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Money matters: A primer on K–12 school funding

"School boards are the education watchdog for their communities, ensuring that students get the best education for the tax dollars spent."
--The role of school boards, The Center for Public Education, National School Boards Association

Nothing riles the U.S. citizenry more than tax dollars spent unwisely or unfairly. Our country’s origins are rooted in rebellion against unfair taxation. Now, more than two centuries later, news headlines reveal that money matters continue to inspire citizen activism and protest. We are culturally wired to question the fiscal decision making of those in authority, and the debates that swirl around the subject of school funding illustrate that truth. Here’s a sampling:

  • The Bozeman, Montana, school board chairman criticized the state’s governor for not spending more of that state’s budget surplus on funding school initiatives. According to a report in the Bozeman Daily Chronicle(Schontzler 2007), the school district received enough money to begin full-day kindergarten classes and pay for employee pay raises, but not enough to hire math specialists or replace retiring teachers at Bozeman High—actions that the board chairman contends are crucial to “innovation” in improving education.
  • In Philadelphia, activists who had lobbied for an overhaul in how Pennsylvania funds its schools are claiming victory. According to the Philadelphia Public School Notebook (Mezzacappa 2008), the governor’s proposed budget includes a new formula for distributing state aid to education. Among other things, the new funding formula takes poverty rates and local taxing capacity into account when dividing up education dollars.
  • In Missouri, 200 school districts filed suit against the state, arguing that the school funding formula doesn’t provide an adequate education for many students or ensure that funds are distributed equally to school districts. According to the St. Louis Post-Dispatch (Franck 2007), the districts lost their legal battle. A lawyer representing Missouri taxpayers said the ruling was a victory for those who oppose sizeable tax increases for school spending.

You can imagine the level of emotion that accompanied these situations. And whether or not you agree with any of the arguments, the point remains: As a school board member, you need to prepare to be questioned yourself. Anticipating the questions constituents might ask, or the objections they might voice, means first understanding where schools in your state and your district get their funding.

As the case in Missouri shows, it’s also important to understand why your state’s school-funding pie gets divided as it does. While it might not be necessary to agree with how state legislators split the pie, it’s crucial to be able to explain the funding formulas as accurately and simply as possible.

Every district in the United States has a slightly different funding situation. And every school (or district) has different needs. Below are your first steps for evaluating your budget accurately.

Where does the money come from?

There is no single recipe for concocting a state’s school-funding pie, but the basic ingredients are the same. Contrary to popular conception, the federal government is not the biggest contributor. On average, federal funds currently make up approximately 9 percent of a school district’s budget. Individual states and local school districts add the rest. How much each state and district provides varies from state-to-state (U.S. Department of Education 2007).

“The Federal Government . . . provides assistance to states and schools in an effort to supplement, not supplant, state support,” write the authors of 10 Facts About K-12 Education Funding (U.S. Department of Education 2005). The percentage of funds the U.S. Department of Education supplies flows into a school’s coffers through a variety of laws and programs, including, among others:

  • Title I, which is included in the Elementary and Secondary Education Act (now called No Child Left Behind), is the largest federal K–12 program. Title I provides money to local districts to improve the academic achievement of children in high-poverty schools.
  • Reading First funds the use of research-based curricula to provide reading instruction for grades K–3.
  • Improving Teacher Quality grants help pay for teacher professional development and training.
  • English Language Acquisition programs teach limited English-proficient children English, assisting schools to help these students meet state academic standards.
  • Other No Child Left Behind (NCLB) programs include those to support charter schools; improve math and science education; support after-school learning programs; and assist American Indian, Alaska Native, and migrant students.
  • The Individuals with Disabilities Education Act (IDEA) assists states and local schools in educating children with disabilities (2005).
  • Other governmental agencies also supply funding. The USDA administers the National School Lunch Program (NSLP), which provides low-cost or free lunches to more than thirty million children each school day. The NSLP also includes reimbursement for snacks served to children in after-school educational and enrichment programs.

