Does Centralization Promote Fiscal Health? The Effect of State Takeover of Local School Districts on Education Finance

A major challenge for states is determining how to support lower levels of government experiencing fiscal or performance challenges without incentivizing future financial mismanagement. Though classical liberal economics tradition argues that decentralization encourages fiscal responsibility, more recent work on fiscal federalism suggests that decentralization could instead encourage fiscal irresponsibility. In this paper, we study one key example of political centralization in the context of public education—state takeovers of local school districts—and its impact on the fiscal condition of the targeted districts. Using event study methods, we find takeovers from 1990 to 2019 increased annual school spending by roughly $2,000 per pupil after five years, leading to improvements in financial condition. Further examination of mechanisms suggests that increased funding was used for employee benefits and debt retirement and came primarily from state sources. The effects on spending were larger when accompanied by accountability mechanisms, and when they occurred in larger districts and districts with higher baseline debt levels. Takeover was less impactful for districts serving higher concentrations of Black students.