Federal, state, and local governments share the financing of our nation’s public schools. The federal share is the smallest, averaging about 7 percent of public school funding in the 1991-92 school year. Nationwide, the other 93 percent of funding was about evenly split between state and local funding (see fig. 2). However, the state share of total public funding varied by state from about 9 percent in New Hampshire to about 76 percent in New Mexico in the 1991-92 school year. Localities raise revenue for education mainly through property taxes, and the amount of local funds depends on both property values and local tax rates. This has produced local funding disparities because school districts’ property tax bases vary widely. Localities with high property values can generally raise large amounts of local revenue per pupil even with relatively low tax rates; localities with low property values usually raise less local revenue per pupil even with higher tax rates. In an earlier report, we found that poorer districts in 35 states tended to make a greater tax effort than wealthier districts in school year 1991-92, but this effort was not sufficient to eliminate the funding gaps between poor and wealthy districts in 23 of these states. When allocating revenue to districts, states typically consider these tax base differences as well as educational need factors. States use various equalization strategies to address the funding gaps that arise from tax base differences. Such strategies include targeting more funds to districts with lower tax bases and increasing the state’s share of total education funds. Meanwhile, states typically consider districts’ educational needs, including the number of pupils in a district, the cost of educating different types of pupils (for example, students with disabilities), and other educational cost factors beyond the districts’ control such as costs related to sparsity or enrollment growth. The educational needs of poor students are one of the states’ considerations when making funding decisions. Poor students risk academic failure because their homes or communities lack the resources to prepare them academically and because, among other factors, they have considerable health and nutrition problems. Children living below the poverty level are more likely than nonpoor children to have learning disabilities and developmental delays. As a result, poor students’ academic achievement tends to be low, and they have high rates of dropping out of high school. To help low-achieving poor students, 28 states funded compensatory programs in school year 1993-94, according to a national study on school finance programs. States may have funded such programs by directly allocating funds for this purpose, incorporating the funding into other programs, or including weights in their basic support formulas that provide funds for school districts’ daily operations. Funding for state compensatory programs that directly targeted poor students represented up to 11 percent of total state school aid. The total spent for compensatory programs ranged from about $1 million in Wyoming to about $785 million in Texas in school year 1993-94. The lawsuits filed since the early 1970s challenging the constitutionality of state school finance systems based on the inequitable distribution of education revenues between districts within states demonstrate that ensuring a fair distribution of funds is a complex and difficult undertaking. States are under constant pressure from both poor and wealthy districts, education interest groups, and anti-tax groups to modify their state school finance systems. For example, in our 1995 study of three states involved in equity lawsuits, we found that the state remedies for improving the equity of their school finance systems had to respond to citizens’ concerns about increased taxes and to concerns of wealthy districts that want to maintain spending levels. In fiscal year 1997, the federal government spent about $37 billion on elementary and secondary education. The Department of Education provides most of these funds. The states’ education agencies receive most of the funds and then allocate them to local districts. Programs funded this way include those for disadvantaged children, children with disabilities, drug-free schools, math and science, vocational education, and migratory education. Department of Education funding provided directly to districts included impact aid, bilingual education, and Indian education. Among other federal agencies that spend substantial amounts on elementary and secondary education are USDA through its child nutrition programs and HHS through its Head Start and other programs. Most federal funding for elementary and secondary education is targeted to disadvantaged and poor children. For example, the Department of Education’s title I grants that provide compensatory services for disadvantaged students accounted for about $7.2 billion of the federal funding for education in fiscal year 1997, and USDA’s child nutrition programs for low-income students accounted for about $8.3 billion. Title I has anchored the Elementary and Secondary Education Act since it was first enacted in 1965. USDA began providing child nutrition programs with the enactment of the National School Lunch Act of 1946 and later expanded its effort under the Child Nutrition Act of 1966. Members of the Congress have recently considered more flexible approaches for funding federal education programs as a way to possibly consolidate duplicative programs and eliminate regulations seen as