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Article Excerpt
School district consolidation has been one of the most dramatic changes in education governance and management in the United States in the last one hundred years. This paper estimates the capitalization of school district consolidation into housing prices in New York State between 1990 and 2000.
We begin with a conceptual discussion that illustrates the channels through which consolidation could affect housing prices. Building on this discussion, we show that any empirical estimate of the impact of consolidation faces three key challenges. First, some characteristics of the consolidated school districts that are not observed by the researcher may be related to both the consolidation decision and housing prices. Some districts that have declining property values, because a large factory has closed, for example, may respond by consolidating with a wealthier neighbor. In this case, the estimated capitalization effects will be biased and inconsistent.
Second, the impact of consolidation on property values is unlikely to be the same in all circumstances. A recent study of rural school districts in New York (Duncombe and Yinger, 2007) finds economies of size that decline with district enrollment. This implies that consolidation will lower per pupil costs substantially when two small districts combine but will have a much smaller impact on costs when both consolidating districts are relatively large for rural districts. Because property values are expected to reflect these cost savings, consolidation will have a larger impact on property values in the first case than in the second.
Third, for policy purposes, it is helpful to know whether consolidation affects property values because it lowers per pupil costs, because it attracts large increases in state aid, or for some other reason.
Only one previous study has explored the effects of school district consolidation on property values, namely, Brasington (2004). Using housing transaction data from Ohio in 1991, this study finds that school district consolidation lead to a 3.5 percentage drop in constant-quality housing values. This pioneering study has extensive data on housing characteristics, but it does not address any of the three problems identified above.
We utilize first differencing and 2SLS to account for district heterogeneity and possible endogeneity of the consolidation decision.
We find that consolidation boosted house values and rents by about 25 percent in very small school districts and that this effect declines with district enrollment, as expected based on economies of size. Consolidation has no impact on housing prices in districts with more than about 1,700 pupils. We also find that the impact of consolidation on housing prices declines with tract house value and rent and actually is negative in the highest-price tracts.
INTRODUCTION
Ever since Oates (1969), economists have recognized that any change in the property tax or perceived quality of the local public school system is likely to have an important impact on housing demand and, therefore, on housing prices in the affected communities. This paper applies this insight to school district consolidation.
School district consolidation has been one of the most dramatic changes in education governance and management in the United States in the last century. The number of U.S. school districts declined from 128,000 in 1930 to 14,805 in 1997 (National Center for Education Statistics (NCES) 2006, Table 84). The trend in New York state mirrors the trend in the nation; the number of school district in New York dropped from 9,950 in 1925 to 719 in 1990 (Pugh, 1994).
School district consolidation is no longer as common as it once was, but some states still encourage districts to consolidate. Districts receive extra aid for "reorganization," which usually means consolidation, in New York and at least seven other states (NCES 2001). (1) Some also encourage consolidation through their building or transportation aid formulas (Haller and Monk, 1988), although several states also discourage consolidation by giving additional aid based on sparsity or small scale (Huang, 2004).
For two reasons, New York State has experienced a resurgence of school district consolidation since the mid 1980s. First, the consolidation incentives in New York's education aid programs were increased dramatically in 1983. A consolidated school district is eligible for additional formula operating aid over 14 years and additional building aid for both approved renovation and new construction for projects begun within ten years of consolidation. According to the 1983 legislation, districts that consolidate received a 20 percent increase in formula operating aid (ten percent in the 1965 legislation) for five years, decreasing two percent each year afterwards, and ending after 14 years. In the case of building aid, the matching rate bonus for consolidating districts was increased from 25 to 30 percentage points (Spear and Payton, 1992). (2)
Second, the implementation of the Regents Action Plan in the mid 1980s contributed to the increased interest in reorganization (Spear and Payton, 1992). The Regents Action Plan imposes requirements to expand both the number and type of courses that students must complete to receive a high school diploma in New York. As a result, some districts, especially the very small ones, most likely rural districts, had to broaden their curriculums and find classrooms to house the added courses.
Not surprisingly, consolidation is a particularly appealing option to small rural school districts. In fact, among the 31 school districts that have consolidated since 1990, only three small suburbs are not classified as rural. Table 1 presents some statistics on the consolidations that have taken place since 1990, such as the year of consolidation and the enrollment before consolidation. The majority of these school districts had an enrollment below 1,000 the year before consolidation. Considering the fact that more than 40 percent of all American schools are in rural areas and 30 percent of all students attend rural schools (NCES, 2006), the focus on rural consolidation in this study may shed light on issues of importance in many states other than New York.
