Many state aid formulas include ad hoc adjustments for environmental factors. This type of adjustment is also proposed in the Wyoming context by Guthrie and Rothstein (see Chapter 7 in this volume). States may pay more for transportation in less dense districts, for example, or compensate for a concentration of students with disabilities or whose native language is not English. Some programs also provide more money to districts with more children in poverty. However, these programs inevitably are ad hoc, with no demonstrated connection between the environmental factors and educational costs.5
The 1996 New York State aid programs, for example, include several provisions that could be interpreted as cost adjustments.6 Operating aid, which provides 53 percent of the total aid paid to school districts, is based on the number of "weighted" pupils in a district. Pupils with extra weights include pupils in secondary school and pupils with "special education needs," defined as students who score below the minimum competency level on the 3rd- and 6th-grade reading or math PEP tests. The first of these weighting factors is supported by some studies of school spending in other states (Ratcliffe et al., 1990), which find a higher cost for high school than for elementary school students. However, it is not supported by our analysis of data for New York State, which finds no cost differences by grade.
The second weighting factor is undoubtedly correlated with cost variables, but we believe it is inappropriate to include a performance measure based on PEP scores in an aid formula. This approach rewards districts for poor performance and gives them an incentive to perform poorly in the future. Aid formulas should be based on factors outside a district's control, such as concentrated poverty, that make it difficult for the district to reach a high performance standard, but not on performance indicators that are influenced by the district's actions. New York also has a relatively new program, called Extraordinary Needs Aid, which gives more aid to districts with lower incomes and higher poverty concentrations. The program provides less than 5 percent of the total aid budget, however, and the formula is not based on any estimate of the relationship between educational costs and poverty.
To move beyond input prices, a cost index must consider the impact of environmental factors on a school districts' costs after accounting for teachers' salaries and for the district's performance. This step requires a statistical procedure based on data describing a district's spending and teacher's salaries, along with measures of relevant environmental factors, such as the district's poverty rate. In addition, it requires information that makes it possible to control for performance. One approach is to control for performance indirectly by controlling