The fair funding formula is student-based, meaning a district’s share of state funding is tied to its share of the student population (measured as average daily membership or ADM). However, each school district is not given the same amount of state funding per student; that would be unfair and would ignore the vast differences in local resources available to districts as well as the research-supported evidence that some students require more resources than others to succeed. Figure 3 provides an overview of the concept of the fair funding formula. The end result is that each school district receives the same amount of formula-driven state funding per weighted and adjusted ADM.

In order to appreciate how the BEFC formula addresses inequities and fairness, one needs to understand what the elements of the formula are and why they were chosen. Tables 5 and 6 at the end of this briefing explore the rationale for the factors and weights/adjustments present in the fair funding formula. There is a dashboard tool available here where you can select a school district to view its formula factors, including how they have changed year-to-year.

“Hold-Harmed”

Not all BEF funds are distributed through the fair funding formula. Under Pennsylvania’s current BEF distribution, each school district receives the BEF subsidy amount it received in 2014/15 (with adjustments in a few cases) plus its fair share (determined by the fair funding formula) of new funding added to the BEF total since 2014/15. Therefore, the proportion of basic education funding distributed through the fair funding formula has increased as the appropriation increased (Figure 4). However, many legislators and advocates believe this progress is too slow and are campaigning to make the fair formula apply to a larger portion of the funding more quickly.

Figure 4

The reason the fair formula does not apply to the entire BEF distribution is because of a policy commonly called “hold-harmless.” Despite the innocent connotation, “hold-harmless” translates as “hold-harmed” for the majority of the commonwealth’s students. This is especially true for school districts with students of color making up higher shares of enrollment. To recognize the effect this policy has had on marginalized groups, it will henceforth herein be referred to as “hold-harmed.”

“Hold-harmed” protects a portion of state funding from an updated formula distribution. This practice can be executed in different ways. In Pennsylvania, beginning in 1992/93 and continuing for more than 20 years, “hold-harmed” was applied annually – essentially “you get what you got last year, plus ‘x’ amount of this new money.” With the adoption of the fair funding formula in 2015/16, Pennsylvania moved away from the annual “hold-harmed” policy by freezing the “hold-harmed” guarantee at 2014/15 levels.

“Hold-harmed” created winners and losers in several ways. Generally, growing districts have had to share marginal increases with districts experiencing declining enrollments, creating a gap between the per student levels of state funding. Exacerbating these inequities, many distributions in the ‘80s, ‘90s, and ‘00s required a minimum 1 or 2 percent increase in state funding for each school district. These minimum increases diverted funds from need-based distributions.

Overall, “hold-harmed” ignores up-to-date student counts and socio-economic factors in favor of data from yesteryear. As noted in BEFC’s Final Report, “According to Penn State University Professor William Hartman, 53 percent of the basic education funding subsidy for fiscal year 2013-2014 is based upon data for fiscal year 1990-1991…” (page 21).

Unsurprisingly, the BEF distribution would look very different if the entire appropriation were distributed using the fair funding formula rather than just the 11.2 percent of the total being distributed today. Getting rid of “hold-harmed” altogether would shift $1.2 billion in state funding from the 353 school districts receiving more than their fair share to the 147 school districts (that educate 55 percent of PA’s students) receiving less than their fair share (see Figure 5 and Table 1 below). See linked “20/21 Hold-Harmed” spreadsheet for an individual breakdown for each school district.

Figure 5

Figure 6², below, compares actual per-student BEF funding to what each school district would receive if “hold-harmed” was eliminated. When looking for trends, there are wealthy and poor school districts on both sides of the “hold-harmed” issue (Table 2). One trend is clear, however. Overwhelmingly, it is “hold-harmless” for school districts with predominantly white enrollments and “hold-harmed” for school districts with higher shares of students of color. Nearly 80 percent of Pennsylvania’s students of color are enrolled in a school district that is not receiving its fair share of state funds.

