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Press Release · November 9, 2010

Small Steps Could Lead to Big Improvement in School Finance System

Reforms Would Create a Fairer, More Transparent Approach to K-12 Funding

SAN FRANCISCO, November 9, 2010—California can significantly improve the way it funds public schools by making strategic changes now, according to a report released today by the Public Policy Institute of California (PPIC).

The PPIC report outlines a strategy to reform California’s school finance system—widely considered to be inadequately funded, inequitable, and overly complex. There is unlikely to be additional money available soon to address the first of these concerns—the level of funding. But the system can be made more equitable and transparent, and doing so would prepare the state to make the most of any additional resources in the future.

“Given California’s budget problems, school finance reform isn’t likely to happen overnight,” says Margaret Weston, PPIC research associate and author of the report. “But small investments over time can add up to a big change. This approach wouldn’t require a major investment in a single year and would ensure that no district would see a decrease in funding per pupil.”

The funding system today is a product of piecemeal changes made over four decades. Before the 1970s, each school district levied its own property taxes and the revenue made up the bulk of funding for district schools. But a Supreme Court decision in 1971 found this system unconstitutional and the passage of Proposition 13 in 1978 lowered the amount of property tax revenue available to schools. As a result, the burden of financing public schools shifted largely to the state. K-12 education is the largest area of spending in the state budget, and schools are allocated money based on a complex array of laws and formulas. Similar districts serving similar students currently get widely varying amounts of money per pupil. Districts with higher per-pupil costs—those with many disadvantaged students, for example—don’t necessarily get significantly more money.

The PPIC report, At Issue: School Finance Reform, offers five guiding principles for a new approach:

  • Meet resource needs. An equitable finance system should take into account that some students are more expensive to educate than others. English learners need additional resources to achieve state standards, high school students take classes with expensive lab equipment, and children in rural areas often have extensive transportation needs. To maintain simplicity and transparency, it would be important to address major needs only.
  • Structure incentives properly. If a district were given additional money based on the number of students failing state tests, for example, it would have no financial incentive to help those students improve. In fact, improved student performance would ultimately reduce revenue. Instead, funds should be allocated by measures that school districts can’t manipulate and that are highly correlated with student achievement—family income, for example.
  • Allocate funds transparently. The state currently determines its contribution to K-12 schools through a series of complex formulas governed by Proposition 98, which dictates the minimum amount the state must spend. Proposition 98 funds also support state categorical programs, each with its own formula and rules. The Governor’s Committee on Education Excellence concluded in 2007 that the system is “virtually impenetrable.” The system of allocating money to schools should be comprehensible to all citizens rather than a handful of experts.
  • Treat similar districts equitably. Programs that compensate districts for extra costs should allocate money based on a statewide per-pupil rate. Equal per-pupil rates would improve transparency. Currently, funding rates for many programs are based on historical expenditures, rather than actual cost differences.
  • Balance state and local authority. The state should take advantage of local knowledge by granting districts and schools more decision-making authority and more control over revenues in exchange for a higher level of accountability.

The PPIC report says that reforming the school finance system will not only meet a critical need today but will better position California in the future, when the state can afford to invest more in public schools. As the economy recovers, K-12 education will receive more revenue than it does today because of the Proposition 98 guarantee. At the same time, demographers project that student enrollment will not increase substantially during the next decade. Coupled with an expected growth in the number of taxpayers, this means more per-pupil funds for schools.

In the past, new revenue has been allocated to schools for specific purposes, creating new programs that further fragmented the system. PPIC proposes an alternative, streamlined strategy, based on strengthening three core elements of the current system, explained in depth in Pathways for School Finance in California.

Both reports were supported with funding from The William and Flora Hewlett Foundation.


PPIC is dedicated to informing and improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett. As a private operating foundation, PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office.