NCPA - National Center for Policy Analysis

Education Funding Formulas Pay for Non-Existent Students

May 6, 2013

With education budgets declining in many states, education leaders are looking for new ways to contain costs and finance schools. Despite reworking transportation formulas, merging districts, investing in digital learning, charter innovations and information systems, many education leaders have missed a prominent misallocation of funds: phantom students. By protecting schools against declining enrollment and subsidizing small districts, state and local education agencies waste valuable resources, say Marguerite Roza, director of the Edunomics Lab at Georgetown University, and Jon Fullerton, executive director of the Center for Education Policy Research at Harvard University.

Phantom student funding takes many forms in various states.

  • California has a finance protection formula that protects against declining enrollment and cost $437 million in 2011.
  • Massachusetts has a formula that holds state aid at the previous year's total enrollment regardless of enrollment changes and cost $180 million in fiscal year 2013.
  • Massachusetts, along with Connecticut, has charter school funding protection, which reimburses districts that send students to charters to reduce the impact of lower enrollment.
  • In these states, districts could be incentivized to not improve services, which would drive more students to charter schools and attract a reimbursement from the state for a student that does not attend.
  • Subsidies are also given to small districts that do not have the advantage of economies of scale that larger districts have and, as a result, receive more per-pupil funding.

In almost every state, funds are also allocated to specific types of students or programs, such as bilingual students or nutritional programs. Many of the formulas for these allocations use fixed-dollar amounts, which unnecessarily raises spending.

  • To fix the current problem of phantom funding, districts should be encouraged to structure allocations in per-student terms and should restructure their unfunded liabilities.
  • Additionally, districts should be limited in their short-term ability to make long-term commitments and how certain funds can be spent.

By changing funding formulas and promoting a more equitable school system, future enrollment changes will not lead to inequity in school finance.

Source: Marguerite Roza and Jon Fullerton, "Funding Phantom Students," Education Next, Summer 2013.


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