Navigating the Financial Landscape of Education Departments: An Overview of Income Sources
Public education, serving over 60 million students nationally, relies on a complex web of funding sources. Understanding how education departments at various levels (federal, state, and local) generate income is crucial for stakeholders, policymakers, and the public alike. This article delves into the diverse revenue streams that support public education, examining their evolution, distribution, and impact on educational equity. It explores the contributions from federal, state, and local entities, highlighting the intricacies of property taxes, grant programs, and funding formulas.
The Tripartite System: Federal, State, and Local Contributions
Public schools, catering to students from kindergarten through 12th grade (K-12), are financed through a combination of local, state, and federal dollars in proportions that vary across and within states. In school year 2020-21, elementary and secondary public school revenues totaled $954 billion in constant 2022-23 dollars. Of this total, the financial burden is shared across three primary levels: federal, state, and local.
Federal Sources: The federal government contributes a relatively small share of education funding through specific grant programs. In 2020-21, 11 percent, or $101 billion, came from federal sources. These programs are designed to supplement funding for schools with at-risk youth, including students with disabilities or from low-income households. Federal dollars supplement state resources by narrowing funding gaps for at-risk students through programs such as Title I grants under the Elementary and Secondary Education Act (ESEA) and Part B grants under the Individuals with Disabilities Education Act (IDEA). Federal funds made up $120 billion or approximately 13 percent of total education funding during the 2023 fiscal year.
State Sources: State governments play a crucial role in funding K-12 education. They rely on formulas that distribute education funds among school districts. In 2020-21, 46 percent, or $437 billion, came from state sources. The state's share of education funding tends to be higher in school districts with a low capacity to raise revenues. Nearly all states (46 out of 50) primarily allocate education funds through foundation program formulas. Such programs establish a minimum level (or "foundation") of funding per student and ensure that each school district receives enough school funding to meet that foundation.
Local Sources: Local entities contribute significantly to public education funding, primarily through property taxes. In 2020-21, 44 percent, or $416 billion, came from local sources. On a national basis in 2020-21, some 83 percent ($343 billion) of local revenues for public schools were derived from local property taxes.
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State and local governments provide the vast majority of funding for K-12 education - 87 percent of all school funding. Those school districts use state dollars and additional revenue raised from federal and local sources to fund individual schools. The Department of Education is responsible for most federal budget administration.
Trends in Revenue Distribution: A Historical Perspective
Between 2010-11 and 2020-21, public school revenues increased by 16 percent (from $819 billion to $954 billion in constant 2022-23 dollars). During this time, total revenues were lowest in 2012-13 ($782 billion). After 2012-13, revenues increased through 2020-21 by an average of $21 billion (3 percent) per year. Between 2010-11 and 2020-21, federal, state, and local revenues exhibited different trends. At the beginning of this period, following the 2008 recession, state and local revenues experienced relative lows. In contrast, federal revenues were relatively high in the wake of the American Recovery and Reinvestment Act of 2009, which provided additional federal funding for education. Following these relative highs and lows, state and local revenues generally increased between 2010-11 and 2020-21, while federal revenues generally decreased through 2019-20. Federal revenue increased by 43 percent (from $70 billion to $101 billion) from 2019-20 to 2020-21.
Over the past century, the local share of education funding has declined, with state funding largely making up the difference.
Federal Grant Programs: Targeted Support for Specific Needs
The federal government offers various grant programs to support specific educational needs. These programs often target at-risk students, students with disabilities, and low-income households.
Title I Grants (ESEA): Title I grants provide funds to school districts serving large shares of low-income students. It is the largest grant program of ESEA, totaling $16 billion during the 2023 fiscal year. Those funds are allocated through four formulas that are based on the number of eligible students and several provisions, including a state's target level of funding per student.
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IDEA Grants: During the 2023 fiscal year, the federal government provided $13 billion in IDEA grants to states.
Child Nutrition Programs: The federal government also allocated $22 billion for child nutrition, which was used to reimburse schools that provided free or reduced-price lunches to eligible students.
Impact Aid: Approximately $6 billion of federal funds went directly to school districts for various programs including Impact Aid.
