RSFN Special Series:
Financing Rural Schools: Characteristics of Strong Rural School Finance Systems

Last Updated: April 30, 2010

This article appeared in the April 2010 Rural Policy Matters.

School Finance Principles, Generally

What does a good school finance system look like?

A good system for funding schools should meet the following basic criteria:

  • It provides a secure, stable and fair sources of revenue;
  • The relationship between property wealth and resources for students is minimal;
  • It takes into account needs of students with unique challenges;
  • It equips all schools to optimally serve their students, staff, and communities

In addition, the Rural Trust sets forth specific principles related to the unique contexts of rural schools. These include the following:

  • Rural people have the right to educate their children in good schools close to home, in a place and context with which students are familiar;
  • All children should be educated well for life within the community as well as beyond it;
  • Rural communities possess the civic and professional skills to run good community schools that meet local as well as state standards of excellence;
  • Rural communities need the fiscal resources to build and maintain schools, provide highly qualified teachers, and support a strong curriculum.
What is a School Finance System?

A school finance system is the set of mechanisms through which schools are funded. Every state’s school finance system is different, and the details of how funds are distributed to schools are found in states’ laws and regulations. Typically those rules are referred to as the formula. Usually, only a few people in the state know exactly how the formula works. Nevertheless, the formulas are a matter of public record and community advocates can learn them. The total amount allocated by the state for public education is found in the state’s annual budget.

School finance systems age quickly because the facts and circumstances they include as factors change in their relative importance or cost. A formula that has been in place for 15 years is considered old. Even so, many states have not overhauled their basic formulas in decades.

State legislatures do tend to make incremental changes to their formulas. These small changes can throw important aspects of the formula out of balance and dramatically reduce how much funding a district receives.

It is important to acknowledge that school finance is political in nature. ‘Horsetrading’ among legislators is not uncommon, and programs or interests with powerful advocates are often funded, even as pressing needs of less powerful constituencies go unaddressed. The political nature of school finance also makes overhauling the system difficult. Proposed systemic changes are usually analyzed in terms of impact on specific districts, and ‘winners’ and ‘losers’ quickly declared.

The Current Rural School Funding Landscape

The economic crisis impacts rural schools and communities more harshly than other districts for several reasons. First, in flush economic times, many rural districts lack the local property tax base to generate sufficient revenue for schools, even when tax rates are much higher than state averages. Therefore, when state funding is cut, many local rural districts do not have the means to make up the shortfall. Second, the state policy climate is often indifferent or even hostile to rural schools and districts. For example, many states do not address the extra costs of student transportation common to most rural districts, nor do they address the challenges of staffing rural schools. Many states actively encourage school or district consolidation and use funding as one means to force the issue. Economic crises at the state level tend to intensify the negative policy context for rural schools. Third, rural schools are diverse and have a variety of circumstances and needs. Cuts to funding rarely account for the many different ways rural districts will be affected. Finally, rural people are a demographic and political minority in nearly every state making it harder to get the attention and interest of policymakers for rural issues.

Overall policy trends in school finance also tend to disfavor rural schools. For example, increasing centralization and control of funding streams at the state level generally decreases both local autonomy and local accountability. School finance system characteristics are closely tied to how much control the state has over schools and districts. For these reasons, it is important for rural school advocates to be active in school finance activities in their communities, in the policymaking arena, and, at times, in the courts.

Guidelines for Rural School Funding Reform

Many of the guidelines featured in this special RSFN series are based on work that is already underway in rural places among partners and friends of Rural Trust. We are glad to facilitate connections between groups that are working to distribute funding in ways that provide the most support to the poorest rural schools.

Characteristic 1: A Strong Foundation Formula

One place to start an analysis of your state’s funding system is to determine whether the largest source of money for districts comes from a foundation formula. A foundation formula calculates the basic amount of funding needed to educate a student in a general education (rather than a special education) program. A strong formula should account for all of the major elements necessary to educate a typical student in a typical district to state standards: teachers, curriculum materials and equipment, supplies, facilities, administration and other support personnel, transportation, maintenance, and other core education needs.

A foundation program determines how much “base” funding is needed per student, although it does not necessarily determine how that money is spent by the district. Other aspects of the state’s finance formula determine how much of the foundation is covered by the state and how much by the district.

A few states use a teacher or personnel allocation (often called a “teacher unit”) method to determine foundation funding. In this case funding is based on district enrollment but funding calculations are tied to the number of teachers, administrators, and other personnel “earned” by the district.

A foundation formula is important to rural schools because it establishes a base amount needed to educate a student. In most states, a foundation formula implies a state obligation to help districts meet the foundation amount regardless of local property wealth. Most states adjust the distribution of state funding in relation to the relative wealth of the district as determined by taxpayer indices and local property values. In other words, low-wealth property-poor districts get a higher proportion of foundation funding from the state than do high-wealth property-rich districts. As currently implemented, these measures rarely ensure funding equity for rural districts, but they do help.

Foundation formulas usually recognize that it does not cost the same to educate every child. For example, it costs more to educate a high school student than an elementary school student and more to educate children living in poverty than in affluence.

These types of cost differences are recognized in good foundation formulas and are often accounted for by giving extra “weight” to various student characteristics. For example, each poor or at-risk student or each English Language Learner might get extra weight in the formula based on how much more it costs to achieve the same educational outcome for these students as it would for students without those needs. It is important that weights are accurate measures of cost, a topic that will be discussed in a future article in this series.

The state and the local district share the cost of the foundation amount. The local share of that cost is usually based on a uniform tax rate, and often a local minimum tax rate is required. In some states, a local tax cap is imposed.

A characteristic of a strong rural school finance system is that the foundation or equalization portion of the formula is the largest source of money for districts. The foundation amount should include the biggest costs for districts so that rural districts can benefit from adjustments for differences in local wealth.

The calculation of the foundation amount is also an important advocacy opportunity. Too often, state legislatures first decide an amount of money to be spent on education, and then allocate it among districts — with some not getting what they need. The base student cost in a state should reflect what the actual costs of educating students are, not what amount of money is available in a given year.

A Note About Categorical Funding

Another funding mechanism closely related to the foundation formula is categorical funding. Categoricals are specific amounts of money for particular children, special programs, or special purposes. They are usually smaller pots of money for restricted purposes, typically distributed without regard to a district’s property wealth or per-pupil spending.

Although rural schools need school finance systems that recognize specific needs, categorical funding is not always the most efficient or sufficient method for meeting those needs.

Categorical funding generally requires compliance activities on the part of districts; it often is used for programs with a “one-size-fits-all” approach; it frequently results in the labeling of children and incentivizes retaining children in programs that earn more funding for the district; and categorical funding often lacks transparency at the local level. One of the primary reasons for increases in categorical restricted funding — usually to the detriment of foundation funding — is the desire of legislators to control how funds are spent.

Categorical funding does, however, allow legislatures to target additional funds to special student populations, against the general trend of higher funding for wealthier schools. In addition, innovative new programs can also more easily be funded categorically.

Read more from the April 2010 Rural Policy Matters.

Related Categories: Rural Policy Matters

Related Tags: Rural School Funding News