America’s elementary and secondary schools are funded primarily by state and local revenue sources. State revenues derive primarily from general sales, personal income, and corporate taxes. Localities raise revenues primarily through property taxes and, to a lesser extent, local sales and income taxes. Federal aid to education has historically been provided to supplement state and local funds for students with the greatest needs. State school finance programs are meant to meet the educational needs of children, while considering budget priorities in each state. Finance programs vary in complexity as well as in the amount spent per pupil. Some of this variation in per pupil expenditures is accounted for by differences in the cost of educational services, the property wealth of the state, the amount the state is willing to spend for education, or the funding formula used by the state. In some states, this variation has led to lawsuits challenging funding formulas. From 1979-80 to 1992-93, total real expenditures for public elementary and secondary education increased by 40 percent to $254.4 billion. Total expenditures have generally increased since the 1960s, except for a slight decline between 1977 and 1980. Between 1989-90 and 1992-93, expenditures increased by 6 percent, similar to the rate of increase in public school enrollment during this time. This increase in total expenditures contrasts with the levels in the 1970s, when the totals remained somewhat level until increasing to approximately $189 billion in 1977-78 (see fig. 1). Since 1990, enrollment has begun growing after generally leveling off in the 1980s. In 1980-81, public school enrollment was 40.9 million; it declined to a low of 39.2 million in 1984-85. Thereafter, public school enrollment began growing slowly and in 1989-90 reached 40.5 million. From 1989-90 to 1992-93, public school enrollment increased by 6 percent, to 42.8 million. By the school year 2000-01, this enrollment is projected to increase to 48.3 million (see fig. 1). In addition, the number of at-risk children in all categories has increased since 1980. Between 1980 and 1990, the number of poor school-age children increased by about 6 percent to 7.6 million, while the overall school-age population declined. The numbers of other types of at-risk students, such as those with limited English proficiency (LEP), immigrants, and students needing special education, have all increased at similar or higher rates (see app. II, table II.2). We also examined data on all children under age 18, school age and nonschool age, because they provide a more comprehensive measure of the number of children expected to enroll in school currently and in the future. From 1980 to 1993, the number of poor children under age 18 in families increased by 35 percent, from 11.1 million to 15 million (see app. II, fig. II.4). The growth in these at-risk populations has increased the demand for specialized classroom services. Regular classroom services increasingly include special education for the physically and mentally challenged, compensatory education for the economically disadvantaged, and language services for LEP students. In addition, many schools will have to address the needs of other at-risk students, such as children who change schools frequently and are, therefore, more likely to be low achievers and have other difficulties such as health and nutrition problems. Because of the additional services associated with educating poor and other at-risk students, many schools face elevated cost requirements and must find ways to stretch current funding levels to pay for these services. This is more difficult in areas with high concentrations of poverty because such areas are frequently limited in their ability to raise revenues. This limitation is partially offset, in many states, by federal and state categorical education programs. After decades of increase (with one plateau in the late 1970s), per pupil expenditures for elementary and secondary education leveled off beginning in 1989-90, increasing less than 1 percent, on average, each year until 1992-93 (see app. III, fig. III.1). This leveling off of per pupil expenditures is due, in part, to the increased number of children who enrolled in our nation’s schools since 1990 and the effects of the 1990-91 recession. Before the 1990s, education spending—measured as current per pupil expenditures—rose steadily. Data going back to the 1960s show a rapid increase in expenditures—up 69 percent for the decade, with a slower rate of increase in the 1970s—35 percent—and a similar increase in the 1980s—33 percent. For the nation, the average total per pupil expenditure for 1992-93, using fall enrollment as a measure, was $5,296, although per pupil expenditures vary throughout the United States. In 1992-93, per pupil expenditures for the states