The Great Recession led to marked declines in state revenue. In this paper we investigate whether (and how) local school districts modified their funding and taxing decisions in response to state aid declines in the post-recession period. Our results reveal school districts responded to state aid cuts in the post-recession period by countering these cuts. Relative to the pre-recession period, a unit decrease in state aid was associated with a relative increase in local funding. To further probe the school district role, we explore whether the property tax rate, which reflects decisions of districts facing budgetary needs, responded to state aid cuts. We find, relative to the pre-recession period, the post-recession period was characterized by a strong negative relationship between property tax rate and state aid per pupil. We also find important heterogeneities in these responses by region, property wealth, and importance of School Tax Relief Program revenue in district budgets.

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.