Funding North Carolina Public Schools: Time for Change?
Education is one of the state’s most important responsibilities. That importance is highlighted in the North Carolina state constitution, where it says, “Religion, morality and knowledge being necessary to good government and the happiness of mankind, schools, libraries and the means of education shall forever be encouraged.”
The benefits of education can be both personal and public. Education contributes to economic productivity, strengthens our democracy and enhances the quality of life for individuals and all members of society. So, we should all care about how schools are funded. North Carolina spends almost 40 percent of the state budget on public education, more than any other expenditure.[i] In fiscal year 2018-19, $13.9 billion (statistical profile) was spent on K-12 public schools, $9.1 billion of that total was money appropriated by state government.
While unprecedented amounts of money are spent on public education, few believe North Carolina does a good job of getting money to our public schools. If you look closely at our system of financing education, you’ll find it inequitable, ineffective and incoherent. It does a poor job of getting needed funds to students, provides little flexibility and offers little transparency. The system isn’t working for students, policymakers, poor children, taxpayers or educators.
The sentiment isn’t new. A 2010“Despite its existing strengths, however, the state’s current system could benefit from several potential changes.” In 2016, the Program Evaluation Division completed an evaluation of the funding formulas and recommended modifications to existing formulas or moving to a student-based funding system. Most recently The Legislative Task Force on School Finance Reform finished its work in 2018 and concluded the state find a better way to finance public schools. No legislation has been introduced to do so yet.
Before offering ways to improve the current system, let’s briefly review how North Carolina finances the public schools.
North Carolina Public School Finance
Public education is a huge enterprise in the Tar Heel State. According to the of the North Carolina Public School Budget, in 2019-20, North Carolina spent about $13.9 billion in funding (state, federal and local) for approximately 2,650 public schools – including about 200 charter schools. The schools enrolled about 1.55 million students in public and charter schools and employed about 174,000 staff in traditional public schools and another 11,600 in charter schools. In terms of size, resources and manpower the public schools are one of the largest employers in North Carolina.
The State of North Carolina is charged with funding general school operations known as current expense. N.C. General Statutes 115C-408 stipulates the state will fund operational instructional expenses from state revenues. The same statute (N.C. General Statute 115C-B) declares North Carolina counties are responsible for building, equipping and maintaining school facilities and can also supplement state school operating expenses. The state also distributes funds to educate specific populations such as special needs or at-risk students and provides support to districts with particular characteristics such as small size or low wealth.
In 2018-19, North Carolina spent an average of $9,865 per student. This total includes all funding from state, federal and local governments. By far the highest percentage of funding for public education comes from the state (63.4%). In 2018-19, state expenditures totaled $9.1 billion for North Carolina public schools. A little over a quarter of funding (26.4%), $3.4 billion, came from local government (counties) and the remainder $1.3 billion (10.2%), from the federal government. Federal funding included funding for Every Student Succeeds Act (Title I) as well as Individuals with Disabilities Act. North Carolina schools received approximately $3.4 billion in funding from local county governments which is used for a variety of expenses from capital building projects to supplementing teacher salaries. In addition, in 2019 North Carolina public schools received $727.6 million in revenue from the North Carolina education lottery. Federal and local revenue are important parts of school finance for a variety of reasons. For purposes of this article however, we will focus only on how state funds are distributed.
Resource Allocation Model
North Carolina is one of only a handful of states that uses what is called a resource allocation model to distribute funding to local districts, which then distribute funding to schools. Most of the time this funding is distributed to Local Education Agencies (LEAs). However, local lab schools and charter schools are also considered LEAs in North Carolina.
North Carolina funds school expenses via position of dollar allotments. Allotments are formulas that use specific criteria to allocate money. Allotments are used to ensure that districts are treated fairly and that they also meet the differing needs of school districts.
