Chapter 2: Literature Review

Fourteen sources are reviewed across five sections: the constitutional framework (Ford, 2017; Aleman, 2007; Toutkoushian & Michael, 2007), charter fiscal impacts (Bifulco & Reback, 2014; Ladd & Singleton, 2020; Ridley & Terrier, 2023), cream skimming and segregation (Fuller, 2014; Bifulco & Ladd, 2007; Heilig et al., 2019; Ukanwa et al., 2022), school finance equity measurement (Templeton et al., 2023; Hoxby, 2000), and needs-based funding weights (Gubbels et al., 2019; Cárdenas, 1997). Texas-specific studies are used when available. School voucher analyses are excluded due to insufficient publicly available data on the Texas Education Freedom Accounts program, which is in the process of first-round implementation at the time of this research.

2.1 Constitutional Framework: The "Efficient System" Standard

The "efficient system" constitutional standard has evolved over time. Ford (2017) traces the Court's interpretation from Rodriguez through Edgewood and Morath. Ford's analysis shows that the Court's definition of "efficient" has shifted from broad equity mandates (Edgewood I; substantially equal access) to specific quantitative benchmarks (Meno; 98% revenue equalization, 85% student coverage, $600 maximum gap per weighted student) and later to structural evaluation (Morath; adequacy, efficiency, suitability), showing how the court has progressively refined the constitutional standard (Ford, 2017).

The Morath framework sets the current constitutional standard. In this decision the Court amended its definition of "adequacy". With this decision, "adequacy" is no longer strictly based on financial inputs, but rather on educational outputs. The Court further amended its definition of "financial efficiency" as yielding equal access per tax effort, and "suitability" as "structural soundness" of the system. In this ruling, the Morath Court upheld Texas' system of school finance, but flagged concerns regarding the use of frozen statutory funding weights, as well as the State's declining share of per pupil expenditures. Ford's (2017) documentation of these shifts provides the foundation of legal standards by which this capstone will evaluate the current system of school finance in Texas.

Further evidence finds that despite formally mandated legal equality, structural racial inequity persists in the system. Aleman (2007) applies a critical race theory lens to show that mechanisms designed to produce "substantially equal" outcomes in Texas reproduce existing racial disparities in the state. Even when courts mandate equal access, the mechanisms through which the funding is distributed reproduce and deepen existing disparities. Aleman's (2007) study reveals that the formal legal equality mandated by the Edgewood standard is not sufficient. While the system can formally satisfy Edgewood's language, it can still produce racially inequitable outcomes.

Toutkoushian and Michael (2007) establish an empirical methodology for evaluating equity in the school finance system. Their methodology utilizes a multivariate regression framework to measure vertical and horizontal equity. Vertical equity is the principle that students with greater need should receive proportionally greater funding. Vertical equity is measured by comparing actual funding-to-need factor relationships against intended statutory values. Horizontal equity is the concept that students with similar needs should receive similar funding, and it is measured through unexplained variance in per-pupil funding after controlling for factors such as district size and geographic cost differences. This methodology, also used by Templeton et al. (2023), provides the blueprint for the capstone's At-Risk Coefficient (ARC) model, which is used to test the constitutional standard empirically in this study.

Edgewood I established the funding of school facilities as an integral part of an "efficient" system. However, the current system relies on local bond elections to fund facilities for ISDs, while charter networks have access to revenue bonds backed by the Permanent School Fund. The outcomes of local bond elections correlate with property wealth and voter demographics. Districts with identical growth trajectories pass or fail bonds based on factors unrelated to educational necessity. This is a direct application of the Edgewood equal-access standard that has not been tested through litigation.

Ford (2017) establishes that the Court now demands "structural soundness". Aleman (2007) shows that structurally mandated mechanisms intended to equalize the system reproduce existing inequities. Toutkoushian and Michael (2007) provide the tool to measure equity in the school finance system. Together, they provide this capstone the constitutional standard for structural evaluation, the grounding that formal compliance can mask inequity, and an empirical method to test the equity of the system. The remaining four sections of this literature review apply this framework.