State and local dollars. Traditionally, states and local communities are charged with delivering the majority of K–12 education revenue. Each state determines How much of its schools' budget  it will contribute. A handful of states provide at least 50 percent of their schools’ total budget (Alabama, Alaska, Arkansas, California, Delaware, Hawaii, Idaho, Kansas, Kentucky, Michigan, Minnesota, Nevada, New Mexico, North Carolina, Oklahoma, Oregon, Utah, Vermont, Washington, West Virginia, and Wisconsin). Hawaii and Vermont contribute the highest percentage, each supplying close to 90 percent of their schools’ revenue. More than half of the 50 states provide less than 50 percent of their schools' budgets, with Illinois, South Dakota, and Texas providing the least amount, at around 32 percent (U.S. Census Bureau 2008).

As each state came into the union, it stipulated in its constitution its obligation to provide for residents’ education. Most states then assigned much of the responsibility to local school districts, which raised revenue primarily through local property taxes. Property taxes continue to be the primary source of funding for education for most states and communities, but they aren’t the only taxes collected to fund K–12 education. In many states, a portion of other taxed items may be earmarked for schools. These include sales, motor vehicle, amusement, tobacco, alcohol, utility, and gasoline and mineral taxes. Many states also draw upon the proceeds from state lotteries to bolster their education budgets. At least 24 states use lottery money for school programs, according to the ECS report, Lottery Information by State (February 2006). Some states extract a percentage of the total earnings, while other states are required to deposit all lottery proceeds into education funds.

But the policies that govern how those taxes are levied and collected are as varied as the states themselves.

In some states, local school boards are given the authority to develop a district budget and set a tax rate to support that budget, according to the Education Commission of the States (ECS). These districts are “fiscally independent,” write the authors of Taxation and Spending Policies (ECS 2004). There are some limits to that authority, the authors point out: In some states, voters must approve any tax increase, while in other states, voters get involved only after a school board surpasses a specified tax rate. In others, a budget or budget increase over a specified amount must be passed by the voters with the tax rate to support it.

On the other hand, “fiscally dependent” school boards, as the name implies, can’t impose their own taxes. Another entity—such as the city or county government, for example—must approve the school board’s budget and levy taxes to meet it (ECS 2004). These often occur in countywide school districts and New England townships.

Other revenue sources. There are times when federal, state, and local revenue sources don’t provide enough money to fund special projects schools want to provide. Often, school districts then seek private funding.

Certainly, the school fundraiser is a tried-and-true method of generating small pools of money or materials. According to a poll conducted by the National Parent Teachers Association (PTA), more parents are being asked to fund items and needs that once were covered by school budgets—everything from purchasing paper and cleaning supplies to augmenting teacher salaries and curricula. “Thirty-nine percent are contributing more than $100 to their kids’ classrooms each year, and one in ten (11 percent) say they’re giving more than $300 a year,” the PTA reports (February 2004).

Teachers themselves often spend their own money to purchase supplies they believe are necessary for their lessons. According to a New York Times article, “Teachers Dig Deeper to Fill Gap in Supplies,” elementary and middle school teachers spent an average of $521 of their own money on supplies in 2001. Those were the findings of a survey conducted by Quality Education Data Inc., a market research firm in Denver (Colorado). Both of these sources, while significant for the teachers and parents involved, add up to just a fraction of a district’s average per-pupil expenditure, which is around $9000.

Another locally-based source of revenue is a district or school education foundation. Such foundations are privately operated, nonprofit organizations that qualify as charitable organizations. Tax-deductible donations can be made to the foundation to support administrators and teachers who need additional funding. “Many schools are beginning to understand what colleges and universities have known for decades,” observes the National School Foundation Association (NSFA). “There are many individuals who wish to support education and a foundation is an excellent way to begin to develop this stream of philanthropy,” (NFSA 2007).

Fundraisers and education foundations help, but “increasingly, the financial support necessary to develop small- and large-scale initiatives is coming from grant-funded sources, including the government, private foundations, and corporate sponsors,” write Rebecca Gajda and Richard Tulikangas in Getting the Grant: How Educators Can Write Winning Proposals and Manage Successful Projects (2005).