unnecessarily limiting local flexibility. Education programs serving disadvantaged students, including title I, are possible candidates for this approach. The Congressional Research Service recently noted that among the unresolved issues concerning such approaches are the amount of flexibility that would be allowed states or localities in using these federal funds and the extent to which recipients would be held accountable for achieving certain outcomes. Most states targeted more funds to districts with large numbers of poor students, although the amount of such funding varied widely. In most states, federal funds were more targeted than state funds, which resulted in increasing the overall amount of additional funding for each poor student. Regardless of whether a state’s school finance system explicitly targeted poor students, the effect was to target more state funds to poor students in 43 of the 47 states in our analysis. State school finance systems may have targeted poor students either directly through compensatory programs or indirectly through other programs, such as bilingual education, which may serve a high proportion of poor students. The amount of extra state funding districts received for each poor student varied widely. On average, for every $1 a state provided in education aid for each student in a district, the state provided an additional $.62 per poor student. At the high end, New Hampshire provided an extra $6.69 per poor student; at the low end, four states provided no additional funding per poor student. Federal funding was more targeted to poor students than state funding in 45 of the 47 states. On average, for every $1 of federal funding districts received for each student, they received an additional $4.73 in federal funding per poor student. The amount of additional federal funding districts received for each poor student varied widely. At the high end, districts in Alaska received an additional $9.04 in federal funding; at the low end, districts in West Virginia received an additional $2.59. In general, the greater federal targeting had the effect of raising the additional funding for poor students from the state-only average of $.62 to a combined state and federal average of $1.10, a 77-percent increase. This increase reflects that most states’ relatively small share of federal funds was highly targeted. Again, states varied widely in the amount of combined targeting that occurred, ranging from an additional $7.41 for poor students in Missouri to an additional $.27 in West Virginia. In three states, the addition of federal funding increased funding for poor students but did not enhance the state targeting effort. In one state (New Hampshire), the addition of federal funding yielded less combined targeting for a poor student. The other two states (Nevada and New York) did not target poor students, and the addition of the relatively small amount of targeted federal funding did not raise the combined targeting effort above zero. Table 1 shows each state’s amount of state and federal targeting and the amount of targeting when state and federal funding are combined. The addition of state and federal funds had the effect of reducing or eliminating the local funding gap between high- and low-poverty districts in most states. In 37 states, high-poverty districts had less local funding per weighted pupil than low-poverty districts. State funding eliminated this funding gap in 7 states and reduced it in the remaining 30 states. The addition of the more targeted federal funds eliminated the funding gap in another 9 states and further reduced it in the 21 states that still had funding gaps. A substantial number of poor students lived in these 21 states, however. Although targeting poor students helped reduce the total funding gap, the percentage of total education funding provided by state and federal governments was more important in reducing the gap. States with a greater state and federal share of education funding had smaller total funding gaps. High-poverty districts had less local funding per weighted pupil than low-poverty districts in 37 states. Separating all school districts into five groups on the basis of increasing poverty rates reveals the size of the gaps (see fig. 3). The average local funding per weighted pupil in the lowest poverty districts was $3,739 compared with $1,751 in the highest poverty districts. The lowest poverty districts nationwide had about 114 percent more local funding than the highest poverty districts. This gap occurred even though the highest poverty districts in 30 states made a greater tax effort than the lowest poverty districts. Combined state and federal funding had the effect of eliminating the funding gap in 16 of the 37 states where the local funding per weighted pupil was less in high- than low-poverty districts. Combined state and federal funding reduced the funding gap in the remaining 21 states. The arrows in figure 4 show the effects of combined state and federal funding on closing the local funding gap between high- and low-poverty districts. The light arrow indicates the effect of state funding on closing the funding gap; the dark arrow indicates the effect of federal funding. The zero line (0) of the figure indicates no funding gap between high- and low-poverty districts. States whose funding gaps are represented by negative values are those where higher poverty districts had less funding per weighted pupil; states whose funding gaps are represented by positive values are those where higher poverty districts had more funding per weighted pupil.