Financing Higher Standards in Public Education: The Importance of Accounting for Educational Costs

Performance standards have been at the center of recent debates on educational reform. Many states have implemented new performance standards, often based on student test scores, and a district's state aid is sometimes linked to its success in meeting the standards. This focus on performance is designed primarily to promote better student achievement by holding schools accountable. However, a school's performance is influence not only by the actions of its administrators and teachers but also by factors outside its control, such as the nature of its student body. Thus, a focus on performance is inevitably unfair, especially to cities, unless it accounts for the impact on performance of factors outside the control of school officials. To be fair, school report cards and performance-based state aid systems must distinguish between poor performance based on external factors and on school inefficiency. Many state aid systems have taken one step in this direction by compensating districts with low wealth, a factor over which they have no control. However, school district performance is also influenced by the cost of education, which varies widely from district to district based on local wage rates, student characteristics, and other external factors. Existing state aid formulas either ignore these factors altogether or else use ad hoc corrections, such as "weighted pupil" counts, that account for them partially at best. In this policy brief, we explain why a performance focus and educational cost indexes must go hand in hand, discuss alternative methods for estimating educational cost indexes, and show how these cost indexes can be incorporated into a performance-based state aid program. We show, using data from New York State, that controlling for costs in the design of school aid formulas is crucial to enable central cities to reach educational adequacy standards.