• Alter incentives to make performance count (within the existing governance structure); and

  • Empower schools and parents to make decisions about the use of public funds (thereby altering governance and management relationships).

Reducing funding inequities and inadequacies includes options such as reducing disparities in funding across schools, districts, or states; ensuring that all schools or districts have funding sufficient to provide an adequate level of education to the students they serve; and raising revenue more fairly without neglecting efficiency. Investing more resources in developing capacity refers not only to the capacity of the formal education system to provide services but also to the capacity of students to learn. Hence, it includes investments in inputs, such as teacher quality and technology, and in programs, such as preschool for disadvantaged students. Altering incentives embraces changes in incentives designed to operate primarily within the existing system of school governance and includes policies such as restructuring teacher salaries, use of school-based incentive programs, and changes to the incentives built into financing formulas for students with special needs. Empowering schools and parents refers to policies that would decentralize significant authority over the use of public funds, to schools in the form of site-based management or charter schools, and to parents in the form of significant additional parental choice over which schools (public and perhaps private as well) their children will attend.

In reality, policy makers do not and should not consider strategies in isolation. Finance policies ought to reflect the interrelatedness of the various facets of the finance system and the possibility that complementary changes may be required for reform to be successful. Indeed, some visions of overall education reform explicitly call for a set of intertwined finance strategies.

Our decision to examine the strategies separately is useful for analytical purposes, but it also reflects the important fact that strategies can be combined in different ways. It is important to emphasize, however, that not all strategies are compatible. For example, a centrally (i.e., state or school district) managed program of investment in capacity would not fit naturally with a program that empowers parents and schools to make decisions about the kind of capacity in which they wish to invest.

For each of the three goals for an education finance system, we evaluate a variety of policy options employing these strategies and weigh the evidence on how effective they are likely to be in helping meet the objectives.

Achieving Goal 1: Promoting Higher Achievement for All Students in a Cost-Efficient Way

  • Adequate funding (sufficient funding for efficiently operating schools to generate higher achievement levels) is clearly essential for meeting goal 1. Al-

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