Figure 6

How to handle Pennsylvania’s “hold-harmed” legacy was one of the biggest policy decisions confronting BEFC. Ultimately, BEFC agreed to two guiding principles on the issue of “hold-harmed.” First, they recommended that no new money should be subject to a “hold-harmed” provision. This was a huge step for Pennsylvania education funding policy as it went against the past 20 years of practice. Second, BEFC asserted that abruptly eliminating the existing “hold-harmed” practice would have an insurmountable budgetary impact – a median decline of 10.6 percent in total revenue – among the 355 school districts receiving more than their fair share.

Beyond these two recommendations, BEFC did not take a position on how to deal with “hold-harmed,” but they did identify three gradual ways for the General Assembly to address the issue:

• Option 1 (the option implemented by the General Assembly): Select a base year of funding and distribute all funds above that amount through BEFC’s recommended formula. For example, each district’s allocation begins with what it received in 2014/15 and any funding appropriated above that amount is distributed through the fair formula. Under this scenario, a school district is always guaranteed to receive at least the state funding it received in 2014/15.
• Option 2: Starts with Option 1, but then prioritizes new funding for school districts that are receiving less than their fair share.
  • For example, the legislature could decide to use a base year of 2014/15 and provide a $100 million basic education funding increase through the formula. Suppose when the entire basic education funding appropriation is distributed through the formula, District A’s allocation is greater than what is prescribed by the formula (receiving more than its fair share) and District B’s allocation is lower (receiving less than its fair share). If District A was due a $100,000 increase from the new money, a certain percentage, maybe 50 percent, would be redistributed to District B and other school districts that are victims of “hold-harmed.”
  • Reps. Flynn and Mullins introduced HB1790, which would allocate 75 percent of all new funding to the school districts not receiving their fair share.
• Option 3: Gradually expand the percentage of basic education funding distributed through the fair formula.
  • For example, 10 percent of the funds go through the formula in year 1, 20 percent in year 2, and so on until 100 percent is reached in year 10. Dollars not funneled through the formula would be distributed pro rata based on a district’s existing share of basic education funds.
  • Rep. Cox authored HB1313, which would reduce the base share by 20 percent each year.
  • Rep. Rabb introduced HB961, which would not use the gradual approach but rather allocate 100 percent of the total basic education funds using the fair formula.

Finally, the Ready to Learn Block Grant should be included in the “hold-harmed” discussion. It is a separate appropriation ($268 million in 2020/21) with explicit but broad spending parameters. This funding stream has not used updated factors since 2014/15. As a result, roughly 37 percent of the RTLBG funds are distributed based on 2010/11 factors, about 56 percent are based on 2014/15 factors, and the remaining 7 percent were legislatively driven ($10 million for Allentown SD, $6 million for Scranton SD, and $2 million for East Allegheny SD). In 2015/16 and 2019/20, Gov. Wolf proposed rolling the RTLBG into the basic education funding appropriation, but the change did not garner legislative support.

For 2020/21, policymakers temporarily paused the fair funding formula and chose to provide each school district with the same amount it received in 2019/20 given the uncertainty of the global pandemic and resulting economic crisis.

Growing Importance of Formula Factors

Each school district’s fair share of the formula-driven BEF funding equals its share of the statewide total number of weighted and adjusted average daily membership (Table 3 – row E). As more funding is distributed through the fair funding formula (Table 3 – rows A and C), the corresponding dollar value of each weighted and adjusted ADM (Table 3 – row F) increases. In other words, with more formula-distributed money, small changes in a school district’s annually updated factors, some of which tend to fluctuate, will have a greater and greater impact on a school district’s total state basic education funding.

In most years, a growing pie (i.e. more funding added to the BEF appropriation) masks some of the shifts in weighted and adjusted ADMs. Still, in 2018/19, 16 school districts received less state BEF funding than they had the previous year. If the formula would have been in effect for 2020/21 with no BEF increase to cover some of the ADM shifts, then 265 school districts would have lost funding compared to the previous year.

The growing financial impact of each weighted and adjusted ADM is why it is very important to have stable, yet up-to-date formula factors.

