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

Last Updated: October 27, 2010

This article appeared in the October 2010 Rural Policy Matters.

In this series, Rural School Funding News is reviewing general principles of school finance and sharing information about school funding systems that support rural schools and their unique characteristics and needs. While there are no easy answers to questions about how to fund schools, especially in this economic climate, we hope that these articles will provide you promising practices, ideas for advocacy, and guidelines that are easily transferable in your analysis and work on your own school finance systems.

If you are new to the series, you can review a brief introduction to the subject and discussion of Characteristic 1: A Strong Foundation Formula, here; Characteristic 2: Effective Use of the Judicial System, here; Characteristic 3: Fair Accounting for Cost of Living and Geographic Differences, here; and Characteristic 4: Recognition of the Benefits of Small Schools, here.

Characteristic Five: A Balance of Revenue Sources for Schools

Schools rely on a funding “pie” that is typically cut into two very large and one very small piece. The two larger portions are state and local funding, and the smallest piece is federal funding. Nationally, the average percentage from each source is about 44% from local government, 48% from state government, and 8% from the federal government. Each of these revenue sources has their limitations and issues to consider.

Federal funding for specific purposes is generally inadequate to meet mandates like special education or accountability. Title I funding for addressing poverty also does not go far enough in many districts.  

Inequity is also a problem. Federal funding formulas use state per-pupil spending to determine aid, which hurts students in low-spending states. And, as the Rural Trust is publicizing through its Formula Fairness Campaign, the Title I funding formula sends more Title I funding to larger districts at the expense of smaller ones.

Determining the right level of state aid to districts can be problematic too. As the state share of education funding decreases, wealthy districts have the means to make up the difference while poorer districts do not. Raising state share would seem to be a way to ensure greater equity, but this is not always the case because, in most states, richer areas are able to build in additional funding no matter what the level of state funding is. Increased local contributions in some states effectively cause a draw-down of additional state funding, which causes greater inequity. Typically, the state share should exceed the local share across the state.

Another issue is the weakening of local control over school management decisions that tends to occur when state-directed funding increases. Often increased state funding is accompanied by additional state requirements to implement policies and procedures that are one-size-fits all approaches not appropriate for small and rural districts.

Local contributions must be a part of the overall funding system for schools, but determining the appropriate share can be difficult. One general guideline is that local share should not exceed state share.

On average, local contributions hover near the 50% mark, so local communities have a significant investment in their schools. However, many school districts face serious challenges in trying to fill the funding gap not covered by federal and state support. In some communities, the ability to raise school funds through local property taxes is limited by state law, either through a tax cap or limits on the usage of levy funds. In other districts, especially in the South, school boards lack fiscal autonomy over their own school budgets and must seek approval from some other entity to make tax assessments.

A guiding principle of Rural Trust school finance work is that local rural citizens are well-informed to make decisions about their schools, including financial ones.

Other factors complicating equity in school funding are local property values and the taxpaying ability of local citizens. Property-poor districts need state funding levels to be sensitive to varying needs. But such sensitivity is not always the case, and even if some equalization mechanism is in place, rural districts are often still left with budget shortfalls. In sum, local investment in public schools is essential, but must not be the sole determinant of local schools’ ability to provide a first-class education to students. (See June 2009 RPM in-depth coverage of property tax and revenue issues in rural districts.)

Knowing the limitations of each source of revenue is important, but it is equally important to monitor the overall level of state and local spending. As stimulus funding from the federal government is depleted, states will be facing even more severe funding deficits. Rural school finance advocates will have to watch how their funding pie is being cut and keep working to ensure that their local community does not bear a disproportionate burden. Every child is entitled to a high-quality education, no matter what community they call home. The Rural Trust is committed to finding solutions to rural school funding issues. Call us for help.

Read more from the October 2010 Rural Policy Matters.