2.2 Charter School Fiscal Impacts and Structural Inefficiency

Two public school systems operating under separate governance in overlapping areas creates excess costs. Bifulco and Reback (2014) identify duplicate administrative functions, as well as the need to redistribute resources when enrollment shifts as the major factors contributing to this. Their case study shows that stranded costs prevent districts from reducing expenditures proportionally when students leave. Examples of stranded costs include expenses such as facilities, central administration, and specialized services. Bifulco and Reback's (2014) findings establish the theoretical framework for understanding fiscal externalities in this capstone.

Ladd and Singleton (2020) quantify these fiscal externalities through their case study of Durham County, North Carolina. Their study showed that when charter schools reach a 15% market share of district enrollment, each of the remaining public school students lose more than $500 in effective funding. This comes out to approximately $3,600 leaving a traditional public school per charter-enrolled student. The cost is even greater in nonurban districts where lower population density limits local districts' spending flexibility. In these instances, districts may lose $4,000 to $6,000 per charter student. Ladd and Singleton's (2020) study further revealed that charter schools in North Carolina enroll disproportionately fewer students with disabilities (9% vs. 12%) and English Language Learners (ELLs, under 1% vs. 7%). This finding suggests that districts retain specialized fixed costs for high-needs populations even as enrollment revenues depart. The demographic asymmetry between charter schools and traditional public schools is explored further in Section 2.3.

Conversely, in Massachusetts, Ridley and Terrier (2023) found that charter expansion increased per-pupil expenditures by approximately 5.2%. However, these results depend on Massachusetts' Chapter 46 Aid reimbursement (100% of lost tuition revenue reimbursed to traditional public schools for year one, followed by 25% of lost revenue reimbursed for five years). Their analysis also shows that the positive effects of charter expansion diminish after the reimbursement period ends. Texas has no comparable reimbursement mechanism.

The literature provides well grounded evidence that charter school expansion imposes negative fiscal externalities through stranded costs and dual governance. Bifulco and Reback (2014) established the framework, and Ladd and Singleton (2020) measured the per-pupil costs. Ridley and Terrier (2023) provide the strongest counterpoint, but their findings depend on a state funding mechanism that Texas lacks. If a dual system creates structural inefficiency through duplicated governance and stranded costs, this violates the Morath suitability standard requiring structural soundness.

2.3 Cream Skimming, Segregation, and Equity in Charter Choice

The fiscal externalities from Section 2.2 are compounded when charter enrollment is not demographically representative. Fuller (2014) provides Texas-specific evidence by comparing students entering five high-profile charter organizations against those entering traditional public schools in the same zip codes. The study found that charter entrants had substantially higher math and reading scores, lower rates of ELL and special needs classification, while rates of economically disadvantaged status were roughly comparable. This effect is known as "cream skimming", and the study provides documented evidence of this phenomenon occurring in Texas schools.

Charter choice increases racial isolation as well. Bifulco and Ladd (2007) provide North Carolina panel data tracking individual students year to year. The data reveals that the presence of a charter system increased racial isolation for both Black and white students, widening the Black-white achievement gap. Negative achievement effects for Black students are driven specifically by transfers into more racially isolated charter schools.

The segregation pattern holds beyond individual states. Heilig, Brewer, and Williams (2019) show that Black charter students are more than three times as likely to attend racially isolated schools (90%+ non-white) compared to Black public school students. Their multivariate regression analysis controlling for local demographics shows charters have 1.255 fewer percentage points of white students than nearby public schools, which disproves the argument that the makeup of student bodies is purely driven by neighborhood demographics.

Segregation occurs even when parents don't explicitly consider race. Ukanwa, Jones, and Turner's (2022) use of agent-based modeling found that Black and white parents showed different preferences for school attributes, including performance ratings and commute distance, which mechanistically produced a sorting effect. The study further found that every 3-percentage-point increase in households exercising school choice results in more than 564,000 additional students in segregated schools nationally. This finding is important because it shows segregation results from structural dynamics and not individual prejudice.

