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

Michigan radically altered its school finance system in 1994. The new plan, called Proposal A, significantly increased state aid to the lowest-spending school districts and limited future increases in spending in the highest-spending ones, abolishing local discretion over school spending. I investigate the impact of Proposal A on the distribution of resources and educational outcomes. I analyze the differential effects on the lowest-spending and the highest-spending districts, highlighting the role of local discretion, which has so far been neglected in the literature. I also provide important evidence on the effect of spending on academic performance. Proposal A was quite successful in reducing interdistrict spending disparities. There was also a significant positive effect on student performance in the lowest-spending districts as measured in state tests. However, the constraints on future increases in spending may have had a negative effect on student performance in the highest-spending districts.