Though grants won’t (and shouldn’t) provide the kind of money schools need for their day-to-day budgets, much money can be available from them. According to the Foundation Center’s new report, Foundation Giving Trends (2008 Edition), the nation's largest foundations increased funding for all major subject areas in 2006, with health and education receiving the biggest slices of the pie. 

“Private foundations are everywhere,” but they “vary widely in their interests as well as the size of their giving,” write Gajda and Tulikangas (2005). Bill and Melinda Gates, for example, continue to lead the list of corporate givers to education, and are well-known for the millions of dollars awarded to various initiatives designed to support high school reform. Other top funders, according to the Foundation Center, include the Ford Foundation, J. Paul Getty Trust, the Robert Wood Johnson Foundation, and the William and Flora Hewlett Foundation.

Gajda and Tulikangas note that corporate foundations are slightly different than private foundations. These foundations provide “a way for the corporation to demonstrate its public goodwill by providing cash (and sometimes other company resources) to causes that it chooses to support,” write the authors (2005). The company’s business focus can determine what the foundation will fund, the authors point out. So, for example, if a school is interested in helping students develop a sound understanding of finance, grant seekers may want to apply for a grant from Wells Fargo, which donated $120,000,000 in 2006 to fund, among other initiatives, financial education programs that teach money management skills in classrooms, homes, and banking stores (Business Week, 2000–2008). Schools that want to beef up their math and science programs could appeal to Motorola, National Semiconductor, or Northrop Grumman for funding (Business Week, 2000–2008).

Although federal and state agencies and foundations are probably the entities most often considered when schools seek funding, money can come from unusual sources. The National Gardening Association, for example, has teamed up with Home Depot™ to offer Youth Garden Grants, which include up to $500 for supplies and an activity kit that helps teachers link gardening to science standards and service-learning goals.

No matter which organization funds the grant—federal, state, or local agencies, private or corporation foundations—the grantor has criteria that must be met if the school is to receive the money (see  Going for the Green). And grant money goes away.

It’s important, therefore, that schools know how long grant money will last. Most grantors provide that information in the application materials. The AT&T Foundation, for example, has a new grant program focused on high school success for at-risk students. One of the grants will provide project support for existing, and successful, high school retention programs. Grant payouts for this category will range from $50,000–$100,000 a year, but only for up to four years (2008–2011). Another of the grants, however, is targeted to help schools that want to start high school retention programs. In this category, grant payout will range from $25,000–$35,000 for one year only (AT&T High School Success Special Grants Program 2008).

Where our money comes from—asking good questions:

  • How much money are our schools getting from federal funding, and what is it used for?
  • How much do our state and local governments contribute, and how does that compare to other states?
  • How much of our schools’ budgets depend on grant money? Where do the grants come from? How much of it is due to run out?

Where our money comes from—finding good answers:

  • Data First  gives you the resources to find out how much money your school receives from local, state, and federal sources.

Where does the money go?

The money comes in, the money goes out. It’s easy as that, right? Well, it’s not quite that simple.

Each state has its own way of divvying up money among districts. “States develop educational funding formulas to determine the total amount of funds needed for each student and to establish the state’s share of those costs,” writes Michael Griffith in State Education Funding Formulas and Grade Weighting (ECS 2005). For example, let’s say Kentucky decides to fund 60 percent of its schools’ budget. How will that money be distributed to local school districts? Different states use different formulas.

The most common approach—used by twenty-five states and the District of Columbia—is called theFoundation/Base Formula. These states set a base-level amount of monetary support for each student. That base-level amount is then adjusted, based on how much support that student would need from the district. “Higher funding levels are provided to students enrolled in special education, English language learner or at-risk programs,” Griffith writes (2005). The base-level amount is also often adjusted by different weights assigned to grade-level bands.

Modified Foundation/Base Formula differs from the traditional foundation formula in that each student’s base-level amount varies by district. Each of the twelve states that follow this formula use different criteria to determine the base-level amount.

