How Schools are Funded

There are nearly 50 million students enrolled in public elementary and secondary schools in the United States. Each year, it costs roughly $10,000 per student to teach them everything from the fundamentals of reading and writing to algebra and environmental science, to teach them how to work together, and, ideally, to prepare them for college. During the 2006-2007 school year, according to the National Center for Education Statistics, U.S. school districts spent more than $562.3 billion to educate these students, to operate and invest in the schools, and to provide related services to local communities--such as adult or preschool education. Where does that money come from? It comes primarily from state and local coffers. Overall state governments provide about 48 percent; local governments, about 44 percent; and the balance--8 percent--comes from the federal government.

Ultimately, the responsibility for education rests with the states. In fact, in many states, K-12 education is the only constitutionally mandated public service. And, historically, funding for education has been a local responsibility--not a federal one. Nonetheless, the federal government has a vested interest in education, expressed in the words of Thomas Jefferson that appear on this page. Theoretically, although education is not a fundamental right articulated in the U.S. Constitution, the public education system must serve to prepare the nation’s citizens for participatory democracy--and, by today’s standards, to enable the United States to compete in an increasingly complex global economy. Toward those ends, federal funding for education is designed to supplement state budgets.

Today, the primary sources of federal funds for public education are the Elementary and Secondary Education Act (ESEA), originally passed in 1965, and the Individuals with Disabilities Act (IDEA). Title I funds, targeted to schools with high-poverty students, are provided by ESEA, which was rebranded in 2001 as No Child Left Behind. Federal grants are also available for a variety of specific education programs, such as Reading First and English language instruction. With the passage of No Child Left Behind in 2001, the federal government not only expanded its role in education reform but also increased education funding--from $42.2 billion in 2001 to $54.4 billion in 2007. In addition, the American Recovery and Reinvestment Act (ARRA) of 2009 included an infusion of roughly $100 billion for education over a period of two years--a substantial figure, given that the total U.S. Department of Education budget was $45 billion before the passage of ARRA. Nonetheless, although the federal government’s share of education spending is growing, federal dollars still make up a small share of overall expenditures on elementary and secondary education.

State and Local Education Funding

In the end, most of the money to fund public education comes from state and local revenues. How states and localities share this responsibility varies from one state to another. In some cases, state governments contribute the lion’s share of public education funding. In others, local funding makes up a greater share. Vermont and Hawaii sit at one extreme. According to an Associated Press analysis of 2007 U.S. Census data published in USA Today, fully 88.5 percent of Vermont’s public education program was funded by the state--and only 5 percent came from local sources. In Hawaii, 84.8 percent of the public education expense was borne by the state and only 3 percent locally. In contrast, according to that report, “States with the highest percentage of local government funding were Illinois (58.2%), Nebraska (57.3%) and Connecticut (57.3%).”

At the state level, revenues for education come primarily from sales and income taxes, both corporate and personal. But states use various other mechanisms to help fund schools, including taxes on motor vehicles, tobacco, alcohol, and utilities. According to the Center for Public Education, at least 24 states use lotteries to fund schools, in some cases funneling all the proceeds from their lotteries into education, including higher education.

At the local level, revenues for school funding come primarily--but not exclusively--from property taxes. According to the Associated Press analysis, nearly 64 percent of locally generated revenue for public education comes from property taxes. And, while communities vary in the percentage of property taxes that go to fund education, in general, about 50 percent of our property taxes are used to pay for public education.

Historically, the heavy reliance on property taxes for local school funding created a system that was inherently unequal and inconsistent--and caused dramatic variations in funding between school districts and even within school districts. According to Where We Stand: America’s Schools in the 21st Century, published in 2008 at, “Depending on the property wealth of a community, its schools might boast gleaming buildings and equipment, or they might be dilapidated--struggling with the burden of outdated equipment and unpaid bills.” In addition, state funding systems and per-pupil expenditures on education vary significantly from state to state. Since the 1970s, in an effort to spur improvements in the nation’s public schools, reformers have focused in part on the issue of how schools are funded--and targeted both the state and federal funding systems.