The main source of the consolidation trend in this country appears to be the belief that consolidation leads to lower costs per pupil as a result of economies of size. Several studies, which are reviewed below, have explored the accuracy of this belief. Consolidation has other effects, however, which may be more difficult to estimate. Consolidation may lower competition among school districts, for example, or it may raise the transportation costs of students and their parents. As a result, we attack this issue from a different angle by asking how much parents value district consolidation as reflected by how much they are willing to pay to live in a school district that has recently consolidated with a neighboring district. Thus, we ask whether the people who buy housing perceive net benefits from consolidation due to economies of scale or other sources. Our analysis draws not only on studies of economies of size, but also on studies of the causes of consolidation (Brasington, 1999; Gordon and Knight, 2006).
We begin with a conceptual discussion that illustrates the channels through which consolidation could affect housing prices. Building on this discussion, we show that any empirical estimate of the impact of consolidation faces three key challenges. First, some characteristics of the consolidated school districts that are not observed by the researcher may be related to both the consolidation decision and housing prices. Some districts that have declining property values, because a large factory has closed, for example, may respond by consolidating with a wealthier neighbor. In this case, the estimated capitalization effects will be biased and inconsistent. In other words, we have to deal with the potential endogeneity problem caused by omitted variables.
Second, the impact of consolidation on property values is unlikely to be the same in all circumstances. Many studies, reviewed in Andrews, Duncombe, and Yinger (2002), find a U-shaped relationship between spending per pupil and district enrollment. A recent study of rural school districts in New York (Duncombe and Yinger, 2007) also finds economies of size that decline with district enrollment. These findings imply that consolidation will lower per pupil costs substantially when two small districts combine but will have a much smaller impact on costs when both consolidating districts are relatively large for rural districts. Because property values are expected to reflect these cost savings, consolidation will have a larger impact on property values in the first case than in the second. We develop a specification that allows us to account for this possibility.
Third, for policy purposes, it is helpful to know whether consolidation affects property values because it lowers per pupil costs, because it attracts large increases in state aid, or for some other reason. A comparison of property values in districts that do and do not consolidate, holding other things constant, yields an estimate of the overall impact of consolidation, but it cannot determine which of these factors is at work. In addition to estimating the impact of consolidation alone on property values, therefore, we also estimate a model that separates the property-value impacts of enrollment change, school aid change, and other factors associated with consolidation.
Only one previous study has explored the effects of school district consolidation on property values, namely, Brasington (2004). Using housing transaction data from Ohio in 1991, this study finds that school district consolidation lead to a 3.5 percentage drop in constant-quality housing values. This pioneering study has extensive data on housing characteristics, but it does not address any of the three problems identified above. Brasington (1999) also contributes to an understanding of the potential endogeneity problem discussed above by showing that property values may influence the decision to consolidate, but he does not incorporate this insight into his later study of the impact of consolidation on property values.
The paper is organized as follows. The second section provides a conceptual framework. We discuss the potential sources of economies of size associated with school district consolidation and develop a formal model of the link between consolidation and property values. The third section describes our data set, and the fourth section describes our estimating strategy. Our results are presented in the fifth section. These results indicate the extent to which school district consolidation affects property values in New York State. The sixth section presents our conclusions.
CONCEPTUAL FRAMEWORK
The principal reason consolidation is expected to influence property values and rents is that it allows small school districts to take advantage of economies of size. In this context, the definition of "scale" is school district "enrollment" or "size." (3) As we use the term, economies (diseconomies) of size exist if the estimated elasticity of education costs per pupil with respect to enrollment, holding student performance constant, is less than (greater than) zero.
Sources of Economies of Size
Although consolidation is often expected to engage economies of size, the literature finds sources of both economies and diseconomies of size in educational production. Three main sources of economies of size have been identified. (4) The first one is a price privilege associated with larger size; large districts can negotiate bulk purchases of supplies and equipment. The second one is related to specialization. Tholkes (1991) pointed out that large school districts are able to efficiently utilize specialized labor, such as math and science teachers, and specialized facilities, such as science and computer labs. Finally, administrative costs per pupil may be lower in large schools because central administrative staff and support personnel, such as counselors, can be shared by many students.
Several potential sources of diseconomies of size also appear in the literature. Tholkes (1991) argued that price disadvantages also exist as teacher unions are more apt to organize in larger districts, and wages are typically "leveled up" to those of the most generous district. These possibilities may be particularly relevant for rural areas because one of the objectives of consolidation is to provide competitive salaries so that the new district can attract and retain quality teachers. A second potential source of diseconomies of size, which also appears to be particularly relevant in rural areas, is higher transportation costs. Consolidated districts usually pool pupils in similar grades in the same building, which generally results in longer average commute times. (5) Another factor that could lead to diseconomies of size is lower student and staff motivation and parental involvement in larger schools. Cotton (1996) and Barker and Gump (1964) argue that...
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