Seven states choose to divide their money by allocating funds based on the teachers, administrators, and support staff needed to operate a school, as determined by student enrollment. This is the Teacher Allocation formula. Here’s an example of how it works: “A district might receive funding for one teaching position for every twenty students enrolled and one administrator position (principal or vice principal) for every four hundred students enrolled,” Griffith explains (2005).

Like the foundation method, the Dollar Funding Per Student formula allocates a base-level amount for each student based on his or her specific educational needs. What’s unique is that the two states using this formula then stipulate, in legislation, the exact dollar level of funding each student receives.

Then there are other systems, which are used by three states. Two of those states “allocate funds to school districts based on what was received in the previous year plus an inflation increase,” writes Griffith (2005). The third state combines the foundation and teacher allocation formulas. Hawaii, which operates as a single school district, uses a weighted student formula to fund individual schools. We've put all states' formulas in one table  for your reference.

No matter the formula, once districts receive state money they are generally able to allocate it as they see fit. However, there have been some proposals to restrict this ability by funneling funds directly to schools. For instance, money allocated for a school’s limited English proficient students would be earmarked specifically for those students at that school.

What’s probably easiest to understand is where the money is spent. It’s a simple accounting: A portion of every dollar a district receives is spent on a variety of instructional items, such as salaries for classroom teachers, supplies, and professional development. That education dollar also pays for essential non-instructional items, such as support, community services, and transportation costs (see Tracking the education dollar ).


Where does the money go—asking good questions:

  • How does my state calculate money distribution? How does that affect our schools’ and district’s funding?
  • How much of the money is dedicated to specific programs or priorities? How much money is our district free to allocate?
  • How is our district spending that money?

Where does the money go—finding good answers:

Spending money equitably

The funding formulas are designed to help each state determine its education funding obligations. Since states want to give all students a good education, funding formulas often come under debate. Two terms that come up frequently in these debates are equity and adequacy. Equity refers to distributing a given amount of money evenly among students. Adequacy is not about a given sum of money; it’s an open-ended question of what funding students need in order to succeed. (For answers to other frequently asked questions, see the guide's Q&A .)

Equity issues arise because many parents, educators, and policymakers argue that relying heavily on property taxes to fund K–12 education leads to disparities. “Property wealth varies significantly between districts within a state. As a result, districts with small property tax bases typically find it harder than those with large property tax bases to generate local revenue for schools,” write the authors of a National Research Council report, Equity and Adequacy in Education Finance: Issues and Perspectives (1999). “Compounding the problem, districts with more-costly-to-educate youngsters are often not the ones with the large property tax bases,” the authors write (1999).

In two major decisions in the 1970s, Serrano v. Priest I and II, the California state Supreme Court declared the school’s funding situation to be “unconstitutional and a violation of equal protection principles” under state law. (Serrano v. Priest I 1971; Serrano v. Priest II 1976). In response, the California legislature came back with a system that capped the amount wealthy districts could receive from per-pupil revenues and redistributed the extra money to poorer districts.

After these decisions, many other states legislated that tax revenue be redistributed more equally. In Texas, for example, districts with assessed property values that exceed a certain amount of money are considered “property wealthy” and are subject to the state’s wealth equalization school finance law, write the authors of A Citizen's Guide to School Finance (Round Rock ISD 2005).

Two other developments over the years have served to make school finance a more hotly litigated issue in state courts. First, an attempt to argue that funding inequities among school districts violated the U.S. Constitution failed in 1973, when the U.S. Supreme Court held in San Antonio Independent School District v. Rodriguez that the Texas school funding system did not violate the Equal Protection Clause. (San Antonio ISD v. Rodriguez1973). That decision shifted the focus of such efforts to the education clauses in state constitutions. Although these provisions vary, state courts have held that they establish a legal duty on the part of states to provide for children’s education.

