Thus, a focus on performance is inevitably unfair unless it can somehow account for the impact on performance of factors that are outside the control of school officials. Without such an accounting, some schools get credit for favorable conditions that were not of their making and other schools get blamed for unfavorable conditions over which they have no control. In order to be fair, school report cards and performance-based state aid systems must distinguish between poor performance based on external factors and poor performance based on school inefficiency.

Similarly, a state aid program that brings districts up to a minimum spending level, which is called a foundation program, cannot ensure that a performance-based adequacy standard will be reached in all districts unless this spending level is much higher than the amount a typical district needs to reach an adequate performance. This problem reflects the fact that school district performance is also influenced by the cost of education, which varies widely from district to district based on wage rates, student characteristics, and other factors that are outside the control of district officials. Existing state aid formulas either ignore these factors altogether or else use ad hoc corrections, such as "weighted pupil" counts, that account for them only partially at best. As a result, a foundation program that provides enough revenue for an average district to meet an adequate performance standard leaves a high-cost district short, often far short, of the revenue it needs.

In this chapter, we explain in detail why a performance standard, whether it is set at a level that defines an adequate education or at some other level, must go hand in hand with an educational cost index; we discuss the alternative methods for estimating educational cost indexes, and show how high-cost districts can be brought up to a performance-based state adequacy standard by incorporating these costs indexes into a foundation aid program. Our analysis is illustrated with data from New York State. We find, for example, that the large central city districts must spend two to three times as much as the average district to reach the same performance standard.

The Conceptual Foundations Of Educational Cost Indexes

An educational cost index is designed to measure how much a school district would have to spend, relative to the average district, to obtain any given performance target. Some scholars, including Guthrie and Rothstein (see Chapter 7 in this volume), have used the term "cost index" to refer only to differences in input prices across districts. However, we use the term to refer to a comprehensive accounting of the reasons why some districts must spend more than others to achieve any given performance level—a definition that, as we will show, involves far more than just input prices. After an introductory example, this section explains the relationship between educational performance measures and cost

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