The Big Issues: Adequacy and Equity

Government’s responsibility for education funding--at the federal and state levels--is defined by the two key principles of adequacy and equity. Adequacy refers to the amount of funding required for students to be provided with a reasonable opportunity to meet certain educational standards; equity refers to the amount of funding one group of students receives as compared to other groups of students--for example, low-income students versus other income groups. Following the 1954 Supreme Court ruling in Brown v. Board of Education, equity began to surface as a key element of the federal government’s education agenda--the central question being, does public education provide an equitable education to all its citizens, regardless of race, income group, or ethnicity? Adequacy--that is, the question of how well the nation’s elementary and secondary school systems are doing the fundamental job of educating--moved to the forefront in the 1980s, with the increased emphasis on standards-based education reform. Historically, both adequacy and equity have been difficult to define and even more difficult to measure. Nonetheless, for decades, efforts to improve public education through litigation have been inextricably tied to these two issues.

Since the 1970s, education reformers have used litigation to challenge funding systems. These suits have been filed on both equity and adequacy grounds and, variously, at the federal and state levels. Following a 1973 defeat in the U.S. Supreme Court of a landmark equity-based lawsuit (San Antonio Independent School District v. Rodriguez), reformers turned their attention to the state courts. They experienced some success with equity litigation at the state level, putting pressure on states to address inequities in the allocation of education funds. In response, many states developed funding formulas. One such formula was a “foundation” program that many states still use today. Under this system, the state identifies a base level of funding--a foundation level--for the state’s public education system. The districts within that state are then required to tax at a given rate and the state makes up the difference between the locally generated funds and the foundation level. Not surprisingly, these formulas and how they are applied vary from state to state. And, in the end, per-pupil spending on education and the specific mechanisms for allocating that money are wide-ranging.

In 1983, the landscape changed dramatically--and the focus of education finance litigation shifted from equity to adequacy. A national commission report titled A Nation At Risk warned that America’s economy might suffer in the growing global economy if education systems did not improve. In response, standards-based reform was proposed as a way of improving the nation’s schools. States began developing standards for student achievement, along with assessments to measure student progress toward attaining those standards. In the 1980s, for the first time, a measure of adequacy existed in the form of state standards--and the stage was set for courts to test the constitutionality of education finance systems on adequacy rather than equity grounds. As a result of these shifts, according to an article by Lauren N. Gillespie in the Cornell Law Review (July 2010), education finance litigation has gone through three phases: First, equity-based lawsuits at the federal level; second, equity-based lawsuits at the state level; and finally, adequacy-based litigation at the state level. Writes Gillespie, “Current reformers are in the third wave of education finance litigation, pursuing an adequacy-based strategy in state courts.”

By 2005, litigation challenging state education finance had been filed in 44 of the 50 states. Thirty-two of these were adequacy suits. According to the Education Commission of the States, which tracks school finance litigation, in 14 of these cases the courts found in favor of the plaintiffs, ruling that state funding systems were either wholly or partially in violation of the state’s constitution. Courts have ruled in favor of the states in only seven cases.

For example, the landmark case of Rose v. Council for Better Education was filed in 1985 by a group of schools in Kentucky’s poorer rural school districts. The suit challenged the constitutionality of the state’s school funding system based on equity grounds. In its 1989 ruling in favor of the schools, the Kentucky Supreme Court went a step further and invalidated the entire state system of education, finding it inadequate and incapable of providing students with an opportunity to reach high education standards. While the court did not prescribe specific education reforms, it directed the legislature to create an education system that would provide every student in the state the opportunity to develop seven specific, clearly defined capacities. In 1990, the Kentucky state legislature passed a comprehensive set of education reforms based on the court’s ruling, and as a result, school funding in Kentucky increased substantially, and a number of reforms were put in place.

Although litigation has resulted in education finance reform in many states, such suits are expensive and can stretch on for many years. For example, over the past three decades, New York State has been embroiled in education finance litigation--with suits being filed both on adequacy and equity grounds. A 1993 suit, CFE v. State of New York, argued that the state “was failing in its constitutional duty to provide the opportunity for a sound basic education to hundreds of thousands of its schoolchildren.” Despite a ruling in favor of the plaintiff, the case then went through a series of appeals, special hearings, and a significant costing-out study--a process that lasted more than a decade. In the interim, other similar lawsuits were filed in New York State. As an example of the substantial nature of these judgments, in 2004, New York State was ordered to provide up to $14 billion in additional funding to the New York City School District over a five-year period. Yet it wasn’t until 2007 that the state finally increased its education budget--all of which raises the question of the cost-effectiveness of such a process. Writes Michael Griffith in “School Finance Litigation and Beyond” (April 2005), “While school funding lawsuits have produced broad changes in some states, there are instances where the cost of litigation--both financially and in terms of impacts on the education system--may outstrip any benefits.” Griffith argues that in many cases litigation becomes a tool for states to delay much-needed reforms and that it behooves states to address these issues before litigation surfaces. For example, the state of Maryland--without the provocation of a lawsuit--put a commission in place to study and recommend education reforms, many of which have been implemented to great success.