ranged from $3,700 to $10,100 (see app. III, table III.2). From 1981-82 to 1992-93, on average, most states’ per pupil expenditure increased between 25 and 50 percent (see app. III, fig. III.2). Per pupil expenditures may vary substantially within a state. For example, in Texas, some school districts spent more than twice as much on total operating expenditures per pupil than others. While districts at the low end, the 5th percentile, spent $3,650 per pupil, high-spending districts, at the 95th percentile, spent $7,928 per pupil in 1993-94. These differences may exist, in part, however, because of geographic cost-of-living differences and differences in pupil needs. The previously increasing state share of education spending leveled off beginning in 1989-90 (see fig. 2). Since the early 1970s, the states had provided an increasingly larger share of education spending. In 1969-70, the state share was 39.9 percent, and it increased by 17 percent to 46.8 percent in 1979-80. In 1986-87, the state share had peaked at 49.7 percent. By 1990, the state share had decreased to 47.3 percent. In 1992-93, the state and local shares were roughly equal, with localities contributing a slightly larger share (47.4 percent or $118 billion) than states (45.6 percent or $113 billion). Some states’ shares declined further. Although localities had historically been the major contributors for education revenues, states began playing a larger role in funding education in the 1970s and 1980s. During this time, states sought to reduce the fiscal disparities among districts and became more involved in education reform efforts. Localities’ share decreased by 17 percent from 52.1 percent in 1969-70 to 43.4 percent in 1979-80. During the 1980s, the localities’ share leveled off. It rose slightly from 1988-89 to 1992-93—from 46 to 47.4 percent. During the 1970s, the federal share also began to rise, largely as a result of the increased number of programs for at-risk children. In 1969-70, the federal share was 8 percent, increasing to 9.8 percent in 1979-80. Thereafter, during the 1980s, the federal share decreased and reached a low of 6.1 percent in 1989-90. In 1992-93, the federal share increased to 6.9 percent or $17 billion. State, local, and federal shares for education spending vary by state. In 1991-92, state contributions ranged from a high of 73.8 percent in New Mexico to a low of 8.5 percent in New Hampshire, where citizens regard education as a local responsibility. Most states contribute between 30 and 70 percent. Local contributions range from 14 to 88 percent, and the federal contributions per state range from 3 to 17 percent (see app. IV, table IV.2). Between fiscal years 1987 and 1994, the relative share of elementary and secondary education spending in state budgets decreased by 11 percent. In fiscal year 1987, education accounted for 22.8 percent of total state spending but decreased to 20.3 percent by fiscal year 1994 (see app. V, fig. V.1). This decrease in the percent of states’ budgets spent for education occurred, in part, because of increased spending for Medicaid and corrections (see fig. 3). State shares for education and other government services declined because of relatively weak economic growth as well as the budget effects of state and federal mandates. State education needs compete for funds with other state services, and relative budget shares have shifted since fiscal year 1987. Between fiscal years 1987 and 1994, Medicaid’s share of states’ budgets increased sharply by 90 percent, from 10.2 to 19.4 percent. In addition, corrections’ share increased by 10 percent, from 3 to 3.3 percent. Meanwhile, elementary and secondary education’s and higher education’s shares decreased by 11 percent and 15 percent, respectively. In fiscal year 1990, Medicaid surpassed higher education as the second largest state program; in fiscal year 1994, Medicaid was nearly equal to elementary’s and secondary’s share of 20.3 percent (see fig. V.1). Medicaid spending, which provides medical care for the poor and is mandated by the federal government and administered by states, has been absorbing the bulk of additional revenue generated in many states. Twenty-four states experienced double-digit growth in total Medicaid spending between fiscal years 1993 and 1994. Increased corrections spending is due, in part, to court orders imposed on states requiring the relief of overcrowded prisons or improved prison conditions as well as to an increased number of prisoners. We developed a measure of a state’s ability to raise taxes and revenue based on taxable resources, accounting for differences among states in purchasing power and population (see app. I). In 1992, states with high ability to raise revenue were usually resource rich, had populations with high incomes and high property values, or had large tourist industries.