• Most states now use student-based funding formulas to distribute funds to public schools, with Tennessee and Mississippi moving to do so since 2022 and Alabama considering similar reforms
  • Indiana’s student-based funding formula promotes funding fairness and accountability to taxpayers, and reforms undertaken in the mid-2000s improved access to public schools without harming academic achievement
  • States looking to Indiana as an example should avoid permanent hold-harmless provisions, needless overcomplication, and unfair funding of charter schools compared to district schools

School finance reform often takes decades to achieve, yet a window of opportunity has opened across the South. Recently, both Tennessee (2022) and Mississippi (2024) have significantly changed the way in which they fund K–12 schools.

Lawmakers in Alabama are also considering a complete overhaul of their state’s 30-year-old funding formula, which would modernize the way in which that state’s schools are funded.

Alabama is in the minority of states still using a resource-based funding formula, which focuses more on inputs such as instructional materials and staff salaries than on the particular needs of students.

Most states have transitioned to using student-based funding formulas to finance public schools. These states are focused to a greater degree on students’ needs and typically allocate a base amount of funding per student, supplemented with extra funds for students who require additional support (e.g., being economically disadvantaged, English language learners, or gifted and talented).

According to a recent report from the John Locke Foundation’s Center for Effective Education, 40 states plus Washington, D.C., distribute money to public schools through student-based funding formulas or hybrid formulas that rely extensively on student-based elements.

K–12 Education Funding Formulas (2024)

Source: EdBuild, last accessed June 10, 2024

Note: In mid-2024, Mississippi transitioned from a hybrid funding formula combining student-based and resource-based elements to one that is considered to be primarily student based.

Policymakers seeking to learn from Indiana should likewise consider ways to ensure fair funding that is based on the needs of students.

Like Alabama, North Carolina is one of the few remaining states without a funding formula based primarily on the needs of students.

Previous briefs discussed what Tennessee and California can teach North Carolina about school finance. This brief will discuss what North Carolina can learn from a third state: Indiana.

Main Elements of Indiana’s Student-Based Funding System

Indiana’s funding formula, known as the State Tuition Support Formula (STSF), incorporates five main grants.

  • Basic grant: Provides a set amount of money per student ($6,590 apiece for fiscal year 2024) with additional weighted funding for low-income and foster care students
  • Academic performance grant: Distributes extra funding for students who have been identified as gifted and talented, with various amounts allotted for students who complete graduation requirements ahead of schedule, earn advanced diplomas, complete college credits, or earn their associate’s degree while in high school
  • Special needs grant: Supports students who have disabilities, with the amount increasing based on the severity of the need
  • Career and technical education (CTE) grant: Provides funding for students who participate in introductory CTE courses, apprenticeships, or work-based learning classes, among other specified programs
  • Non-English speaking program grant: Supports students who do not speak English as their first language, with amounts varying depending on each student’s proficiency level

Although there are some other sources of state support for public schools, most education funding is distributed through the STSF and these five main grants.

Strengths of Indiana’s Student-Based Funding System

In 2007–08, Indiana transitioned from a school finance system that factored in local property tax revenue for school district operating expenditures to one that relied solely on state funding for these expenses.

Not only did this reform boost accountability by requiring increased taxpayer oversight over local revenue streams, but it also appeared to be associated with improved academic outcomes: In the decade following the reform, gains made by Indiana fourth and eighth graders outpaced the national average, and low-income students also saw improved performance. Although these gains can’t be definitively attributed to the changes in Indiana’s funding formula because of other, concurrent reforms, they indicate that concerns about school finance reform harming student outcomes are likely overblown.

In addition, Indiana’s reforms effectively increased educational opportunities for families. Since districts had to be less reliant on property tax revenue, they no longer really had a vehicle for charging transfer tuition to families who wanted to send their children to traditional public schools outside their assigned districts. As a result, access to public schools expanded, giving more choices to families.

In a 2024 study of states’ open-enrollment policies, North Carolina, which does not have any statewide open-enrollment laws, not only received an “F” but also ranked dead last. Meanwhile, Indiana — though also receiving an “F” — ranked 17th. According to the study, Indiana “significantly improved” access to public schools in 2024 by expressly forbidding districts participating in the state’s voluntary open-enrollment program from charging parents transfer tuition. Indiana’s example, however imperfect, could therefore suggest ways in which North Carolina could improve access to traditional public schools.

Finally, Indiana’s student-based funding system promotes funding fairness, which we at the John Locke Foundation define as funding all students based on need. By relying on a formula that provides a base amount per student, plus additional funding for certain categories of students with greater needs, Indiana’s school finance system promotes funding fairness.

Policymakers seeking to learn from Indiana should likewise consider ways to ensure fair funding that is based on the needs of students.

Weaknesses of Indiana’s Student-Based Funding System

Policymakers looking to Indiana’s example should also strive to avoid Indiana’s mistakes.

First, Indiana permanently enshrined into law hold-harmless provisions, which insulate districts from decreases in funding. Research indicates that in Indiana, these provisions “perpetuate unfair spending patterns, preventing similarly situated students from receiving the same funding and students with greater needs from receiving more funding.” Given the opportunity costs of funding districts for students they may no longer be educating, policymakers should be wary of making these compromises permanent.

Second, although most education funding in Indiana is distributed through the funding formula, not all of it is. Incorporating this outside funding into the formula could not only simplify the state’s school finance system but also give districts greater flexibility to use funding according to student need. States looking to learn from Indiana should strive to avoid inflexibility and unnecessary complexity.

Finally, although the calculation for basic grant funding is the same for district and charter schools, charter schools still receive less than district schools because of differing access to local tax revenue. Instead, policymakers should strive to equalize funding between district and charter schools.

For nearly two decades, multiple reports have pointed out problems with North Carolina’s system and recommended reform. Indiana’s school finance system helps chart a path forward.