities continues to escalate in cost, even though most economists and policymakers agree that an over-reliance on tax incentives and other business subsidies to attract footloose companies is not good development policy.

As a tool for economic development, business subsidies are not going to disappear because they can make the difference in location decisions between very close substitutes. States and localities should, therefore, structure them to maximize benefits and minimize costs. Needed reform of business incentives include:

  • limiting development incentives to strategic and realistic priorities;


  • strengthening accountability and disclosure;


  • using only the most appropriate incentives;


  • linking incentives to employment;


  • considering the education impact of new tax incentive deals or policy changes on school finance;


  • filing amicus briefs in support of the upcoming U.S. Supreme Court case (Cuno v. DaimlerChrysler) that will determine whether many state and local tax incentives are in violation of the interstate commerce clause; and


  • walking away from bad deals.

Most importantly, a broadened and modernized tax base provides a stable stream of revenues with which to make public investments. Some argue that state and local taxes discourage investment, slow economic growth and destroy jobs. But they have the wrong target. The real obstacle is our outmoded tax systems. Simply responding to pressure by tinkering around the edges of a state’s tax codes will do little to improve the overall development climate. A better way requires that:

  • tax competitiveness becomes only one of a number of goals for a quality fiscal system;


  • tax reform is based on creating a better fit between a state’s fiscal system and its changing economic base;


  • tax reform is comprehensive in scope;


  • ineffective and wasteful tax expenditures are curbed;


  • states seek to cooperate with their neighbors on issues of tax uniformity, taxing multi-state corporations and restraining the incentives arms race; and


  • most importantly, a tax system should offer lower rates, greater predictability, a broader base, more equity and increased transparency.


Directing Money
States can pursue various strategies to develop a lifelong learning system, from improving the quality of teaching to retraining incumbent workers. Recognizing that funds are limited and that some strategies may have more impact than others, there are three priority recommendations for states that want to link education, workforce development and economic development in a positive way.

  • Helping at-risk students.
    An education strategy for achieving significant economic impact is investing in proven techniques or promising reform approaches that will improve the performance of low achievers and other at-risk students already in school. Such approaches include early identification and response, new learning technologies, intensive teaching and alternative learning environments and programs to help teen-age parents stay in school.

In its 2003 report “Every Child a Graduate: A Framework for an Excellent Education for Middle and High School Students,” the Alliance for Excellent Education reports that six million students are on the verge of being left behind. The alliance suggests four strategies for reducing that number: an adolescent literacy initiative to provide intensive and focused literacy and tutoring that complements the Reading First work that helps early grades; a teacher and principal quality initiative to provide incentives to educators to work in high-poverty schools, to provide mentoring for new teachers and to provide opportunities for ongoing professional development; a college preparation initiative to expand guidance counseling to help each student pursue a viable post-secondary education career path; and a learning initiative to establish smaller schools or schools-within-schools.

  • Improving the school-to-work transition.
    School–to-work initiatives have the most direct connection to business of all the educational strategies that states can pursue. These include apprenticeships, technical preparatory education, career academies and school-based enterprises, all of which benefit from the active participation of employers and are designed to ease the transition from school to work by combining classroom learning with real work experience.

School-to-work initiatives are targeted at the large number of high school graduates who need advanced skills and training, without pursuing a four-year degree, to secure jobs that pay decent wages. The initiatives often emphasize the diverse needs of today’s students by incorporating hands-on learning and may be better suited to students who are less comfortable in a classroom setting.

  • Increased accountability in education finance.
    Tight state budgets together with legitimate concerns about how well education dollars are spent, political reality dictates additional resources require that schools be more accountable for improving student performance. Options to enhance accountability might include requirements for higher minimum tax efforts by localities; the creation of a financing formula that would give more funds to poorer school districts and those with more at-risk students; the creation of an incentive fund for improved performance at the school level; allowing local school tax efforts beyond the minimum that is not matched by the state; and allowing for a “hold harmless” period of five years with a new financing system so that no district loses money during the first few years.


  • Improve early childhood development.
    Preparing all children for school through the use of early childhood screening and increased access to quality early child care and pre-K classes can only improve educational achievement. This it the best time to enhance a child’s cognitive skills.


  • Work with the private sector to encourage a demand for skilled employees.
    States can shape policies and programs to encourage private businesses to move toward high-performance, high-skill practices and workplaces. Ultimately, companies must choose a high-value/high-road path; only then will they demand the highly skilled workers such enterprises require.

Realizing Goals
Zavalla Elementary School in Austin, Texas, is still on the leading edge. Despite going through three principals over the past 16 years, the school won a gold performance award in October 2005 from the Texas Education Agency for its students’ writing skills while continuing its partnership with Austin Interfaith. In fact, it is now part of a statewide network of 100 schools created by the Industrial Areas Foundation called the Alliance Schools.

These schools meet regularly and share lessons in teaching, parental involvement and numerous other issues. Alliance Schools teach mainly poor and minority students, yet have performed academically at higher levels than peer schools. Alliance Schools now receive extra funding from the state for curriculum and teaching innovations.

Bringing together multiple strategies and techniques — better curricula, professional development, smaller schools and class sizes and new technologies — can improve school performance even in the most low-income schools. What is essential is for the school and community learning cultures to change.

Zavalla and the other Alliance Schools have demonstrated ways to generate broad support for public schools by developing an organized constituency committed to reform and needed public investment. Their efforts are rooted in a neighborhood school. They have not taken the charter school or voucher route to change. Moreover, they develop the collective leadership skills of the school staff and the surrounding community to be strong advocates for better financial support and stronger partnerships between schools and parents.

Ernesto Cortes, a MacArthur Foundation “genius” award winner, is a supervisor with the Industrial Areas Foundation in Austin and serves as head of the Alliance Schools. He says: “This constituency will create the public space for schools to explore innovative teaching strategies and other reform efforts. However, this constituency will also hold the public school accountable for results.”

To create many schools like Ortega and Zavalla, states and localities will have to shift tax and spending priorities and build a broad-based constituency of community members committed to change. If this nation is to achieve a higher and more shared standard of living, U.S. firms must compete on the basis of new, higher quality service and production approaches, using new technologies and a more skilled workforce. A high quality education and training continuum, while not sufficient alone, is a necessary condition for meeting this challenge.

William Schweke is vice president for learning and innovation at the Corporation for Enterprise Development, 123 W. Main St., Suite 210, Durham, NC 27701. E-mail: Schweke@cfed.org