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Restructuring California's School Finance System

State should use weighted student formula

Lisa Snell
January 23, 2004

California’s $41 billion education finance system offers schools money through two types of funding streams: “revenue limits” and categorical funds that include 100 different programs. The funding system is complex and results in unequal funding amounts at the student level. In many cases, the amount of money a school district receives depends on how savvy the school district is and the size of its central bureaucracy rather than the needs of individual students. California should create one simple funding mechanism that distributes both categorical and revenue-limit funding based on a “weighted student formula” that would include one base allocation equalized across the state and additional weighted funds for students with additional needs including special education, poverty, and English learners. This process would make school finance in California simpler, more equitable, and bring significant cost savings by reducing categorical administration costs and central office costs and redirecting some of this savings to increase per-pupil funding allocations in California. The Governor’s Quality Education Commission should study how categorical programs have been reformed in other states and how the weighted student formula has been implemented, and devise model legislation based on the best practices from other states and localities.

The Problem

At approximately $41 billion, K12 education spending is California’s largest budget item and accounts for 41 percent of California’s budget. California has one of the most centralized public school systems in the United States. In California, local property taxes are aggregated in Sacramento and then re-allocated to school districts on a per-capita basis. These reallocated funds—both general revenue and categorical funds—flow not directly to schools, but to school district central offices. The central offices then allocate personnel to schools rather than money. For example, a school district would determine the number of teachers and other kinds of personnel based on the district’s student population and characteristics. If a school principal wanted to invest resources in an additional reading instructor to raise reading scores at the school, the school principal would not have the budgetary discretion to hire the reading teacher because employees are assigned at the district level based on the average characteristics of schools in the district.

Finance Problem Finance Solution
Funding streams & categorical funds Weighted student formula

1. Complex

2. Unequal funding

3. Bureaucratic

4. Less per pupil funding

1. Simple

2. Equitable

3. Cost savings: $2 Billion

4. More per pupil funding

Both California’s general education revenue, called “revenue limits,” and the $12 billion that goes to more than 100 different categorical funds have complex funding formulas based on historical and archaic data points that generate inequitable funding at the local school level. As a November 2003 report in the Sacramento Bee, highlighted several examples:

This system has, literally, a thousand different base funding amounts for children and then adds other, sometimes random, amounts from categorical programs, demanding a large central bureaucracy to navigate and track the paperwork and documentation. The amount each district receives per pupil is irrational and based on too many complex factors. As the Sacramento Bee stated in its recent investigative series on California’s school finance structure, the system “is so convoluted and obscure that not even the people who manage school budgets for a living can explain the finance system to taxpayers, who support it.”

The most significant consequence of California’s complex school finance system is that too much revenue is targeted toward administering school programs and budgets rather than raising student achievement. According to the National Center for Education Statistics, instructional spending in California is only 54 percent of per-pupil spending. For example, the Los Angeles Unified School District spends only $84 per pupil on textbooks (or 90 percent of the state average) but spends $107 dollars per student on Supervisors' salaries (which is 191 percent of the state average and does not include principals or other school level administrators). It is critical to work toward an education budget process that encourages cost-consciousness at the local level, shifts resources from non-instructional budget categories into classroom-level spending, and truly equalizes per-pupil funding based on the individual characteristics of students.

These misdirected resources have had negative consequences for California’s most disadvantaged students. On the 2002 National Assessment of Educational Progress, California's average reading scores for students who were eligible for free and reduced-price lunches were the lowest of any state in the nation, at both fourth and eighth grade. Sixty-seven percent of California's poor fourth-graders scored "below basic" in reading (meaning they could not even demonstrate "partial mastery" of the subject matter for their grade level). In New York, 49 percent scored "below basic"; in Texas 52 percent; Florida, 51 percent. In eighth-grade math, the percentage of California poor children scoring "below basic" was 62; only Alabama and Mississippi had more low-scoring students.

The Solution

California should simplify and equalize per-pupil student funding by offering one simple base revenue stream that includes the money allocated for categorical programs and the current revenue limits and distributes the funding through a weighted student formula. This approach would increase per-pupil spending at the school level, reduce central office and administrative spending, and offer a truly equalized per-pupil spending formula.

The most comprehensive evidence for a “weighted student formula” comes from several studies and a new book by UCLA Professor of Management William G. Ouchi, Making Schools Work: A Revolutionary Plan to Get Your Children the Education They Need.

Ouchi and a team of 12 researchers found, after studying a variety of public and Catholic school systems in North America, that decentralized school systems run more efficiently and produce better student achievement.

Ouchi included three types of large North American school systems in his research sample:

Ouchi’s research team visited 223 schools, representing at least 5 percent of the schools in each system. In each system the team gathered data about student performance, school centralization, and the amount of money that reaches the classroom. The team focused on school budgets, accountability systems, and the achievement of students.