Formula Issues

“Cliffs” in the Formula – Concentrated Poverty and Sparsity Size Adjustment

The concentrated poverty factor has a hard eligibility cut-off at 30 percent of students living in the 0-100 percent range of the federal poverty line. In other words, school districts with 29 percent concentrated poverty do not receive a benefit in the formula, while school districts with 31 percent concentrated poverty receive a boost in their fair share calculation.

The poverty factors are updated annually using Census data, and the school districts near this 30 percent cliff have found themselves on either side depending on the year (Figure 5), which causes swings and unpredictability in funding. In fact, through the first six years of the fair funding formula data, 45 school districts have been on both sides of the concentrated poverty cliff (Table 2). This phenomenon is not limited to a certain size or locale of a school district. 

Figure 7

Similarly, the sparsity size adjustment factor, which recognizes the added educational costs experienced by low population density school districts, applies to school districts above the sparsity size ratio’s 70^th percentile (the 150 school districts with the lowest population density). Only six school districts have been on both sides of the cliff caused by the sparsity size fixed limit: Clearfield Area SD (Clearfield), Pequea Valley SD (Lancaster), Lake-Lehman SD (Luzerne), Muncy SD (Lycoming), Mifflinburg Area SD (Union), and Western Wayne SD (Wayne).

Fluctuating Median Household Income Data

The median household income index is a multiplier in the formula, and therefore, small changes have an outsized impact on a school district’s total weighted and adjusted ADM. The data comes from the U.S. Census Bureau’s 5-year American Community Survey, which is a monthly sampling over a five-year timeframe.

For PA school districts, the median year-over-year change in the latest household income data was 3.7 percent, with a high of 17.6 percent, a low of -8.9 percent, and a standard deviation of 3.4 percent. The small number of school districts on the tails of the normal distribution pictured in Figure 8 are seeing greater swings in their share of formula-distributed funds, which erodes the stability of the formula distribution.

Figure 8

Additionally, due to the nature³ of the survey, smaller-sized school districts tend to have higher margins of error as a share of reported income. There have been isolated instances, like Portage Area SD in 2017 (Figure 9), where school districts with smaller enrollments have seen large yearly changes in median household income coupled with increasing margins of error. This invites questions about how much of the change was attributable to actual changes in the surveyed population versus sampling error. When BEFC reconstitutes, it should entertain expert testimony about how to minimize the uncertainty in the median household income data.

Figure 9

Quintile Analysis and Inequities

The BEF fair funding formula distributes funds progressively. The 100 poorest school districts in the commonwealth collectively receive 54.4 percent of the state’s fair formula-distributed funds despite being responsible for only 28 percent of the students. Conversely, the wealthiest 100 SDs educate 27.7 percent of the students, but receive just 11.5 percent of the state BEF (Figures 10 and 11).

Nevertheless, inequities persist. Pennsylvania’s 100 wealthiest school districts are spending 48 percent more per weighted student than the 100 poorest school districts. The state funding is not enough to make up for the uneven playing field. Compared to its peers, Pennsylvania’s 38.3 percent state share of education funding ranks 44^th. This breeds an overreliance on local funding where huge disparities exist in the ability to raise funds. If every school district taxed itself at the statewide median tax rate, the median school district would generate $7,470 per weighted student. Meanwhile, the lowest amount raised per weighted student would be $1,154 and the highest would be $35,560.

Conclusion

The impact relevancy of the fair funding formula for basic education increased each year as more funding flowed through it. Until, that is, the legislature paused the formula for 2020/21 to lessen the unpredictability of finances during the coronavirus pandemic. Basic education funding is PA’s largest subsidy to school districts, and it is imperative to ensure that these resources are distributed predictably, accountably, transparently, and equitably. In 2022/23, BEFC is scheduled to be reconstituted to evaluate the implementation of the fair funding formula. The members of the commission will have to discuss important issues, potentially including whether “hold-harmed” is being handled in the right way, how to address the fluctuations in Census data, and the possibility of avoiding cliffs in the concentrated poverty factor.