School Funding Formulas (May 2012)

This study provides a literature review on school funding formulas across OECD countries. It looks at three salient questions from a comparative perspective: i) What kind of school formula funding schemes exist and how are they used, particularly for promoting the needs of socially disadvantaged pupils?; ii) How do school formula funding regimes perform according to equity and efficiency standards?; iii) What are the unresolved issues? Formula funding of schools, as opposed to administrative discretion and bidding, relies on a mathematical formula containing a number of variables (e.g. number of pupils), each of which has attached to it a cash amount to determine school budgets. Across OECD countries there are four main groups of variables in such formulas: i) student number and grade level-based; ii) needs-based; iii) curriculum or educational programme-based and; iv) school characteristics-based. Sometimes output and outcome-related variables are also used. The performance of formula funding compared to alternative funding regimes is dependent on the details of the formula and on the wider education policy environment. Formula funding systems typically advance transparency and accountability at low administrative costs and in combination with matching complementary policy tools they can also contribute to equity and efficiency. Currently, there are several ongoing debates across OECD countries: First, there is an inherent tradeoff between transparency/simplicity and sensitivity to local conditions/complexity. Second, knowing how much educating to a given standard costs is problematic and subject to heated debates. The main reason for this is that the causal relationship between education costs and student performance is largely unknown and even the identified impacts appear to be relatively small. Third, even though resources are allocated according to need estimation, they might not be devoted to these needs. Fourth, it is still undecided whether the introduction of school formula funding regimes has changed actual school funding practice.