North Carolina uses three types of allotments to distribute funding to the public schools. Position allotments, dollar allotments and categorical allotments.
|Table 1 -Types of NC School Allotments|
|Position Allotments||Each LEA has specified position limit based on ADM. Provides educator positions for specific purpose. State pays salary and benefits Allows LEAs to hire best qualified, regardless of cost.||Example: Teachers, instructional support personnel, principals and assistant principals.|
|Dollar Allotments||Districts receive a dollar amount for non-certified employees and to purchase goods. LEA has discretion, as long as stay under specified limit.||Example: Teacher Assistants, textbooks and digital resources.|
|Categorical Allotment||Funding targeted on addressing differences in student and district characteristics. Categorical allotments supplement base funding to provide additional resources (i.e. more teachers or services)||Example: At-Risk Student Services, Children with Disabilities, Limited English Proficiency, Low Wealth Supplemental Funding.|
Source: Highlights of the North Carolina Public School Budget, 2020.
It’s helpful to understand that nearly 40 different allotments (position and dollar) are also divided into four major categories; Base Allotments, Student Characteristics Allotments, LEA Characteristics Allotments and Grant Application Allotments. Table 2 outlines these four major categories and their distinctives. The three major categories include Base Allotments, Student Characteristics and LEA Characteristics. Grant/Application is significantly smaller in scope and dollars than the other categories.
|Table 2 – Categories of NC School Allotments|
|Base Allotments||Grant/Application||Student Characteristics||LEA Characteristics|
|Used to procure materials, staffing, contracts and services meant to support all students and district activities.||Provide funding for various categories. Requires application.||Provides funding for LEAs for populations of students with certain characteristics.||Provide funding to LEAs based o district size or wealth.|
Source: Program Evaluation Division, Allotment -Specific and System-Level Issues Adversely Affect North Carolina’s Distribution of Resources.
According to the North Carolina Department of Public Instruction, in 2019-20, almost two – thirds (65.5%) of funds were distributed via position allotments. Categorical allotments accounted for almost another quarter (23.5%) of funding, while dollar allotments accounted for the remainder (10.9%).
The North Carolina Department of Public Instruction distributes funds using allotments. Details on each allotment as well as the formula for computing funding is found in the . While it is difficult to comprehend the sheer number and type of funding options, it is important to realize that the overwhelming majority of actual expenditures are for salaries and benefits. In 2019 According to Highlights of the North Carolina Public School Budget, 68 percent of all LEA expenditures ($6.19 billion) were for salary and 26 percent were for employee benefits ($2.3 billion). Of $9.1 billion in state expenditures, only 6 percent fell outside the areas of salaries and benefits.
Criticism of Resource Allocation Models
Resource allocation models are very centralized, controlled and opaque systems. They are designed to apportion positions to meet district needs and provide resources to meet the needs of specific student populations and the differing needs of school districts. Various reviews show resource allocation models don’t maximize resources and have significant shortcomings. This is especially noticeable when using position allotments for teachers. Remember position allotments don’t cost or save local districts, schools or districts have few incentives to maximize resources. Position allotments allow districts to hire the best candidate. But since district’s don’t need to consider salary, teachers naturally sort toward more favorable and oftentimes, wealthier districts. This results in middle or lower-income communities having less experienced or less qualified teachers and higher teacher turnover. Such incentives work against the broader goals of increasing student achievement.
Other criticism focuses on categories of allotments. Many allotments are restricted to a specific purpose. Allotments are supposed to ensure that money reaches targeted students and specified purposes are accomplished. Yet not all allotments are equally restricted and some are more restricted than they need to be. Such conditions limit the flexibility and autonomy of districts to meet the budget challenges of changing districts. More importantly, in addition to limiting the decision-making authority of local districts, the number and complexity of the allotment system makes it difficult to understand and track how money is spent and if goals were accomplished. Administrators frequently take up to two years to understand the allotment system. The level of school resources should not be dependent on an administrator’s understanding of allotments, but it frequently is.
Georgetown University Research Professor Marguerite Roza has criticized North Carolina’s hybrid of staffing and categorical allotments. During a presentation before The Joint Education Finance Reform Committee in 2018, Roza said formulas and categories tend to create inequitable spending, limit district flexibility of resources and inhibit innovation.
