Note to Readers: Last week we published the first of three articles on how State funding of K-12 schools is failing students and schools who need the most. That article looked at a unique measure of funding adequacy and a clear pattern of underfunding for students of color and those who need the most from public schools. Along with the article, we published a data visualization of funding across school districts and student groups. This second article looks at how Minnesota allocates K-12 education funding, and how it could tweak funding formulas to make them more equitable. Next week, we will have a third article to examine what other states are doing to make their K-12 funding more equitable.

Minnesota distributes the vast majority of its annual $10.5 billion in K-12 school funding without regard for student need or local costs. As we explored in the first part of this series, that means school districts like Minnetonka and Orono that need less still get far more than what would be considered adequate–while districts like Minneapolis, St. Cloud, Worthington, and others, are left struggling to take care of basic student needs, much less offering “extras” like music and a wide selection of AP classes. 

The overall funding system does allocate more funding to school districts with a higher proportion of low-income students- which many states do not manage to accomplish. Yet this system still leaves about 15% of the state’s students enrolled in districts without adequate funding. Students enrolled in inadequately funded districts are twice as likely to qualify for free and reduced price meals, four times as likely to be English learners, and twice as likely to be students of color or Indigenous. 

Some of the underfunding of school districts can be attributed to the state’s underfunding of special education and English Learner services, evident through the nearly $1 billion per year school districts spend on these services without state reimbursement. Compared to research-based benchmarks, the state’s compensatory revenue–aid targeted directly to low-income students–is also underfunded. 

There are currently no bills before the House or Senate that would increase the amount of compensatory revenue funding for low-income students, nor address some of the peculiarities in Minnesota’s formula– even at a time of historic budget surpluses, and control of all three houses by Democrats, who make equity and education funding a cornerstone of their political platform

Special education and English Learner cross-subsidies create funding inequities between Minnesota school districts because some districts have more students, who need more, and qualify for these services. 

Last year, Minnesota school districts used $822 million of their general formula aid to cover the cost of special education services not paid for by the state of Minnesota. They spent an additional $147 million to cover the cost of English Learner services not paid for by the state. These cross-subsidies- the amount districts spend on required services that State funding doesn’t cover- represent almost 15% of the general formula aid the state sent to school districts.

On average, the combined cross-subsidy for special education and English Learner services for a Minnesota public school student was $1,199 last year, nearly 18 percent of the general formula aid per student. But this varies significantly across school districts. Some school districts receive more than they need to pay for special ed and English Learner services, while other districts spend as much as  $2,400 per student out of their general funds to pay for these. 

English learners, low-income students, and homeless and highly mobile students are more likely to be enrolled in districts where State underfunding of special education and English Learner services are higher than the statewide average. Students of color and Indigenous students are also more likely to be enrolled in districts with above-average cross subsidies. 

The differences in cross-subsidies across districts provides a perverse incentive for families to seek out school districts with fewer students needing special education and English Learner services. Districts with lower cross-subsidies are able to put more of their general formula aid into general education, athletics, advanced academics, arts programming and more. These programs are attractive to families. 

While Governor Walz has proposed reducing the special education cross-subsidy by half and the English Learner cross-subsidy by 10%, bills currently in the Education Finance Committee in both the House and Senate propose full funding of both cross-subsidies. Fully funding the cross subsidies would likely address some of the inequities in Minnesota’s current funding system. For many districts, though, covering the cross-subsidies still wouldn’t fill their gap in adequate funding. Beyond closing cross-subsidies, an equitable school funding system will likely require more significant changes to how Minnesota funds its schools. 

Minnesota already explicitly funds low-income students, but that funding has peculiar features that make it unlikely to cover the full cost to school districts of meeting students' needs.

Minnesota could change its existing funding targeted to low-income students to make state funding more equitable and aligned with student needs. Compensatory revenue is Minnesota’s funding targeted to students who qualify for free and reduced price meals, the state’s measurement of household income for students. Under the current formula, the maximum amount of additional funding a school district can receive for a qualifying student is $3,614. This maximum amount is 53% of the current per student general formula aid. 

For a district to receive the maximum amount of compensatory revenue, a student must qualify for free meals and attend a school where 80% or more of the students in the building also qualify for free lunch. For the purposes of calculating compensatory revenue, the state counts a student who qualifies for reduced-price meals, but not free meals, as half of a student. Under the current formula, aid per student increases as the proportion of qualifying students in a school site increases. The amount of aid plateaus when the proportion of qualifying students reaches 80%.

The current compensatory revenue formula has three features, which an equity-minded legislature and governor might consider changing. The first is counting students who qualify for reduced price meals at half the rate as students who qualify for free meals. Currently, a family of four in Minnesota qualifies for free meals up to an income of $36,075 per year. To qualify for reduced price meals, a family of 4 must earn less than $51,339. 

In Minneapolis, these income amounts are near 30% and 50% of area median income, respectively. Families at both of these levels of income are likely to be rent-burdened, and face challenges finding affordable housing. And that is just one of the challenges faced by students experiencing poverty. Additionally, it seems implausible that the needs of a student are suddenly halved by moving from a household income of $36,075 to $36,076. Yet that assumption is built into the current formula.

The second peculiar feature of the compensatory revenue formula is that it lacks a baseline amount per student. A positive feature of compensatory revenue is that it increases as the proportion of qualifying students increases in a school. But without a base amount per student, there are cases where the amount of aid is too little to add meaningful services at a school site. 

Within Minneapolis Public Schools, for example, the district received less than $15 per qualifying student in its lowest poverty schools, and up to the maximum amount per qualifying student at 17 of its schools this year. For students experiencing poverty, there’s nothing magical about attending school with well-off peers that eliminates their additional needs. The current formula for compensatory revenue implies the needs of low-income students can be mostly alleviated by attending school with wealthier peers.

Third, the amount of compensatory revenue per qualifying student is too low based on research about the actual costs of meeting the needs of students experiencing poverty. Although a 53% increase in funding per student may seem like a lot, districts are not receiving this level of aid for most qualifying students. Statewide, compensatory revenue makes up about 8% of total funding to K-12 schools, while a third of the State’s students qualify for free or reduced price meals. 

Consensus is that districts need 2-3 times as much money per student to address the additional needs of low-income students compared to students who are not experiencing poverty. If we accept that the general formula aid is an appropriate level of funding per student without additional needs, then the maximum compensatory revenue is four to six times less than what is needed to meet student needs.

An equity-minded Governor and Legislature might consider changing compensatory revenue. Those changes could include counting students who qualify for reduced price meals as a whole student in the formula, setting a baseline amount per qualifying student so all schools with qualifying students could provide a baseline level of services, and increasing the overall level of aid so that it was more consistent with research on the cost of meeting student needs.