Understanding the Various Types of School Financing Systems

By Matthew Lynch on July 15, 2016 8:16 AM | No comments

Educators can argue that the funding within education determines student success, staff morale, and
the overall functionality of school system. The importance of understanding all types of funding is
crucial to your development as an Educator, parent/guardian, and student. In this blog, state funding
will be addressed and aid in creating a better understanding of trends and issues in school financing
systems.

States generally use one of four types of school financing systems to provide districts with state
funds: foundation, general aid, flat rate/local effort equalization, and full state funding. When using the
foundation financing system, states set a desired (guaranteed) per-pupil amount they wish to see
spent on students' education in the state (e.g., at $12,000 per pupil). States then make up the
difference between the amount generated by districts' local taxes and the state-guaranteed per-pupil
amount.

General aid is a foundation approach using three separate calculations to establish the amount
districts receive from the state. When determining state aid to districts, states consider the
guaranteed minimum per pupil and calculations of the percentage of district resources below or
above the guaranteed minimum.

The flat rate/local effort equalization financing system is based on a quantifiable unit of need, such as
a district's average daily attendance or total school enrollment, and on districts' property tax rates to
determine state aid. Schools are fully funded in Hawaii and Vermont, with no consideration of local
taxes.

Two other states have rather unique ways of providing state funds to local school districts. In
Pennsylvania, school districts receive a percentage of state funds based on the amount a district
needs to address key educational principles established by the state. Wisconsin uses a guaranteed
tax base system, where all districts, regardless of their level of wealth, have the same tax rate. As a
result, Wisconsin raises the same amount allocated per pupil from a combination of state and local
sources.

Tax sources of funding are equally diverse and vary according to states. The three main tax sources
providing input to education are income tax, sales tax, and property taxes. Income taxation, however,
is generally enacted at a federal rather than at a state level, with much federal education aid
originating from income taxes. Taxes levied on corporations are also included in income tax, although
the rate of taxation differs among states. Sales tax is generated based on the sale of goods or
commodities, which is paid by the person buying the goods. A special type of tax, excise tax, is levied
on items that are considered undesirable for consumption, or that consumers are encouraged to
spend less on, including cigarettes, gasoline, and liquor. Sales and income taxes make up
approximately two thirds of all monies channeled into education, while the income derived from
excise taxes makes up the remaining third.

Currently, lotteries are being marketed as a novel way of paying for public education. But in many
cases, education actually ends up getting the short end of the stick. Instead of using lottery funds as
additional funding for schools, state governments use these monies to cover the education budget
and spend the monies that would be traditionally earmarked for education on other issues. In short,
public school budgets have not received any additional funding as a result of lotteries. In the end, it's
true that billions of dollars pour into the U.S. education system, but not in the manner that we have
been led to believe.

Property taxation is the most important source of revenue-generating taxation at a local level.
Approximately half of the revenue generated from property tax is allocated for education. The exact
amount of revenue generated from property taxes varies from region to region, due to differences in
property tax rates that are based not only on the perceived value of the property but also on the
amount/percentage that a constituency is willing to charge its homeowners as tax.
The school district tax rate is determined by calculating the total assessed valuation of the district,
which refers to the amount of money required to be generated divided by the local tax base. The
school district tax rate, however, is subject to a legal maximum, which may not be exceeded. The
school district tax is added to the tax rates of other services (including fire relief, ambulance, or police
services) and is described as a percentage or "millage," where one mill is equal to one tenth of a
percent. Thus, a tax rate expressed as 312 mills is equivalent to 31.2%.

During the late 1960s and in the 1970s, property values and taxation increased far more rapidly than
other forms of wealth, resulting in mass dissatisfaction with the rate of property taxation. This
gradually led to various legal reforms regarding the taxation of property, which again varied between
individual states. In 1993, Michigan decided to replace school funds generated from local property
taxes with state-generated funds. The state increased both sales tax and taxes on luxury items such
as cigarettes, reallocating funds to its poorer districts, and ensuring a more equitable education for all
children in the state. Other states have followed suit and have come to rely less on property taxes as
a funding base for their educational systems.

In some instances, wealthier school districts have reacted to the redistribution of educational funding
by actively setting out to ensure that their schools are not endangered or placed on a fiscal par with
less economically fortunate areas. The Parent Teacher Association (PTA), which can receive state
and national funds, and Parent Teacher Organizations (PTOs), which cannot, work with local
businesses to ensure that funds other than those generated and allocated by the state are available
to their schools. Parent groups conduct fundraisers and seek monies from private foundations. Some
parent groups have sought legal support to ensure adequate funding for their schools. These
advocates want to ensure that all schools have a base minimum amount of money on which to
operate their programs and services.

The allocation of funds for education is determined by the governor and can vary greatly from state to
state. The authorities must determine how available funds will be divided among all educational
entities in the state. States typically funnel education funds to school districts through state
departments of education. Schools may receive funds based on any or all of the following: enrollment,
educational programs, or the types of activities they offer students.

Furthermore, some funds are designated for specific purposes: some can only be used for
technology; others are solely for textbooks or school supplies. Thus, some schools may have a pool
of money allocated to one resource, while sorely needing another. This can have a direct impact on
you as a teacher. For example, you may need art supplies for your third-grade class, but because no
money is specifically allocated for this purchase, you may have to be creative in how you provision
your art program. You may have to consider approaching local businesses for donations of money or
supplies. You may also have to sharpen your grant-writing skills and apply to both corporations and
foundations for that much-needed extra cash.

Take the time to review your school's financing system and how state funding may be creating a
greater impact that is unaware to you. If your school is lacking in areas that are effecting student
success consider researching the suggestions made in this blog such as submitting grants for
additional funding.