A 2016 report by the Program Evaluation Division evaluated how North Carolina distributes funds to the public schools. The report highlighted numerous shortcomings of the allotment system. Some of the most prominent include:
Classroom Teacher Allotment (Position Allotment)/ 2019- $3.4 billion. Classroom teacher allotments have pros and cons. Since districts don’t pay the salary, they are free to hire the best available teacher and can use money for other expenditures. On the negative side, the allotment results in favoring well-off counties. LEAs with the most experienced, best educated and most credentialed faculty receive a greater share of resources than poor counties. The allotment system leads to a pattern of where veteran teachers who earn higher salaries are in certain districts. Teacher sorting adversely impacts districts by limiting the quality of teachers it can attract and contributing to higher turnover. The teacher salary schedule reinforces this problem because it limits the ability of LEAs to prevent teacher sorting. Salary supplements are intended to address these concerns but the reality is those resources (tax base) are not uniformly distributed and usually unavailable where they are most needed.
Special Needs (Categorial allotment)/ 2019-$934.5 million. Categorical allotments are intended to address differences in students or LEA characteristics. Special Needs allotment currently caps funding at 12.5 percent of the student population. The cap was put in place to limit overidentification of children. The cap, however, also serves to hurt those who have legitimate needs. The special needs allotment falsely assumes that special needs students are uniformly distributed across North Carolina. Oftentimes, there is a higher percentage of special needs children among families in poverty. Families also move to districts that have a reputation for better student services. The special needs allotment also fails to differentiate children based on condition and treats students as if they all have the same level of severity. Because special needs students are not evenly distributed, the cap essentially forces schools to treat students with fewer resources.
Disadvantaged Student Supplemental Funding (DSSF) (Categorical Allotment)/ 2019 -$95.5 million. The intent of DSSF is to ensure school districts have funding to address the needs of disadvantaged students. DSSF was piloted in 2004-2006 with sixteen LEAs. When the program expanded to all districts, the 16 original piloted institutions were given held harmless provisions so that their funding would never be lower than the initial allotments. The provision remains in place and has resulted in similar populations receiving different levels of resources. The 2016 Program Evaluation report estimates that ending the hold harmless provision would free up $18 million in additional resources, would treat students more equitably and also align funding based on actual need.
Central Office Administration (Dollar Allotment)/ 2019 -$90.3 million. Used to pay for superintendents, assistant superintendents, finance officers and other types of directors or supervisor positions. The original central office allotment gave a base amount plus a dollar amount. Legislation passed in 2002 however, froze the central office allotment at the 2002 ADM level. Since allotment amounts are not calculated on ADM but on the previous year’s allotment, the formula could result in districts that are declining in enrollment receiving more funding than districts with growing enrollment, leading to a maldistribution of resources.
Low Wealth Supplemental Funding (Categorial Allotment)/2019- $240.1 million. Intended to provide counties with money that don’t have the ability to generate sufficient revenue for public schools at close to the state average. LEAs are eligible if county wealth is less than 100 percent of state average wealth based on formula. However, eligibility formula uses an adjusted property tax base per square mile that does not include student population. As such, the current formula inaccurately predicts a county’s ability to generate revenue for education. Consequently, dollars are not distributed to where they are intended.
North Carolina’s resource allocation model for financing public schools may have worked at one time, but its time is past. It is no longer useful for distributing funding to LEAs and schools. The current model is highly centralized, inefficient and does not do a good job of distributing resources to needed populations or services. Worse still, the model is excessively complex, lacks fairness, flexibility and transparency. It’s time to heed the criticism and develop a school funding solution that considers the needs of students, educators, taxpayers and policymakers.
How to Improve the Financing of North Carolina Public Schools
Reviews of North Carolina’s system for financing public schools highlight significant problems that warrant remedy. Not many states use resource allocation models to finance schools and now we know why. Policymakers are faced with two choices. They can keep the current system and remake the formulas to eliminate the negative effects. Or, they can start from scratch and create a new system of financing schools.
Again, Georgetown Professor Marguerite Roza is helpful. In her April 25, 2018 presentation to the Joint Committee on Education Finance Reform, she told policymakers that before they create a new finance system, they should consider what they want the system to do. Roza says every successful school finance system should do five things.
- Ensure equity for students
- Be flexible to withstand the test of time – most school finance systems last 20-30 years before a major overhaul or replacement
- Tap adequate, stable and sustainable resources
- Be simple, easily understood
- Be transparent so administrators can monitor and demonstrate spending is connected to outcomes.
