How Do Schools Make Money? A Comprehensive Guide to Understanding This $700 Billion System
Have you ever wondered how public schools support 25 million elementary and secondary students across America each year? From teacher salaries to textbooks and buses, it takes nearly $700 billion annually to run this vital institution.
Unlike a typical business, schools stay tuition-free while piecing together funding from an intricate web of sources. State and local taxes make up most of the budget, supplemented by federal dollars, fees, donations and even creative corporate partnerships.
I‘ll be your guide through the complex maze of dollars flowing in and out of school finance. You‘ll gain insight into how these systems operate from the administrator‘s view down to the classroom. Let‘s dive in!
The 30-Second Funding Breakdown
Before we get into the weeds, here is the simple overview:
- 92% of funding comes from state and local sources
- 47% from state taxes and budgets
- 45% from local property and sales taxes
- 2.4% from federal programs
- Remaining 5% from miscellaneous sources
This balance varies across the over 13,000 U.S. school districts, but the bulk originates directly from state and community taxes. Federal funding plays a smaller role than most assume.
Now let‘s unpack how these dollars flow on a state, local and federal level.
State Dollars: Unequal Distribution
States provide nearly half of total education dollars across the U.S. This money originates from income and sales taxes, flowing to schools based on enrollment numbers, demographics and mandated categorical programs.
Breaking Down The State Funding Formulas
Per-Pupil Funding Based on Enrollment
Instead of a single block amount, states allocate funding tied to districts‘ student enrollment numbers. The goal is distributing money equitably based on schools‘ size and needs.
Additional dollars get earmarked within this pot for schools serving high-poverty communities or those with larger special education populations. We‘ll cover how federal Title I and IDEA funds specifically assist these students later on.
Categorical Funding for Specific Student Groups
Beyond general enrollment dollars, states designate specialized pots of money for key focus areas like special education, STEM initiatives or English language services.
Having these protected buckets ensures schools can fund state-mandated programs for target student groups year over year. It prevents these priorities from getting lost in the broader budget shuffle.
The Problems Around State Funding Approaches
While state budgets make up 47% of education funds nationally, there is plenty of debate around distribution practices which advantage wealthy districts.
Unequal Funding Across Districts
Per-pupil funding aims to allocate equitably, but factors like property taxes often benefit more affluent areas. This leads to continued resource gaps between schools serving working class areas compared to white-collar communities.
More Reliance on Property Tax Than Income Tax
Many states rely more heavily on local property taxes than state income tax rates, which varies enormously between jurisdictions. Some states have even faced lawsuits challenging funding models as inadequately and unfairly distributed.
State Budget Cuts Disproportionately Target Education
When economic downturns strike, education funding takes a disproportionate hit in state budget cuts. The Great Recession saw sweeping cuts to state education allotments, forcing layoffs upwards of 300,000 teachers nationwide.
Students in states like Oklahoma and West Virginia have rallied for budget increases after seeing hardly any state funding rise over the last decade when accounting for inflation. Per student inflation-adjusted spending dropped over 12% in Oklahoma in this timespan.
State Funding Case Study Comparisons
To compare stateside spending, let‘s look at two case studies:
Utah spends $7,100 per student, among the lowest nationally. High birth rates and slow tax revenue growth make it difficult for Utah to stretch education funds despite a strong economy. The state picks up 63% while 37% is locally funded.
Compare this to New York‘s $22,600 per pupil expenditure, among the country‘s highest. With lower birth rates, higher taxes, and property values, New York can put more state tax dollars toward schools rather than relying on local sources.
Local Dollars: Tapping Into The Community
While state budgets provide foundational funding, local dollars make up 45% of the pie. Funding raised directly in the district itself gives schools flexible resources tailored to community needs.
The bulk of these locally-raised funds come from property taxes, assessed directly on homes and businesses within a district‘s boundaries. This means the property value and tax rates around schools have an enormous impact.
Property taxes brought in $287 billion for education nationally in 2016. Some districts supplement by issuing special purpose bonds and levies, which voters approve to pay for building upgrades or program improvements.
Beyond property taxes, municipalities collect sales tax dollars that share revenues with local districts. Areas with booming industries and property values bring far more local dollars than rural or economically depressed regions—exacerbating funding inequality across district lines.
For example, Illinois currently picks up just 49% of education funding from in-state sources, leaving the burden to local communities. This means poorer neighborhoods with lower home prices and property taxes suffer compared to affluent areas.
Federal Funding: Money With Restrictions
Compared to state and local sources, federal funding represents a smaller slice, around just 2.4% of total dollars spent—or $18 billion currently. So where does this federal money come from and how do schools utilize it?