They found that how a school is managed matters. Schools perform better on fiscal and academic outcomes when there is a) local control of school budgets by principals, and b) open enrollment, which allows the per-pupil funding to follow the child.

Overall, the decentralized public school districts and Catholic schools had significantly less fraud, less centralized bureaucracy and staff, more money at the classroom level, and higher student achievement.

The decentralized public school districts all used the ”weighted student formula” pioneered by Edmonton school superintendent Michael Strembitsky. The formula attaches school funding to the backs of children and in so doing gives budgetary control to each school principal.

For example, in the Seattle system, students are assigned “weights” for supplementary funds for categories such as poverty, limited English proficiency, and special education. The weighting scheme is simple and described on one page in the Seattle district’s budget book. Each child is worth a weight of between 1 and 9.2 depending on the needs of the individual child.

Each school is funded by a basic operating grant from the district plus the weighted funds brought in by each individual child enrolled at the school. The weighted student formula allows individual schools to compete for students and allows principals to control their budgets and tailor their schools to the needs of their specific school populations.

After the introduction of the weighted student formula in Seattle, all principals attended management training programs to prepare them to be CEOs of their schools, with full responsibility for staffing, budgets, scheduling, and marketing.

The weighted student formula is based on five principles that are not currently practiced in California’s school finance system:

Simply put, the weighted student formula allocation system delivers resources more equitably to students based on their educational needs and increases flexibility for tailoring and funding academic achievement plans at the school level.

The weighted student formula recognizes that the cost of effectively educating a child varies by the type of student and the difficulty associated with educating each individual student. Under current weighted student formulas in other school systems, three factors drive the revenue amount associated with each student: base funding, grade level, and student characteristics. For example, in Seattle for each student characteristic specific weighting has been assigned by grade level. Weighting categories include regular education, special education (4 levels), bilingual education, and free and reduced price lunch.

Student revenue = grade-level weight + student characteristic weight x base funding amount. This formula is the same for every student in every school in Seattle.

In order to simplify California’s school finance system, a weighted student formula that adds the $12 billion categorical program to base revenue and distributes funding to students based on their unique needs would more equitably distribute resources to California schools.

Potential Cost Savings

Collapsing categorical programs and increasing schools’ basic allocation per student would yield state and district savings by reducing the administrative effort entailed in operating multiple categorical programs and a large central office staff. Currently districts must apply for, separately track, and monitor the appropriate use of categorical funds. Research from Reason Foundation’s Citizen’s Budget projects an overall savings rate of at least 15 percent of administrative costs at the district and state level if these changes were introduced. In other words, by simplifying the funding stream and collapsing categorical programs the state could cut the state department of education administrative budget by up to 15 percent and reduce the combined categorical and revenue limit budget to account for administrative savings.

Theoretically, by adding the $12 billion categorical amount to the $29 billion in revenue limits and returning budget control to the local schools, the state could increase the amount of per-pupil allocation while cutting overall education funding by 5 percent resulting from dramatic reductions in central staff and save close to $2 billion.

Other states have reduced overall spending while increasing per-pupil spending by shutting down categorical programs. According to the Sacramento Bee, the state of Maryland went through a comprehensive two-year process to streamline categorical programs. A new system was adopted in the 2002-2003 school year that called for increasing basic per-child "foundation" amounts over a six-year period, from about $4,300 to more than $6,100. One of the most significant changes in Maryland involved ending state categorical programs. Maryland got rid of about 30 of its categoricals and added the revenue to the basic allocations. The elimination of the 30 Maryland categoricals freed up more than $300 million a year that helped boost foundation funding for all students. In other words, more money was targeted to students and less money went to administering programs in Maryland.

Vehicle for Reform

The Quality Education Commission tasked with studying California’s school finance system should examine every current state and local district that has either collapsed categorical programs or implemented the weighted student formula for best practices and model legislation. For example, San Francisco, Santa Monica, Seattle, Edmonton, Houston, Oregon, and Hawaii have all crafted legislation and resolutions detailing the weighted student formula. These unique localities have all taken slightly different approaches to implementing the weighted student formula. A study of best practices and lessons learned with a hybrid of the best weighted student formula and categorical reform legislation should be recommended by the committee. California should not reinvent the weighted student formula but learn from the implementation experiences of other states and localities.

Contacts

Lisa Snell
Reason Foundation
3415 S. Sepulveda Blvd. #400
Los Angeles, Ca 90034
310-391-2245
lsnell@reason.org

Dr. William G. Ouchi
University of California Los Angeles
310-825-5848
William.ouchi@anderson.ucla.edu

J.C. Bowman
(served in Governor Jeb Bush’s Administration with Donna Arduin)
Center for Education Innovation
Florida State University
850-644-3419
jbowman@coe.fsu.edu


Lisa Snell is director of education and child welfare at Reason Foundation. She formerly taught speech courses at California State University, Fullerton.


Lisa Snell is Director of Education


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