Published: August 4, 2004

School Finance

Updated June 20, 2011

Running schools—and improving them—cannot take place without the proper resources, and it all starts with money.

School budgets and the ways they are financed vary from state to state and school district to school district. Generally, though, states use a combination of income taxes, corporate taxes, sales taxes, and fees to provide about 48 percent of the budget for elementary and secondary schools. Local districts contribute around 44 percent, drawn mostly from local property taxes. And the federal government antes up approximately 8 percent of state education budgets (National Center for Education Statistics, 2010). Altogether, these funds are distributed to school districts on a per-pupil basis (to ensure there is enough to cover each child’s education) and categorically (to ensure there is enough for each special program or facility).

But school funding isn't quite that simple. Every state has its own formula and system for financing education, with responsibility for providing a level of funding necessary for a basic education shared between the state and local districts. Because local funding is so important to public education, the amount of money particular schools receive tends to vary dramatically, depending largely on property values, not just from state to state but from district to district, and from year to year.

The recession that started in 2007 took a serious toll on school financing across the country, and led to a one-time burst of federal funding that spurred changes in schools. The American Recovery and Reinvestment Act, signed in 2009, provided more than $100 billion in education aid to offset budget cuts—and to promote Obama administration education priorities, which the administration carried out largely through competitive grants, such as its signature "Race to the Top" program, which awarded money to states that committed to education policy changes. Congress provided an additional $10 billion in 2010 to avert mass teacher layoffs (Education Week, "Total Recovery Act").

But by 2011, the end to that federal cash infusion, dubbed the funding cliff, was approaching, and state legislatures began cutting deep into their education budgets. According to a review of state finances by the National Governors Association and the National Association of State Budget Officers, 18 states made midyear, unanticipated cuts to K-12 education during the 2011 fiscal year totaling $1.8 billion (fiscal years typically start on July 1 of the previous calendar year). Three states—Indiana, Oregon, and Washington—cut at least $300 million midyear, and several legislatures cut more in their fiscal 2012 budgets. The report estimated states were on track to spend $2.5 billion less on K-12 education during the 2012 fiscal year than they did in 2011 (National Governors Association, 2011).

Adequacy and Equity

One way to better understand school finance is to think of it in terms of the adequacy and equity of resources. Adequacy is based on the principle that states should provide enough funding for all students to be able to meet academic expectations. According to the most recent data available from the National Center for Education Statistics, nationwide, the average state spending per pupil was $10,297 in 2008—ranging from a high of $11,572 in New York to a low of $3,886 in Utah (NCES, 2010). It is difficult, however, to determine exactly how much money is needed to give all students an adequate education.

There is a wide range of estimates for what researchers and educators believe a "sound, basic education" actually costs, and there are three main reasons: First, researchers typically use one of four main methods to estimate these costs (professional judgment, successful schools, cost function, and evidence-based), and each has its own strengths and weaknesses. Second, not all of the studies incorporate the additional costs for students that are more expensive to educate, such as students with disabilities or those in poverty. Finally, cost estimates vary because the authors base their judgments on different standards of what an adequate education entails.

The notion of equity in school funding focuses on strategies for closing the gap between local districts’ abilities to raise revenues for their schools. Since local funds are commonly based at least in part on property taxes, less wealthy communities are not able to raise as much money for schools as wealthier districts, leaving their children at a considerable disadvantage.

The higher the share of funding that states provide for education, and the more states target that money, the better the chances for increasing equity in the system.

Court battles have repeatedly determined that states are responsible for all education spending and that even when their funding is simply a minor supplement to local budgets, states should not allow one district to spend vastly more than another.

A wave of state school finance lawsuits that started in California in 1971 has served as one of the main means for spurring changes in states’ education finance systems. From that first case in California through the 1980s, most cases were waged as challenges to the equity of state finance systems on behalf of disadvantaged children. In the late 1980s, however, many finance litigants shifted their focus to addressing the overall adequacy of finance systems and equity among districts.

District Challenges

While some school reformers are concentrating on getting more money for schools and spreading it around more equitably, others are concentrating on another question: Are schools spending their money intelligently? One strategy many states have used to ensure dollars go to the places where they are most needed to improve student achievement is a technique known as "weighted student funding," which is used to funnel extra money to groups of students that experts agree cost more to educate.

Some education officials are examining ways schools could use money more like the private sector does—as an incentive. For instance, they ask, instead of paying teachers and administrators according to an unbending formula, is there a way to reward superior performance?

In 2010 and 2011, several districts, including those in Pittsburgh and Baltimore, began looking at ways to update the traditional methods of providing automatic step raises and extra pay for advanced degrees and instead tie raises more closely to classroom evaluations and student test scores. Florida and Indiana were among a series of states that approved merit pay legislation.

Others are looking at ways to cut central-office spending, and in turn increase the amount of money that actually flows down to the school level.

To further cut costs, some state legislatures increased educators' pension and health insurance contributions in 2011. Personnel costs consume about 80 percent of districts’ budgets, according to the Educational Research Service. A 2010 report by the Pew Center for the States faced a $1 trillion shortfall between what they are obligated to pay current and retired workers—including teachers—and the money they had on hand to cover the costs.


HOW TO CITE THIS ARTICLE
Editorial Projects in Education Research Center. (2011, June 20). Issues A-Z: School Finance. Education Week. Retrieved Month Day, Year from http://www.edweek.org/ew/issues/school-finance/

Sources
Education Week, "Mixed Report Card for Education Stimulus,"Feb. 12, 2011.
Education Week, "Race to Top Now Faces Acid Test," Sept. 1, 2010.
Education Week, "Total Recovery Act: $787 Billion", Jan. 13, 2011.
National Governors Association & National Association of State Budget Officers, The Fiscal Survey of States, 2011.
U.S. Department of Education, National Center for Education Statistics, “Revenues and Expenditures for Public Elementary and Secondary Education: School Year 2007-08,” 2010.

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