November 7, 2002

Executive Summary and Introduction

By Kevin Carey

PDF of the complete report

Related analyses:
ArrowOverview of K-12 Education Finance
ArrowEducation Funding and Low-Income Children: A Review of Current Research

Additional Analyses

If you cannot access the files through the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader.

State and federal policymakers are increasingly focused on creating high standards of academic achievement for all students.  Schools that serve large numbers of low-income students face particular challenges in meeting these standards.  As a result, a number of states have implemented education funding policies that direct additional resources to local school districts on the basis of poverty.  This paper presents the results of a survey of state poverty-based education funding programs, and explores policy options for policymakers working to implement or expand programs designed to improve education funding for low-income children.

 The survey finds that 38 states currently distribute some education funds on the basis of poverty.  A total of 75 separate programs in those states distributed $8.7 billion to schools in the 2001 – 2002 school year.  Eighty-three percent of the programs were first implemented in their current form in the period since 1990, indicating active interest among state policymakers in working to provide adequate funding for school districts that serve poor children.

 State poverty-based education funding programs vary significantly in terms of size, focus, and method of funding.  Thirteen states provide additional funding by adjusting the parameters of their basic state aid formulas, which are the large distributions of state funds that form the backbone of public support for education in almost every state.  Eighteen states have established separate “categorical” grants to assist poor students, providing supplemental distributions that augment basic state aid.  Seven states utilize both approaches.

 Rather than develop new processes for gathering student poverty data, every state piggybacks on means-tested federal programs to estimate the number of low-income children in each school or school district.  The most commonly-used measure is eligibility for the federally-funded free and reduced-price lunch program.  Twenty states base some or all of their poverty-based education funding distributions on the number of students eligible for free or reduced-price meals, while 10 states use the number of students eligible for free meals only.  Six states rely on poverty data calculated by the U.S. Bureau of Census, three states use the number of children in households receiving TANF benefits, and one state relies on data from the food stamp program. Using data from federal programs reduces administrative costs, but each of the measures has limitations that can lead to an undercount of poor children.

Because many researchers and educators believe that high-poverty schools face particular obstacles to academic achievement, a number of states have chosen to target poverty-based education funds to school districts with larger numbers of poor children.  Twenty states restrict eligibility for some or all poverty-based funding programs to school districts with poverty rates above a threshold level.  Fifteen states vary the amount funding distributed per low-income student, providing larger per-student grants to school districts with higher poverty rates.

             Some states attach strings to poverty-based funding.  Thirty-seven of the 53 separate categorical grants are restricted for specific purposes, either in terms of the way the funds may be used or in terms of the students who are to be served.  Ten states provide poverty-based funding specifically for preschool or kindergarten programs; seven states target funds to class-size reduction, and four states provide resources specifically for reading programs in the early grades.  Other states restrict services to students in the early grades, students who are poor, or students who are falling behind academically.

             The overall level of commitment to poverty-based funding varies significantly among the states.  Poverty-based funding per low-income student ranges from $111 in Arkansas to $5,199 in Massachusetts.  Among the states that provide poverty-based funding, the amount of additional poverty-based education funding provided per low-income student ranges from 1.9 percent to 58.7 percent of the average per-student funding level for all students, with an average of 17.2 percent.  

             While 38 states provide some level of poverty-based funding, only 23 provide more than $1,000 per low-income student.  Only 11 states provide additional funding per low-income student that exceeds 25 percent of average per-student funding levels, despite research indicating that the actual cost of educating low-income students is at least 100 percent greater than non-poor students.

