How do individual schools get their funds from districts, how do districts get funding from states, and how do states generate revenue for education?
These are little-understood mechanisms, and what’s more, the way we finance schools looks different in almost every community because of statutory structures and local context.
There’s a lot of prognosticating going around about how school budgets will look next calendar and school year due to COVID-19, but the economic shock flowing through the education sector needs to be tempered with some fact checking and clarity. In my previous life, I advised the Texas legislature on public education budgeting and school finance, so I’m here to simplify the complex so education leaders can get a clear and accurate understanding of how funding actually trickles down.
After you read these FAQs, check out the rest of The Looming Financial Crisis? series for key takeaways for school districts, state education agencies, individual schools, charter networks, and more:
- Where does most school funding come from?
- Where do state dollars for education come from?
- What about local dollars? Where do those come from?
- Why can’t we predict next year’s school budgets? Shouldn’t school funding already have decreased since many people are out of work and probably not paying income taxes?
- What are a few different scenarios you could imagine for schools?
- What are the first things to go when a school leader has reduced funds to work with?
- Don’t governments have reserves they can lean on during tough times?
- If a state or district leader wants to prepare for different possible economic impacts, what should they be doing?
- What if I want to get wonky and learn more about this?
Where does most school funding come from?
The first common misunderstanding is about where the bulk of school-level education funding actually comes from: your local community, your state, or the federal government.
The answer is it’s all three, but not the breakdown you might assume. As the chart below shows, funding for education, on average is mostly from state and local governments, about a 50-50 split, with only 8-10% coming from the federal government. It is worth noting that while these proportions of state and local funds are true on average, tremendous variability in how much funding comes from state versus local sources exists between and even within states, depending largely on the structure of state school funding formulas.
The two largest sources of federal funds from the U.S. Department of Education are Title I, which targets funding to schools serving low-income students, and the Individuals with Disabilities Education Act (or IDEA), which supports students with disabilities. In addition to these large programs, the federal government also runs grant programs to support other initiatives including teacher quality, early childhood education, and charter schools. And the federal government heavily subsidizes school meals, which is the largest source of federal funding flowing into schools, through the free and reduced-price breakfast and lunch programs administered by the U.S. Department of Agriculture.
But the bulk of funding that supports educator salaries and benefits, instructional materials for students, construction and maintenance of school facilities, school transportation systems, and all the other core ingredients for school operations are funded from state and local funds.
Where do state dollars for education come from?
Most states get most of their revenue from income and sales taxes. Different states tax different purchases differently (e.g., some states exempt select purchases considered to be basic needs, like food and medicine), and some don’t charge any income or sales tax at all. There are nine states with no personal income tax, but several of those have some other tax source to fill the gap (like Alaska and Texas, which generate significant revenue from the oil and gas industry). Most states have a mix of other taxes and fees they may levy on businesses, tourism, or other specific activities. But across the country, personal income tax and sales tax provide the lion’s share of state tax revenue.
State tax dollars pay for a range of services, with the largest proportion of state investments in most states going to K-12 public education. Beyond K-12 education, significant state spending goes to public higher education systems, health care (especially Medicaid, which is jointly funded from state and federal sources), criminal justice systems (state law enforcement, court, and prison systems), social services (like child protective services and administration of family supports), economic and workforce development, and regulatory functions (like licensing child care facilities or various professional licenses). Many of these functions are also supported with federal and/or local funds. Continue reading