How Are Public Schools Financed? Part I

Superintendents view the period from December through April as the budget season. This varies across school districts with most planning, preparing, and finalizing a budget on or before April 1 as required by law. State law requires each division superintendent to prepare, with the approval of the school board, and submit to the governing body’s appropriating funds, the estimate of the amount of money deemed to be needed during the next fiscal year. It is the duty of the school superintendent to prepare a needs-based budget as required by law.

Given this duty, it is useful to share insight on how public schools are financed in Virginia. Schools in the Commonwealth are financed by revenue derived from four sources: local and state revenue, plus revenue received from the dedicated 1 cent sales tax and federal funds (Salmon and Alexander, 2014). The primary revenue source of local revenue for public schools is provided by property taxes. For the 2017 – 2018 school-year, budgeted sources of revenue as a percentage of the total operating budget for DPS are as follows: State = 55%, Sales Tax = 10.5%, City = 34% and Other = less than .5%. These proportions indicate that DPS is primarily funded by state funds.

Most of the funding for public schools is expended for salaries, benefits, and health insurance. Schools, by the very nature of the work required (teaching and learning), rely heavily on human capital (employees) to deliver services. In fact, 80% of the operating budget is related to employees or employee benefits.

The majority of staffing positions in a school division are established by the Standards of Quality (SOQ) as the prescribed requirements that must be met by all schools as the minimum educational program that must be provided. This staffing mandate is a shared fiscal responsibility between the state and the locality using a funding formula to determine the shared cost between the two entities to support public schools. This formula is known as the Local Composite Index or LCI. The LCI is the state’s formula for determining the fiscal ability to provide funding to school divisions across the state. Generally, the lower the LCI the more money the school system will receive from the state and the higher the LCI, the less. The LCI is unique to each of Virginia’s 136 school divisions. The LCI for Danville is .2668. By way of comparison, Falls Church has an LCI of .8000. Essentially, this means that the majority of funding for public schools in Falls Church is provided by the governing body rather than the state. DPS is largely dependent on state funding based on this formula.

To explain this a bit further, revenues generated to support the SOQ require a local match such that there is a shared fiscal responsibility for the cost for public schools. This mandated formula is called the Required Local Effort or RLE. The RLE is essentially the minimum that a locality must fund public education. Localities are permitted to expend more than their minimum required effort to offer programs and employ staff beyond what is required in the SOQ. In fact, every locality in the state, except Westmoreland County exceeded the Required Local Effort by an average of 70%. In Danville, the percentage of funds beyond what is required in the SOQ is 67.31% for fiscal year 2017 – 2018. By way of comparison, these percentages for other cities are 148.22% for Martinsville, 92.52% for Roanoke, and 117.88% for Lynchburg. Ultimately, these comparisons reveal that the State pays only a portion of what it really costs to operate schools and the variance in funding by locality yields inequity.