State Funding Formulas: Aiming for Equitable Distribution
States use formulas that aim, at least in part, to equitably distribute education funding across school districts. Although their ability to do so is limited by the resources available, those formulas account for locally raised revenues and the needs of students in each district. As a result, the state's share of education funding tends to be higher in school districts with a low capacity to raise revenues.
Nearly all states (46 out of 50) primarily allocate education funds through foundation program formulas. Such programs establish a minimum level (or "foundation") of funding per student and ensure that each school district receives enough school funding to meet that foundation.
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Local Property Taxes: A Double-Edged Sword
In addition to the revenues allocated by the federal and state government, school districts raise funding at the local level, in general by levying local property taxes. Nearly 43 percent of funding for public education stems from local taxes. As a result, funding can vary widely among school districts based on the wealth of families living in them. School districts with high-value property are often able to fund their schools above the minimum level established by the state, contributing to wider disparities. Those disparities become more apparent during economic downturns because wealthier school districts benefit from relatively stable revenues from property taxes. In contrast, funding for school districts more reliant on the state, and specifically a state income tax, tends to vary with economic performance.
On a national basis in 2020-21, some 83 percent ($343 billion) of local revenues for public schools were derived from local property taxes. The percentage of total revenue from local property taxes generally differed by state. New Hampshire and Connecticut had the highest percentages of total revenue from property taxes (61 and 57 percent, respectively). In Vermont, the percentage of revenue from local property taxes rounded to zero.
COVID-19 Federal Assistance Funds: A Temporary Boost
Federal revenue in 2020-21 included COVID-19 federal assistance funds. In 2020-21, some 2 percent ($18.6 billion) of total public school revenues nationally were awarded from the ESF. Reported CRF revenues totaled $10.2 billion and accounted for 1 percent of total revenue nationally, with a high of 8 percent in Maine and a low of less than one-half of 1 percent in 18 states. Only three states (Minnesota, Nevada, and Texas) and the District of Columbia reported greater than zero revenues from SLFRF. However, not all state education agencies were able to separately report CRF and SLFRF revenues when school districts received these funds from state or local governments.
Disparities and Inequities in Funding Distribution
Despite school districts allocating resources based on standardized factors like student-teacher ratios, there can be significant disparities in the amounts actually spent on schools within a district. That can partially stem from the school district’s practice of distributing resources, not dollars, which masks higher spending for some schools.
While state financing programs aim to fairly distribute funding and resources across all school districts, no state is capable of fully equalizing funding disparities. Those disparities are driven by differences among districts in the cost of education as well as the ability and willingness of districts to spend money on education. However, more spending per pupil does not necessarily equate to better educational outcomes.
Weighted Student Funding Formulas: A Shift Towards Equity?
Once revenues are raised and allocated from federal, state, and local sources, school districts are tasked with distributing that funding to each school in the district. In recent years, a number of school districts have moved away from that process and have begun to develop budgets for individual schools that apply the concept of weighted student funding formulas to assign resources based on student need. Proponents of student-based allocation argue that it would improve transparency by reflecting actual expenditures per school and promote equity by linking resources to specific needs. However, many states have layers of rules that limit the application of this new approach.
State-Level Variations in Revenue Sources
In 2020-21, there were variations across the 50 states and the District of Columbia in the distribution of public school revenue coming from federal, state, and local sources. Federal revenue was lowest in New York, New Jersey, and Connecticut (5 percent each). State revenue was lowest in Missouri (30 percent) and New Hampshire and Nebraska (31 percent each). Federal revenue was highest in the jurisdictions as well. Virgin Islands, 34 percent in Guam, and 32 percent in Puerto Rico. COVID-19 federal assistance funds were lowest in Virginia, Massachusetts, Connecticut, Maine, New Jersey, New Hampshire, and Kansas (less than 1 percent each). COVID-19 federal assistance funds were highest in the Virgin Islands, 32 percent in the Northern Mariana Islands, 16 percent in Guam, and 1 percent in Puerto Rico. COVID-19 federal assistance funds reported by American Samoa did not meet reporting standards and were suppressed.
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