Second, as states adopted standards-based reform and started legally defining what kind of education they would hold school districts accountable for, state courts were given a clearer legal standard for what constitutes a legally adequate education. This meant that they were better able to evaluate evidence about whether school funding was adequate to provide students with a meaningful opportunity to achieve state standards. In many states, “costing-out” studies have been conducted to make these estimates.

As a result of these lawsuits, a host of adequacy lawsuits have been filed against state-level funding strategies. The ECS reports that as of 2005, some form of finance litigation had been filed in 44 of the 50 states, with plaintiffs bringing claims of inequity or inadequacy of funding (see the guide's Q&A). In recent years many of these lawsuits have been successful.

The search for fair funding, however, is further complicated when state economies are struggling, reports the ECS. States with shrinking budgets may search for more politically palatable alternative funding sources, such as lotteries and increases in sales taxes or “sin taxes” on purchases on items like tobacco or alcohol. But with these strategies come a whole new set of questions. For example, does a reliance on state lotteries actually result in a decrease in state spending on education? Lotteries and taxes levied on sales or items such as alcohol and tobacco often are seen as regressive. Apart from these taxes’ possible effects on consumption, is it fair to bolster state education coffers by taking a larger percentage of the incomes of lower-income citizens than from the incomes of higher-income citizens? Another concern is that these alternatives are typically more volatile than property tax revenues.

Answers to questions about funding are not simple, and the American public is ambivalent. According to a poll commissioned by the Educational Testing Service (ETS), a majority recognize that some schools, especially those in low-income areas, need to improve—and need money to do so. Still, these citizens are wary of raising taxes.

In Equity and Adequacy: Americans Speak on Public School Funding, ETS reports that the opinions expressed by those surveyed fail to provide policymakers with a clear mandate. “In the end, Americans resist making hard choices to either limit education spending or raise additional revenue,” write the report’s authors (ETS, Executive Summary 2004).

The poll found that while a majority of Americans believe it is appropriate to reallocate funds raised in other areas to provide increased funds to schools in low-income areas, “they do not offer a clear direction in the debate between the equity model and the adequacy model. The equity model (preferred by 40 percent) suggests that states should make efforts to ensure that an equal amount of money is spent on every student. Nearly as many (37 percent) Americans choose the adequacy model, which suggests that states should make efforts to ensure that each school receives the funds necessary for each of its students to succeed.” (ETS 2004).

Americans are also uncertain about how to balance funding between state and local governments. When asked to choose between two statements about education funding at the state level, half (50 percent) of those surveyed said they preferred the state to increase the amount of money it adds to the funding pie “even if it means an increase in state taxes.” Meanwhile, nearly as many of those surveyed (44 percent) didn’t want state taxes to increase, “even if it means no additional funding for education,” stating that existing taxes were adequate, and that there was “already too much waste in the system,” (ETS June 2004).

Spending money equitably—asking good questions:

  • Are citizens in our district concerned about whether our school funding is equitable or adequate?
  • Besides equity and adequacy, what other concerns do citizens in our district have about our spending?
  • How should we address questions they might have?
  • Given that state funds provide equity and local funds local control, what should our balance be? What would provide financial stability?

Finding answers before questions are asked

The ETS poll revealed that the public is willing to devote more dollars to education, but citizens want to know that more money spent will result in a better education for all, and that more money spent won’t be more money wasted. “The priority that Americans place on education makes them willing to bear extra costs for changes to education if they can feel confident that those changes will result in measurable improvements,” write authors of the report. “Securing such support,” the authors continue, requires “voter education messages that take the issue of waste head-on,” (ETS June 2004).

Which brings us back to where we started. If it’s the job of school board members to ensure that students get the best education for the tax dollars spent, then it’s also their responsibility to dig deeper into issues related to school funding in their states and districts. Armed with that knowledge, school board members are then better prepared to educate the public about those issues. See How to dig deeper  to get started yourself.

This guide was written by Kathy Checkley, a freelance writer living in Austin, Texas. Kathy has more than 13 years of experience writing about education issues. All references  for the research cited in this guide are listed on a separate web page.

Posted: July 2, 2008

©Center for Public Education

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