Prioritizing School Finance Equity during an Economic Downturn: Recommendations for State Policy Makers

Economic downturns negatively impact state budgets, placing education funding at risk (Baker and DiCarlo 2020; Roza 2020). Because state budgets are funded primarily through sales and income tax revenues, which are more sensitive to economic fluctuations compared with local property tax revenues, districts that rely more heavily on state—as opposed to local—funding are more vulnerable to economic recessions. And while federal stimulus money targets some of these shortfalls, the funds may not fully insulate all states from making budget cuts (Reber and Gordon 2020). In virtually every state, state funding is targeted to less wealthy school districts and those serving a greater share of low-income students. When states choose to reduce K–12 education funding using a flat or “poverty-neutral” approach (where all districts receive the same percentage reduction in state aid), those cuts may still disproportionately impact low-income students. Following the Great Recession, for example, high-poverty districts received a disproportionate share of state funding cuts, even when states made flat, across-the-board K–12 budget reductions (Knight 2017). Advocacy groups lobbied Congress to compel states to prioritize equity during the economic downturn (King 2020; Vadehra and Amerikaner 2020).

This brief outlines strategies state legislators can use to balance K–12 budgets while prioritizing finance equity. We define finance equity as providing relatively greater funding to school districts serving higher shares of students affected by poverty. An equitable finance system allocates funding “progressively” with respect to student poverty (Hinojosa 2018). We examine racial/ethnic disparities in funding and show that students who identify as Black, indigenous, Latinx, or Pacific Islander are disproportionately concentrated in high-poverty school districts, whereas students who identify as White or Asian are over twice as likely to attend a low-poverty district. The COVID-19 pandemic disproportionately impacts students of color, and the full economic, educational, and health impacts on these communities is uncertain. For students of color and low-income students, equitable school resources may play an especially important role over the next decade. As economic uncertainty looms over state budgets, we argue that legislators can prioritize finance equity by understanding the specific state funding programs that benefit wealthier, lower-poverty school districts.

This brief consists of five sections. We first explore how state funding matters for finance equity and why higher-poverty school districts bore a disproportionate share of funding cuts during the last recession. We then describe the role that state aid currently plays in K–12 funding systems, and the following section disaggregates state aid into specific funding programs. We show through this analysis the likely disproportionate impacts for high-poverty districts associated with seemingly neutral across-the-board cuts in state foundation aid funding. We then draw on state-specific data from Washington State to demonstrate that K–12 finance data generated from a specific state policy context provide more granular information necessary for effective state policy making. We conclude with a summary and policy considerations.

State funding influences finance equity because state funds represent a large share of school district budgets and because students in the United States are highly segregated across districts. School districts receive over 90 percent of funding from state and local sources, on average, although the balance of state and local revenues varies substantially across states. State funding accounts for at least 30 percent of total funding in all states and up to two thirds or more in some states, such as New Mexico, Vermont, and Washington (see Appendix table A.1).¹ The extent to which individual school districts rely on state aid also varies widely within states. State school finance decisions therefore have a significant influence over how school districts are funded. Those decisions have implications for school finance equity because students are segregated across districts.

Table 1 demonstrates one form of student segregation, comparing student race/ethnicity across high- and low-poverty school districts. The table uses poverty quintiles, where districts in each state are ranked by student poverty rate and an equal number of districts is placed in each bin for each state. Districts in poverty quintile 5 represent the 20 percent of districts in each state with the highest poverty rates. Underrepresented students of color are far more likely than White students to attend high-poverty school districts. Nationally, Black and Latinx students are over twice as likely to attend a high-poverty district than a low-poverty district. American Indian/indigenous students are 3.3 times as likely, while White and Asian students are 50 and 40 percent less likely to attend a high-poverty district than a low-poverty district, respectively. In short, state funding decisions—both how funding is allocated and where legislators choose to expand or cut budgets—have serious consequences for school finance equity along both racial/ethnic and socioeconomic terms.

Appendix figure A.1 shows that nationally, districts enrolling the highest percent of White students and Asian students within each state generate the highest level of local revenue, and state aid partially equalizes total funding between predominantly White or Asian districts and those serving the highest percent of Black, Latinx, or indigenous students. The key takeaways for Appendix figure A.1 and figure 2 are (1) districts enrolling historically marginalized students receive a greater share of funds from state—as opposed to local—sources, (2) there is variation across states (based on the design and purpose of K–12 state aid in each state), and (3) federal funds represent a small share of total funding.

