Critical Issue:
Redesigning School Finance:
Moving the Money to the School

ISSUE: Most states now have a district-driven finance system. Districts raise money and determine how it is spent on schools, and states and the federal government distribute money to districts. Schools receive resources - teachers, books, transportation - but they rarely receive money. This district emphasis needs to change to a school orientation if effective site-based management is to be implemented. A shift to school-based financing also would be appropriate for the dozen or so states that have charter schools and public school choice programs. Furthermore, school effectiveness research clearly identifies the school as the key organizational unit - the unit where educational services are provided and student learning occurs (see, for example, Wohlstetter & Smyer, 1995, forthcoming).

OVERVIEW: The objective of school-based financing is to redesign school and district financing to support school restructuring and high-performance management. Decision-making authority over the school budget is a key prerequisite to effective restructuring. Under this approach, the state would allocate most dollars in a lump sum directly to schools. An even more radical approach would be for states over time to fund schools directly; states with charter schools and public school choice programs are already using this strategy.

A less dramatic approach, following the example of England and Wales, would require districts to allocate 85 to 90 percent of all dollars - both general and categorical - to schools in a lump sum. This approach would ensure that the bulk of the money intended for schools would be available for use at the individual school, and it would not disrupt the district or school finance structure within the state. Districts and nations that follow this approach (e.g., Victoria, Australia, and the United Kingdom) often continue to pay teachers at the district level and "charge" the school only the average salary for each teacher. The most advanced approaches also allow sites to "trade in" teachers or other staff for different types of staff or for funds to be used for other purposes, such as professional development, training, computers, and so on.

GOALS: New school-based financing strategies should:



DIFFERENT POINTS OF VIEW: Three primary challenges to the notion of a school-based financing system can be expected. The first is that such a system would erode the tradition of district-based school finance that has served the country for nearly 200 years. Behind this assertion is the belief that devolving budget decision making to school sites could not only violate the fiduciary responsibilities that most state statutes vest in school boards, but also provide opportunities for fraudulent use of education dollars and even less effective use of education resources.

Second, this proposal seems to be at odds with the rising state role in education financing. As the state picks up a larger portion of the costs of public schools, it might be less willing to devolve spending decisions to even lower levels in the system. While one could argue against this position from the perspecitve of high-performance management, such a perspective nevertheless will be a major part of policy reform conversations.

Third, many would argue that even school-based financing is a marginal solution to the problems of public schooling and that a market-driven strategy - such as vouchers, which attach dollars to the child and let him or her choose a school, public or private - is the type of finance innovation needed to improve the education system dramatically.


Michigan. In summer 1993, Michigan became the first state to move away from property taxes as the primary source of funding for public education. See Funding Crisis Forces Action in Michigan (37 K).

Pacific Region


Education Commission of the States
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NCREL Resource Center
North Central Regional Educational Laboratory
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(630) 649-6500, E-mail:

Allan Odden, codirector, Finance Center
Consortium for Policy Research in Education (CPRE)
University of Wisconsin-Madison
Madison, Wisconsin 53706-1796


This Critical Issue summary was researched and written by Allan R. Odden, codirector of the Finance Center, Consortium for Policy Research in Education, and professor, University of Wisconsin-Madison.

Date posted: 1995
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