Fuller's (2014) study establishes cream skimming as a documented phenomenon in Texas. Ukanwa et al. (2022) and Bifulco and Ladd (2007) demonstrate how school choice produces demographic sorting, and Heilig et al. (2019) confirm that this sorting results in intensified racial segregation at all geographic levels. When charter schools skim less costly students, traditional public schools absorb concentrated at-risk populations, compounding the fiscal externalities. This points to the conclusion that "school choice" is a structural mechanism that violates the Edgewood equal-access standard because students in traditional public schools have less access to resources per unit of tax effort as a result of a state-authorized parallel system.

2.4 School Finance Equity Measurement and the Failure of HB 3

The concerns posed by the Morath Court triggered the passage of House Bill 3 (HB 3, 2019), which has in itself deepened inequities. Templeton et al. (2023) use horizontal and vertical equity analyses to evaluate the system before and after the implementation of HB 3. In this study, the researchers use the McLoone index and the Gini coefficient to measure horizontal equity (Templeton et al., 2023). They assess vertical equity through a ratio analysis, as well as a regression model, following Toutkoushian and Michael (2007) methodology. The McLoone index captures how tightly funding clusters at the lower end of the distribution. Their results show the McLoone index declined from 0.876 to 0.858 under HB 3, showing a worsening equity among below-median districts. Additionally, the Gini coefficient, which measures the overall funding dispersion across districts, increased from 0.124 to 0.146 under HB 3. These results indicate HB 3 led to greater overall inequality. Their study further demonstrated that under HB 3, the state's share of per pupil expenditures dropped from 43% to 36%, with property wealth continuing to overpower equity mechanisms built into the bill.

The regression analysis performed by Templeton et al. (2023) reveals that equity factors, including economically disadvantaged, special education, English Language Learner, and career/technical weights, explain only 9% to 16% of per-pupil funding variation. Instead, property wealth is revealed to be dominant over all other factors. The study concludes that Texas districts serving the largest Black student populations consistently receive 14% to 18% less per-pupil funding than predominantly white districts. This study demonstrates that the statutory funding weights used in the funding formula do not meaningfully drive resource allocation toward students in need.

A key argument for many proponents of charter schools and "school choice" is the belief that market competition produces more productive schools at lower costs. Hoxby (2000) finds that metropolitan areas with greater Tiebout choice have higher achievement and lower per-pupil spending. Tiebout choice is the theory that families "vote with their feet" by choosing where to live based on the quality and cost of public services, including local schools. However, this study focuses on inter-district residential movement, rather than the intra-district charter competition found in Texas. These are fundamentally different mechanisms. In contrast, Rothstein (2007) challenges Hoxby's (2000) study, finding the competition effect to be near zero when using replicable measures. The evidence discussed in Sections 2.2 and 2.3 shows fiscal externalities and demographic sorting to be the likely outcome of "school choice", rather than the efficiency gains Hoxby's (2000) theory predicts.

Templeton et al. (2023) demonstrate that HB 3 failed its equity goals. Hoxby's (2000) competition theory and Tiebout do not hold up in the Texas context. Ridley and Terrier (2023) showed potential positive effects of charter schools to be dependent on reimbursement mechanisms not found in Texas' school finance system. The segregation literature (Section 2.3) shows competition does not produce efficiency when cream skimming occurs. Templeton et al.'s (2023) regression methodology shows what the system delivers, and provides the descriptive baseline for the capstone's prescriptive model, ARC, which calculates what the system should deliver.

2.5 Needs-Based Funding Weights as Constitutional Remedy

The statutory funding weights for economically disadvantaged students (0.2) and bilingual students (0.1) have remained unchanged since 1984. The Morath Court explicitly flagged these weights as "ossified", and "ill-suited" for the children of 21st Century Texas. Templeton et al. (2023) confirmed this inadequacy empirically by showing that equity factors explain only 9% to 16% of funding variation. The weights exist in the formula, but they do not drive resource allocation to students in need.

