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For most of this century education funding has been channeled to school districts. But since the 1980s, education reform has created a variety of new policy initiatives that require states to consider how to finance school sites (e.g., school-based management, school-level accountability, and charter schools). As states address this new task, they realize that their current district-based finance structures require significant modification, if not a complete overhaul, to produce a system that fairly and adequately responds to fiscal and curricular goals of the future.

UW-Madison Education Professors William Clune and Allan Odden say new finance systems should align with other initiatives of standards- and school-based education reforms. Based at WCER’s Center for Policy Research in Education (CPRE), Odden says, "With the right kind of change, finance systems and structures could help the education system improve the productivity of the educational dollar. Many more students could be taught to high standards."

Current systems don’t cut it

Current district-oriented school finance systems seem inadequate for fiscal and curricular goals, Clune says. "First, recent court decrees have required much higher levels of equitable expenditures per pupil across school districts within a state." (Clune and Odden refer to this goal as "horizontal equity.") Clune and Odden notice that the balance may be tipping toward a standard that looks at expenditures and away from the standards of the 1970s that just required equal access to the local property tax base.

For example, Texas court decisions in 1989 and 1995 called for eliminating the wealth advantages of the top 50 districts and ordered the wealth of the bottom 50 districts brought up to at least the state average.

Second, courts and legislatures are moving beyond the goal of equity toward the goal of adequacy, meaning a funding level sufficient to support higher student achievement. Adequacy requires a certain base funding as well as adjustments for price and special needs of pupils and schools.

Third, school finance formulas are disconnected from movements within education policy that seek to encourage higher levels of student achievement. District-based funding formulas can and should encourage school-site management, performance awards, and performance-based compensation for teachers. "These all are important elements for high performance organizations," says Odden.

Set specific fiscal equity targets

There is disarray in the current system of delivering state aid to school sites. "Despite constant tinkering by legislatures and courts, fiscal equity across districts has improved but not all that much for several decades," Clune says. "The courts’ increased emphasis on strict horizontal equity in school finance litigation reinforces the need for some solution." To correct the problem of unstable and inadequate minimum funding, Odden and Clune recommend that courts and legislatures design specific fiscal targets for equitable education. For example, a state’s plan could guarantee spending at the higher of the state or national median expenditure per pupil.

This plan, called a foundation plan, should be sufficient to eliminate all "savage inequalities" in the nation’s public schools. It also should allow all districts to finance some version of a school created to teach all students to high performance standards. An additional element is then required: that minimum spending levels must be stabilized and protected from erosion in subsequent years by annual inflation adjustments.

Above the foundation level of an adequate education for the average student across the state, a substantial amount of compensatory aid is needed to meet the special educational needs of poor children, especially those attending high-poverty schools. "Poor children are by far the largest identifiable group whose educational outcomes fall below state-defined minimums for an adequate education," Clune says. "And high-poverty schools face overwhelming problems in meeting so many special needs." A categorical grant of approximately $1,000 per pupil (including federal aid) is a reasonable estimate of the extra instructional costs involved in bringing scores up to state minimums, Odden says, assuming an effective and well-managed educational intervention.

Redesigning school finance toward school-based budgeting should also help to increase productivity. Almost all of the big decisions about how to increase student performance should be made at the school level. "Education research and experience from outside education strongly suggest that the unit with primary responsibility for meeting performance goals (i.e., the school) also should have budgetary flexibility," says Odden. "The growth of choice schools and charter schools emphasizes the need for school-based budgeting."

Such a shift toward school-based budgeting suggests four additional changes in school finance:

1. Budgeting 80% or more of a district’s operating budget, in a lump sum, to school sites
2. Setting aside a modest amount, say 2 to 4 percent, of the total educational budget for professional development of teaching skills in a coherent, powerful, accelerated curriculum
3. Changing teacher compensation from experience and education units to direct measures of knowledge and skills, and
4. Setting aside another small amount, say 1 to 2 percent, of a district’s budget for rewarding improved student achievement.