Weighted Student Funding
The resource allocation model is plagued with a variety of shortcomings and does not affirm the principles just mentioned. In recent years, a growing number of states and big city school districts moved away from distributing resources via staffing formulas and have shifted toward using a weighted student funding formula to distribute funds. WSF uses a student-based formula to allocate a fixed sum of dollars to LEAs or schools for each student. Base funding is provided for all students. Additional funding is provided to help meet other student needs like special needs, limited English proficiency, or at-risk students. These needs are given a weight to reflect amount of additional funding.
Table 3 below represents an exampled of a California Student Weighted Formula from 2014.
|Table -3 California Student Weighted Formula|
|Source: California DPE, Local Control Funding Formal Overview, Jan. 15, 2014|
Weighted Student Funding (WSF) represents a fundamental shift away from how schools are currently financed. Instead of a centralized allotment system, WSF uses students as the foundation for developing the state’s education budget. Unlike positions, students are the fundamental unit to which funds are attached. A base allocation (1.0) is provided which serves as the foundation for educating a general student. Weights are multiplied by the base account to determine total funding. WSF attempts to more accurately fund the actual costs of educating students with diverse needed.
Lawmakers identify the areas where additional spending is needed. Different weights can be assigned to different cost factors. One immediate and noticeable change from resources allocation models is that WSF pushes discretion and decision-making authority down to the local level where it is needed to produce optimal outcomes and address the needs of changing populations.
Main advantages of a WSF system:
Adaptable. WSF system is generally seen as being more adaptable to working with different education delivery models such as traditional schools, charter schools, distance/virtual learning or dual enrollment.
Serves populations. WSF does a better job of serving populations. WSF changes as population changes. Unlike other models where funding is tied mostly to history, funding for WSF is tied to the needs of the population. The district determines the core staff and no staff that must be hired.
Efficiency. WSF is also more apt to promote efficiency by setting a pre-determined amount to meet student needs. These qualities are likely to make WSF funding more efficient because it is more likely to get needy populations at the appropriate levels.
Transparency. Resource allocation models are complex, centralized and opaque systems. It is difficult to follow spending and ask basic questions. WSF is a much easier system to understand. Simplicity leads to greater transparency. It wouldn’t take finance officers two years to understand the Allotment Policy Manual.
Local Decision-making. Affirms local decision-making. Schools receive budgets in terms of dollars instead of positions. Principals are given more control over their budgets and decisions that affect school and staff. WSF is more successful when decision-making is forced down to the school level.
Equity. Since dollars follow the student, WSF treats all students equitably. WSF levels the playing field for all schools.
Parent Friendly. WSF makes it easy to understand how much money is being spent on education and whether it is being spent as intended. WSF gives parents a voice in the discussion.
While WSF offers many advantages, the system is certainly not perfect. Policymakers should be aware of several problems. First, WSF does not tell policymakers how much to spend. The WestEd Report published in December recommends North Carolina needs to spend up to $8 billion in additional dollars over 8 years to comply with the Leandro decision. The WestEd report is essentially an adequacy study. WSF won’t respond to that. It will – once funding decisions are made – provide a better way of distributing dollars to ensure goals are achieved.
Second, Since LEAs enjoy more discretion and decision-making authority under WSF. Since funding for discrete categories or programs would disappear under WSF, it will be more difficult to track how much was spent on particular programs.
Third, under the current centralized resource allocation model the legislature enjoys significant control over spending. It can encourage spending by saying unless school districts spend X dollars, schools will lose money. Under WSF plan, authority over spending is shifted to LEAs and they decide how much is spent. Lawmakers used to exerting significant control over public schools, may resist such a change.
Lastly, transparency is a key advantage of WSF. However, states or districts who wish to capitalize, would require additional manpower and funding to track and verify enrollment changes.
North Carolina needs a new way to finance public schools. The current system is outdated and by many accounts, broken. It is too complex and can’t ensure that funds are being delivered or outcomes achieved. Weighted student funding provides North Carolina policymakers with a proven alternative to remedy many of the shortcomings of the state’s resource allocation model. While not a perfect system, WSF can result in significant improvements for those who use, administer, support and fund our public schools. For those reasons, WSF is an option worthy of serious consideration by policymakers.
[i] “Highlights of the North Carolina Public School Budget, 2020”, North Carolina Department of Public Instruction, 2020, page3.