School Finance

Editor's note: This version was published in 2004. An updated version is available from 2011.

Running schools—and improving them—cannot take place without the proper resources. And many advocates and educators think that money is perhaps the biggest resource to consider.

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 49 percent of the budget for elementary and secondary schools. Local districts contribute around 43 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, 2002). 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 different formulas and systems for financing education. Forty-two states and the District of Columbia use some version of a foundation program as the basis of their school funding systems, where responsibility for providing a level of funding necessary for a basic education is shared between the state and local districts. But beyond this, there are few similarities in state mechanisms for funding education. And because local funding is so important to most states’ public education systems, the amount of money particular schools receive tends to vary dramatically, depending on property values, not just from state to state but from district to district, and from year to year.

Every state has different formulas and systems for financing education.

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 $7,734 in 2002 – ranging from a high of $11,269 in the District of Columbia to a low of $5,132 in Utah (NCES, 2002). It is difficult, however, to determine exactly how much money is needed to give all students an adequate education. According to an analysis in Education Week's Quality Counts 2005, there is a wide range of estimates for what researchers and educators are saying a "sound, basic education" actually costs. For example, the per-pupil cost estimates from adequacy studies in 17 states range from a low of about $5,000 per pupil in Illinois to a high of more than $15,500 in New York.

There are three main reasons for this range. 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. There have been lawsuits challenging the state funding systems in 45 states, and as of Fall 2004, 16 states were battling litigation (Quality Counts 2005).

From that first lawsuit 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.

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 most states are using to ensure dollars are going to the places where they are most needed to improve student achievement is a technique known as "weighted student funding." States use weighted formulas to funnel extra money to groups of students experts agree cost more to educate. In fact, according to Quality Counts 2005, 43 states and the District of Columbia include weights or adjustments in their school finance formulas to account for the additional costs of students with special needs, such as those with disabilities or English-language learners.

Some reformers are also 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? 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.

Finally, some argue that spending has absolutely no correlation to academic achievement (Hanushek, 1997). They say no matter how much money is pumped into the educational system, it won't make a difference unless schools fundamentally change how they operate.