Charter school effects differ significantly between disadvantaged and non-disadvantaged populations. Spees and Lauen (2019) showed that in North Carolina, Black and economically disadvantaged students experienced slightly more achievement growth in charters than white and non-disadvantaged peers. But charters in North Carolina enrolled student bodies that were 70% white compared to 57% in traditional public schools, and only 22% economically disadvantaged compared to 50%. The study shows that while disadvantaged students may show the most growth within a charter model, charters disproportionately serve non-disadvantaged students. The funding formula's failure to differentiate by student need means the students who would benefit the most from additional resources are systematically underserved. Because the funding follows the student at a flat rate, and there is no mechanism to direct more resources toward the higher-need students who remain concentrated in traditional public schools, the undifferentiated funding formulas fail the students the weights are supposed to serve.

Hoxby's (2000) competition theory predicts efficiency gains would make differentiated funding weights unnecessary. However, the evidence outlined in Sections 2.2-2.4 shows charter expansion produces fiscal externalities, demographic sorting, and results in equity failures. If market competition does not produce the efficiency gains that would justify undifferentiated funding, then the state must ensure adequate resources through the formula itself.

Toutkoushian and Michael's (2007) regression framework contribute methodology to this capstone's ARC model. ARC derives weights from a multivariate regression model using current educational outcome data and at-risk student data. In this sense, ARC is this researcher's attempt to implement the Morath Court's implied directive that frozen weights must eventually be updated.

Templeton et al. (2023) show the frozen funding weights are inadequate. Spees and Lauen (2019) show that the effects of charter schools diverge by student demographics, and demonstrate that undifferentiated weights fail at-risk populations needing the most targeted intervention. The evidence from Sections 2.2 through 2.4 demonstrates that Hoxby's (2000) competition theory does not fit the Texas context. ARC repurposes the methodology used by Toutkoushian and Michael (2007) in an effort to correct the funding equity issue and establish a needs-based funding formula based on current outcome data rather than frozen legislative estimates. The gap between what the system delivers (Templeton et al.'s (2023) descriptive regression) and what it should deliver (ARC's prescriptive regression) forms the core of the constitutional argument: the system fails the adequacy standard because it does not direct resources according to student need. ARC demonstrates that an empirically grounded solution is possible.

2.6 Summary

The Morath Court updated the constitutional standard for school finance in Texas to require "structural soundness". The literature demonstrates that formal mandates of legal equality are not enough to achieve equity. Structural mechanisms can reproduce racial and economic disparities even when legal standards are met (Aleman, 2007). The literature further reveals that charter school expansion creates fiscal externalities through stranded costs and duplicated governance (Bifulco & Reback, 2014; Ladd & Singleton, 2020). This issue is compounded by the demographic sorting that concentrates the most at-risk students into traditional public schools (Fuller, 2014; Heilig et al., 2019; Ukanwa et al., 2022). As Templeton et al. (2023) demonstrate, HB 3 failed to achieve its stated equity goals. Property wealth still dominates funding, and the statutory weights are functionally cosmetic (Templeton et al., 2023). Hoxby's (2000) competition theory does not hold in the Texas context. Any potential positive fiscal effects as observed in other states depend on a state funding reimbursement mechanism that Texas lacks (Ridley & Terrier, 2023).

As the most comprehensive post-HB 3 equity analysis, Templeton et al. (2023) serves as an empirical guide for the work of this capstone. Ford (2017) maps the evolution of the constitutional standards, and provides the legal foundation for the capstone's analysis. Through their regression framework, Toutkoushian and Michael (2007) provide the methodological foundation for ARC to build on. Together, these three studies provide the legal standard, the empirical evidence of systemic failure, and the analytical tools for this capstone to measure the gaps in the system of school finance in Texas.

The literature suggests the current system does not meet the constitutional standard. This capstone's research seeks to test that conclusion empirically. The fiscal externality and cream skimming literature establishes the constitutional concern. The case studies provide Texas-specific evidence. In terms of "structural soundness", bond elections represent an untested constitutional question identified through this review. In considering "adequacy", the gap between frozen funding weights and empirically derived funding weights frames the argument of this capstone, and ARC provides the tool for measuring the gap. This literature establishes a framework that the remaining sections of this capstone apply.