It originates from federal income taxes and gets channeled into three main programs:
Title I Funding
Serves over 24 million students concentrated in high-poverty schools, allocated based on census poverty data. The goal is closing funding gaps by beefing up academic support services. Currently provides about +$16 billion nationally.
IDEA Special Education
Funds additional staff, tools, technologies and instruction tailored to children with disabilities. Schools accessed $12 billion total in FY 2020 to serve students with special needs.
School Nutrition Programs
Covers free and subsidized breakfast/lunch programs for low-income students. The USDA distributes this funding which totaled $20 billion in 2020 school nutrition aid.
While undoubtedly helpful supplements, federal funds come with extensive restrictions dictating use—creating administrative headaches for districts. Rules focus dollars narrowly on target demographics and approved interventions.
For example, Title I averages around +$3,000 allocated per student concentrated in high-poverty schools. While a helpful injection, it rarely covers comprehensive turnarounds required to overcome systemic disadvantages rooted in socioeconomic differences.
Additionally, federal spending cuts disproportionately target education funding—especially during recessions when needs multiply. Several deficit reduction acts over the last decade triggered restrictions impacting schools.
Other Dollars: Donations, Fees…and Getting Creative
Beyond taxes, schools piece together revenues from an array of miscellaneous sources. These dollars provide important though often inconsistent periphery support.
Parent Teacher Associations and community partners run fundraisers as varied as jog-a-thons, raffles and bake sales. Public and corporate grants help fill resource gaps.
While basic instruction stays tuition-free, schools collect fees from enrolled families on extras like sports teams, clubs, field trips and activities. Some schools also generate rental income via available event spaces.
As budgets tighten across many districts, we’ve seen administrators getting creative tapping corporate sponsorships and launching specialty ventures. Let’s explore some examples where schools aim to educate while generating funds.
Corporate Sponsorships
Exclusive advertising and naming rights agreements between districts and hometown partners can infuse schools with additional dollars. Stadium scoreboards sporting a prominent logo. Branding rights to the gym floor below the basketball hoop. Companies exchange dollars to align their brand with schools.
In-House Enterprises
Some districts have launched side business embedded right into the student experience. A high school bakery that sells student-baked cookies and cakes to the community. An automotive class that brings in revenue doing oil changes and brake pad replacements for neighborhood drivers. Schools offset costs while giving students real-world business training.
Premium Seating & VIP Access
Universities have modeled this concept for years through coveted alumni donor suites and exclusive seating options. Primary and secondary schools nowimplement similar programs, packaging premium tickets with perks like preferred parking, lounge access and special hospitality. High-dollar donors compete for prime recognition and naming rights opportunities.
What’s an Administrator To Do? The Budget Balancing Act
As Eric Morse, principal of Jefferson Elementary School, reviews next year’s budget outlook, tough decisions loom. State funding stays flat while healthcare and pension costs tick higher for staff. Does he increase third grade classes by two students? Cut the enrichment coordinators driving arts and technology integration? Scale back the beloved robotics program?
Like all administrators, Morse must balance resources across academic priorities and student services. State and federal funds dictate certain fixed costs—like serving every special education student‘s needs—but boards pressure principals to limit local taxes. Parents want small classes, engaged learning and vibrant extracurriculars. Teachers need development and livable wages. Whiplash ensues over each funding decision.
Innovative Solutions: More Student-Centered Budgeting
While school budgets seem in crisis mode, innovative models continue emerging. Student-based budgeting (SBB) structures funding based on universal per student allocation, rather than fixed staff expenditures. Dollars follow the child’s needs. This fosters transparency around spending and nimbler adjustments.
SBB gives principals flexibility over resource decisions rather than prescribing interventions. Coupled with strong community partnerships, student advocates and integrated support staff, SBB provides a multifaceted approach to stabilization and growth.
The Bottom Line: It Takes an Village to Fund Our Schools
Behind America‘s schools lies an intricate web of funding sources, economic uncertainty, community pressures, administrator tradeoffs and innovations. But budget nitty-gritty boils down to delivering equitable education and opportunity to our children.
State legislatures wrestling to balance tax relief with education obligations. District staff losing sleep over offering enough programs ‘to compete‘ while making payroll. Corporate partners weighing optics of stadium branding rights. High schoolers fundraising patiently for promised buses to the state Robotics Finals.
All stakeholders need aligned voices to steward budgets responsibly. That way students inherit not only knowledge in the classroom, but financial and civic lessons about communities investing in their own collective future. Our schools shape society‘s cornerstone.
I hope this guide brought transparency around the dollars and dilemmas facing administrators and communities in keeping schools flowing. It‘s a complex system needing compassion from all partners at the table. Here‘s to cultivating both responsible spending and tax dollars well-allocated.