Other state funding streams include payments for employee benefits made on behalf of districts, special education, staff improvement, capital outlay and debt service, transportation, and compensatory programs. All other funding streams represent less than 1 percent of state aid. On-behalf payments (e.g., pensions and group health insurance) are regressive, on average, with an additional $82 per student allocated to low-poverty districts. Most other funding streams are moderately progressive, with the exception of compensatory programs, which (on average) are substantially progressive, targeting four times as much funding to high-poverty districts as low-poverty ($215 compared with $53).

State-level analyses provide some clues about how specific state systems operate. In California, 15 percent of total state aid falls into “Other Programs,” which captures a wide range of relatively small state aid programs, such as summer school, desegregation, community services, and regional centers (Cornman, Ampadu, and Hanak 2020). Transportation, gifted, bilingual education, and most compensatory program funds are allocated through the funding formula and do not have specific categorical funding streams. The same is true in Texas, although both states have small progressive funding streams to support capital expenses and school lunch programs. Washington's formula funding allocates roughly the same funding level regardless of student poverty, which aligns with its fully state-funded system (a model used by only five other states). Special education is also allocated evenly, and the state's only progressive funding stream is compensatory education and the category “other programs.” As we discuss in the next section, “capital outlay” includes multiple state funding streams for Washington that vary in their contribution to finance equity and, when combined, appear regressive. And in general, national school finance data (the U.S. Census F-33 survey) do not disaggregate state funding categories with sufficient detail to guide effective state policy making.

While U.S. Census school finance data disaggregate state funding into fourteen separate categories designed to be comparable across states, states do not necessarily use all of these categories. The second largest funding stream within national data is “Other Programs,” suggesting that a significant proportion of state aid does not fit within the thirteen other prespecified categories in federal data. Relatedly, some federal categories include multiple state programs. State data also have the advantage of being more up to date. To demonstrate these points, we draw on the F-196 school district finance survey from the Washington Office of the Superintendent for Public Instruction.²

With any change to state funding, lawmakers should consider not just which jurisdictions win and lose, but how students and families are affected. During times of fiscal duress, state leaders and education advocates need to be clear about which state funding streams should be protected if finance equity is a priority. This analysis provides a roadmap for doing this work. We highlight several state funding programs that disproportionately benefit students from low-income households. But we also point to funding streams that benefit school districts enrolling a greater share of White students, or districts serving wealthier student populations.

We argue that cutting specific categorical funding programs that benefit wealthier districts is preferrable to a general fund reduction that is conditional on district poverty rate. First, many districts allocate their general fund progressively across schools (Shores and Ejdemyr 2017; Knight 2019), so making large general fund cuts to lower-poverty districts may negatively affect students from low-income households in those districts. In contrast, categorical funds that a state allocates regressively are less likely to be allocated progressively at the local level (Smith et al. 2013). Second, implementing a broad general fund cut relegates the important work state legislators do to understand how money flows through a state education system, what programs are effective or ineffective, and which students benefit.

Most importantly, we show that across-the-board reductions to general formula funding will create regressive budget cuts in most states, and states should therefore avoid this approach. The “Maintenance of Equity” provision, included in the American Recovery Plan of 2021, helps safeguard higher-poverty districts through 2022–23 (Education Trust 2021), but adverse budget impacts can arise years after an initial economic shock (Knight 2017). In the few states where general formula funding is distributed roughly evenly between high- and low-poverty districts (or even regressively, see figure 3), legislators could prioritize finance equity by reducing general formula funding while expanding funding targeted to low-income students or to low-wealth districts (e.g., LAP and LEA in Washington, respectively). District poverty rates—as well as local property wealth and district racial/ethnic diversity—are not perfectly correlated, and states may need separate provisions to prioritize specific equity-based funding streams. Many states do not provide low-wealth districts with any capital improvement financial support; the pandemic and economic recession may be an ideal time for investments in district infrastructure. Legislators can also reexamine longer-term financial commitments, including Hold Harmless agreements and state pensions, which place increasing pressure on state finance systems. State policy makers and advocates should conduct their own analyses of school finance data to determine the best approach to prioritizing equity in their state's budgeting decisions.

State education leaders should also advocate for federal support during an economic crisis. Federal stimulus following the Great Recession, which amounted to $54 billion, helped patch holes but did not prevent states from making substantial cuts that disproportionately impacted low-income students and students of color. Policy makers will need to provide schools with a wide range of supports in the coming years, and adequate and equitable funding will be essential.

The authors wish to thank Dr. Nancy Beadie and Dr. Ana Elfers for helpful feedback on earlier drafts of this paper.