            There is significant potential for improving poverty-based education funding programs.  State policymakers who wish to implement new poverty-based education funding programs or improve existing distributions have a number of available options:


1) Provide Funding That Adequately Reflects the Cost of Educating Low-Income Children

The average level of additional poverty-based education funding provided per low-income student is equal to 17.2 percent of average funding for all students.  Recent studies suggest, however, that the actual additional cost of educating low-income children is between two and two-and-a-half times the cost of educating non-poor students.  States can address this funding gap in a variety of ways.  The percentage adjustments applied to per-student funding levels in basic state aid formulas can be increased.  States can also redefine the “foundation” per-student funding levels to which those percentage adjustments are applied to reflect accurately the average per-student spending level in the state, and they can adopt more expansive definitions of poverty to increase the number of low-income children eligible for additional funding. 

 2) Target Funding to High-Poverty School Districts

            With limited resources available for poverty-based funding, states can maximize the effectiveness of additional resources by targeting funding to higher-poverty school districts.   States can restrict eligibility for funding to districts with poverty rates above a threshold level, and increase the amount of funding provided per low-income student to school districts that have large numbers of low-income children.  These measures will concentrate resources in the high-poverty areas most in need.

3) Increase the Accuracy of Poverty-Based Distributions by Using Multiple Data Sources

            States can help overcome the data limitations inherent in relying on a single measure of poverty by incorporating information from multiple sources.  For example, states that use data from the federal free and reduced-price lunch program to determine poverty-based education funding distributions can incorporate poverty data gathered by the Census Bureau into their funding formulas. 

4) Address Other Education Funding Policies that Reduce the Effectiveness of Poverty-Based Education Funding

Poverty-based education funding programs exist as one part of larger, more complex state education finance systems.  If aspects of the larger system are detrimental to high-poverty school districts, the benefits of poverty-based distributions can be reduced or negated.  For example, some states continue to rely heavily on local property taxes to fund education, resulting in inequitable funding levels for low-wealth, high-poverty school districts.  Some states have adopted “hold harmless” provisions that maintain funding levels for school districts whose poverty levels are declining, reducing available resources for districts whose poverty levels are increasing.  New York state appears to have determined funding outcomes based on political considerations prior to the actual development of funding policies and gathering of school data, negating the effects of poverty-based funding policies for the state’s largest school district altogether.  Policymakers developing poverty-based programs should be aware of these external pitfalls and seek to remedy them if possible.

            By taking these considerations into account, state policymakers can make their poverty-based funding programs more robust, focused, accurate, and effective, helping to ensure that schools have adequate resources to meet the needs of low-income children. 



            State education policymakers are increasingly focused on establishing rigorous academic standards of achievement and creating accountability for results among schools and students.  Student scores on state-mandated standardized tests are used to assess school performance, while the federal government recently increased requirements for ongoing academic improvement in the “No Child Left Behind Act” enacted in 2002.  States are developing systems to track the ongoing progress of every pupil, making promotion and graduation contingent on academic progress, and assessing the performance of administrators and teachers based on student achievement. 

            This new accountability creates particular challenges for school districts that serve large numbers of low-income children.  The link between poverty and lack of academic achievement is significant, persistent, and well-known.  Without the resources to serve children who are at-risk of academic failure, high-poverty school districts face a strong likelihood of failing to meet strict academic standards.  The federal government recognized this need by linking new standards to increased funding for the “Title 1” program that provides additional funding to states and school districts based on local poverty rates.  A growing number of states have adopted similar policies, directing education funding to school districts on the basis of poverty.

            This paper describes the current status of state poverty-based education funding programs and provides options for how those programs can be implemented or improved.  A survey of education finance officials in the 49 states with multiple school districts found that state poverty-based education funding programs vary substantially.[1]  State policies differ in terms of the level of funding provided, definition of poverty, formulas used to distribute funds, degree to which funds are targeted to high-poverty school districts, restrictions on the use of funds, and integration of poverty data with other measures of at-risk children.  The first section of the paper describes the results of the survey and the various policies that states have adopted, while the second section provides policy options for states seeking to implement or improve poverty-based education funding programs.

Click here for the .PDF version of the full report.

End Notes:

[1] Hawaii and the District of Columbia operate a single, state-wide school district.