Financial Support of Schools

School finance involves the interrelated issues of raising, distributing, allocating, and using revenues for the purpose of educating children. Early in the twentieth century, local school districts were primarily responsible for providing funds–mostly through property taxes–for schools. Considerable disparities in the per pupil property wealth of school districts led to dramatic differences in both local property tax rates and in the amount of money available for schools. It was not uncommon to find districts with very low tax rates and high expenditures as well as districts with high tax rates and low expenditures.

In 1968 plaintiffs in California filed the first successful legal challenge, known as the Serrano case, to such school funding systems. The California state supreme court held that such inequities were unconstitutional and ordered the state to equalize spending differences based on property wealth. Challenges have been filed in most other states and have been successful in about half of these cases. In the late 1980s, plaintiffs began to challenge state funding systems by arguing that they do not provide adequate resources for education. These cases have been successful in a number of states, most notably in Kentucky, Ohio, and Wyoming.

Faced with such court rulings, or in many cases simply faced with a legal challenge, states have increased the level of support for schools. Whereas in 1920, local property taxes accounted for nearly 90 percent of school district revenues, by 2001, the federal government provided about 6 percent of school revenues with the remaining 94 percent shared approximately equally between states and local school districts. Although these percentages vary considerably from state to state, the general pattern of increased state involvement in the funding of schools is clear.

States rely on two major types of intergovernmental grants to school districts and use a variety of distribution formulas to actually allocate funds to each district. The two major types of grants are general aid and categorical grants.

General Aid

General–or unrestricted–aid represents the largest source of state revenue for local school districts in all of the states. General aid is money distributed to school districts with relatively few strings attached. This money, combined with local resources, usually represents between 70 and 90 percent of a district's budget and is spent for such things as teacher salaries, administrators, operations, and maintenance, instructional support, and the general operations of the schools. Much of this money is distributed to school districts in inverse relation to the local property wealth per pupil, with the intended consequence of equalizing differences in revenue capacity. States use the following mechanisms to allocate general aid to school districts.

Flat grants. A flat grant is a fixed amount of money given to each school district regardless of need. Popular in the early twentieth century, flat grants, if they are used at all, are relatively small today. Flat grants have lost favor because of their disequalizing impact and the fact that they provide assistance to districts regardless of local property wealth.

Foundation programs. Under a foundation program, the state establishes a base–or foundation–level of revenue that each district should maintain. It also establishes a required tax rate that each district must levy. The state then provides resources to each school district to make up the difference between the foundation level and how much is raised by that school district though the required property tax rate. If a district raises more than the required amount some states take those additional funds and use them to finance the state's share in other districts. This process is known as recapture. A foundation program works well in states where the court has ruled that some minimum level of funding is necessary to insure adequate educational opportunities.

Guaranteed yield. Another approach is to guarantee each district the ability to raise money as if it had a specified level of property wealth. The state establishes a guaranteed wealth level and as under the foundation program, districts with per pupil property wealth below that guarantee are given state aid so that at any tax rate they can raise as much revenue as the district whose wealth is equal to the guarantee. As before, wealthy districts are able to raise more than the guarantee. Some states recapture this difference and others do not.

The principle difference between foundation programs and guaranteed yield programs is that under a foundation program all districts are required to level a fixed tax rate and have the same revenue guarantee. This provides for considerable equity across districts, but limits local choices over how much to spend. Districts seeking to spend more than the foundation guarantee must do so with unequalized local property taxes. To the extent that the foundation level defined by the state does not grow as fast as school district revenue needs, larger portions of total revenue will become unequalized. This problem occurred in many states in the last half of the twentieth century.

Guaranteed yield programs specify a wealth guarantee. This gives districts more flexibility in determining how much they wish to spend, and insures that all districts (whose wealth is less than or equal to the guaranteed level) have access to the same level of per pupil revenue with equal tax rates. This approach allows for more local choice, but if the wealth guarantee does not keep up with growth in property values in the state, it too can lead to substantial portions of local revenue not being equalized.

A common solution to this problem is a twotiered approach to distributing general aid to school districts. The first tier is a traditional foundation program requiring all districts to levy a minimum property tax and guaranteeing funding at a minimum level. The second tier relies on a guaranteed yield system, offering districts an equal amount of revenue per pupil for each increment in property tax rate above the foundation required tax rate. This guarantee often is capped at some level. Some states even allow districts an unequalized property tax above the second tier.

Categorical Grants

Not all students have the same needs. Some children have disabilities that require special assistance to help them learn. There is also considerable evidence that children from low-income homes are at a disadvantage in learning compared to children from higher-income families. Therefore, simply providing an equal level of revenue for each child may not offer equal educational opportunities. In addition, the characteristics of school districts may lead to differences in cost structures that must be compensated for if all children are to have equal access to educational services. Categorical grants are generally used by states to compensate for these differences in student and district characteristics. Among the categorical approaches most frequently in place are the following.

Pupil weighting. Something of a hybrid between general and categorical aid, the practice of pupil weighting counts students with special needs more than once before general state aid is distributed to school districts. For example, a child with a learning disability may receive an additional weight of one, meaning he or she is counted as two students for the purpose of state aid distribution. This has the effect of reducing the districts per pupil property wealth and hence increasing the state aid per pupil, and of providing that state aid for that child twice. It is assumed that the additional revenues will be used to meet the needs of the children who generate the funds, although not all states actually require that.

Program-specific grants. An alternative approach, program-specific grants give districts additional money based on child or district characteristics. For example, grants could be provided to help fund the special educational needs of children with disabilities. This can come in the form of direct reimbursements, or paying a fixed amount of money for each child so identified. In the case of compensatory education (money for children from low-income homes), additional revenue is often provided to enhance educational opportunities. Generally it is required that the funds be spent on the children who generated the funds in the first place.

States also provide categorical funds to assist districts with programs where costs may vary for reasons that are out of the control of the district. For example, geographically large but sparsely populated districts generally have higher transportation costs per pupil than do more densely populated urban districts. Many states provide separate transportation assistance to districts to compensate for these differences.

Geographic cost differences. In addition to the cost differences that school districts experience described above, across most states there are substantial differences in the costs of the personnel, supplies and materials that schools purchase. Some states have begun to make adjustments to state aid formulas to accommodate these differences. For example, the costs of housing may be higher in large urban areas of a state compared to rural areas. In addition, there may be more competition for individuals with high levels of education and training (such as teachers) in some areas of a state. As a result, it may cost a district more to provide exactly the same services different parts of any state. Therefore, a geographic cost adjustment could be included in the state aid formula to adjust for those differences. These adjustments are often controversial and frequently poorly understood by state policy makers. Their intent is to equalize differences in costs faced by school districts that are out of their control. But legislators faced with allocating more money to other parts of the state often have difficulty supporting such adjustments and as a result they are only infrequently used today.

It is likely that over time, as lawsuits focused on school funding adequacy grow in importance, the state share of support for public education will grow. How states elect to distribute funds to local school districts will not only continue to be an important policy issue, but its importance will grow over time.