Introduction

When state policymakers and advocates engage on public school finance issues, they most commonly focus on state allocations: either appropriations for public education or the funding formulas that states use to distribute aid for school district operations. These are hugely important for determining how much money goes into the system and whether state support is directed towards the students and communities that need the most help. However, there are numerous other policy factors that influence the equity of school funding in a state. These deserve greater attention, both as areas of opportunity and because, if neglected, they can become equity trapdoors—places where fairness can fall out of the funding system. These trapdoors can affect school districts anywhere, but especially in states where the main funding formula has been recently reformed or is already fairly equitable. The gains made through formula reform can be lost in many small ways, undercutting both the system itself and the political willingness to commit to further investments. 

For the purposes of this guide, an equitable school funding system is one in which: 

• District funding levels are aligned with the needs of students and communities; districts with similar student and community need levels have similar funding levels. 
• Within districts, students and schools are supported in proportion to their needs (whether through direct-to-school funding allocations or service provision). 
• Communities and taxpayers contribute their fair share to the public schools, so that low-wealth, low-income communities are not overburdened and high-wealth, high-income communities contribute appropriately.

This guide will provide an overview of the state policies that affect school funding equity, providing state policymakers, advocates, and their supporters with a checklist to ensure that they consider the full range of important factors.

Of course, equity is not the only important priority in a funding system. There are also good reasons to value adequacy, reliability, and transparency. This guide focuses specifically on state policy levers for ensuring equity in the funding that states and communities contribute, that districts raise and receive, and that reach students and schools. Other policy aims will be discussed insofar as they contribute to the goal of achieving an equitable school funding system.

This guide is organized according to three main questions that should have positive answers in an equitable school funding system. It lists the policy factors that determine the answer to each question. The three questions are: 

1. How much does each district have, and is it enough for its students?
2. What revenue is raised for districts, and is it fair, predictable, and protected?
3. How are funds used, and do state policies promote equitable use within districts?

Before readers consider the specific policy factors that contribute to (or detract from) the equity of state school finance systems, they should have a baseline understanding of these systems. The broad strokes of state school finance policy are as follows:

First, each state has a school funding formula. This formula uses the count of students in each district, as well as various other pieces of information about the district’s population and circumstances, to set a target funding amount for the district. This target amount is neither the district’s ultimate state aid amount nor its total amount of funding—it is a starting point for the school funding system, not an end point.

The second important element is that almost every state splits responsibility for funding the target amount between the state and the district. The state sets an expectation for the district’s local revenue contribution using a measure of local wealth that is mostly based on the value of the district’s property tax base. The state calculates the district’s expected local contribution, subtracts that amount from the formula target, and provides the difference as state aid. This step—the use of a local wealth measure to determine the district and state shares of responsibility for the formula target amount—determines the primary state funding allocation to the district.

The third key factor is that districts levy taxes, primarily property taxes, to raise local revenue for their schools. In some states, the expected local contribution in the step above is a minimum required amount. It is only rarely a maximum permitted amount. Districts usually raise enough money to fund their share of the formula target, and many raise extra money as well. The extra local dollars increase the district’s funding amount above the formula target and are usually not offset by reductions in state aid.

Finally, separate from the funding formula, the state may provide funding through grants or other categorical programs that support specific priorities. These funds also increase the district’s funding amount above the formula target and are generally not subject to a local share requirement.

These four steps are composed of many smaller policy decisions: What factors are considered in the funding formula? How is local fiscal capacity measured? What latitude does the district have to set tax rates higher or lower than the formula anticipates? What state money is distributed outside the funding formula? What tax sources contribute to state and local school revenues, and who pays? What rules and conditions affect district costs and spending decisions? Factors like these are the focus of this guide.