The Challenges Ahead

As the debate over how to improve our education system continues, it remains tied to education finance--and the issues of adequacy and equity. Today, researchers, reformers, and policymakers have sophisticated tools that help illuminate the problem. But solutions are more elusive. Since the 1990s, the National Assessment of Educational Progress has provided a valuable tool for comparing student achievement across states and school districts--a measure that reaches beyond state performance standards, which vary dramatically from one state to the next. And, in recent years, reformers have provided compelling evidence that inequities and inadequacies persist. For example, based on an Education Trust analysis released in 2006, “On average, states and localities spend $908 less per student in districts educating the most students of color, and $825 less per student in districts educating the most low-income students as compared to what is spent in the wealthiest and whitest districts.” The Education Trust simultaneously released research findings that demonstrated how the Title I funding system serves to “widen rather than narrow the education funding gaps that separate wealthy states from poor states.”

There is ample evidence that our country needs to find ways to improve public education--and that there is room for education finance reform. Yet, as states face severe budget crises in the wake of the recession that began in 2008, many are slashing education budgets. In February of 2011, the Center on Budget and Policy Priorities reported that 34 states and the District of Columbia have cut their K-12 budgets since 2008. Given that the biggest item in school budgets--often as much as 50 to 70 percent--is teacher salaries, teacher cutbacks are widespread. The American Recovery and Reinvestment Act of 2009--the economic stimulus package--provided grants to help states make up budget shortfalls, including funding for education jobs. As of 2010, 95 percent of U.S. school districts had either received or been promised grants under ARRA. Nonetheless, according to the Center for Education Policy, 45 percent of those schools still had to cut teaching jobs during the 2009-2010 school year. And, as of July 2010, roughly 75 percent of schools expected to cut teaching jobs in 2010-2011.

With school budgets undergoing intensive scrutiny nationwide, state and local governments and school boards are trying to find ways to reduce expenses without eroding school performance, and that’s an enormous challenge. But the real challenge may be for states to look closely at education funding--even as they cut budgets--and spend more effectively. “If you look across the country, you see education financing getting sliced--often in the most thoughtless and destructive ways,” writes New York Times columnist David Brooks in a February 28, 2011 editorial. He cites, among other cutbacks, Hawaii’s decision to reduce the number of days in the school year. “Of all the ways to cut education, why on earth would you reduce student time in the classroom?”

On March 3, 2011, the U.S. Department of Education released a set of guiding principles, “Promising Practices on Productivity, Flexibility” to help cash-strapped states determine “how to spend education dollars productively and highlighting flexibility available for spending federal funds.” In releasing the report, Secretary Arne Duncan told the national press, “There is a right way and a wrong way to cut spending, and the most important guiding principle I can offer is to minimize the negative impact on students and seize this opportunity to redirect your spending priorities.” In all likelihood, the education funding decisions state and local leaders make today will affect America’s future in ways we have yet to imagine.

Web Resources

The National Access Network provides a wealth of information on litigation and education finance reform in all 50 states. Links at the site include a clickable map that provides access to resources and activities by state, as well as current news, research, and policy papers on school finance reform.

The Funding Gap2
Visit the Education Trust for their most up-to-date report on funding gaps within and among states.

Money matters: A primer on K-12 school funding3
An excellent overview of school funding issues at the Center for Public Education’s website.

Public Education Finances 20084
This report contains U.S. Census data on public school revenues and spending on a state-by-state basis--including tables showing per-pupil expenditures, property taxes as a percentage of total local revenues, and state education spending as a percentage of total state spending.

State Expenditure Report 20095
Published by the National Association of State Budget Officers, this report examines spending in all areas of state budgets, including elementary and secondary education.


See related article in REALTORS® Making a Difference, “Provide Scholarships for Local Students.”
For related articles in Issues in Public Education, “Federal Education Programs: The Politics of Reform,” and “School Building and Siting.”