Understanding the Mechanics of School Funding

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By Michael Kaelber, Esq., LEGAL ONE Coordinator of Continuing Legal Education and Research

School districts across New Jersey were reassured in broadcast memo issued on February 18, 2025 that no school district would lose more than 3% of state aid for the 2025-26 school year.  While this alleviated fear in some districts of a large funding cut, it begs the question as to how school funding calculations are made each year.  In this article, we seek to demystify that process and walk through the major elements of New Jersey’s funding formula.  

Part of the process to keep the School Funding Reform Act formula current (and constitutionally acceptable under a 2009 New Jersey Supreme Court decision) is the issuance, by the Governor to the Legislature, of the Educational Adequacy Report (EAR), every three years with recommendations on the updating of certain elements included in the formula. 

According to the statute, the EAR must include updates pertaining to the following seven major components of the funding formula: 

  1. the base per pupil amount based upon the core curriculum content standards established pursuant to N.J.S.A. 18A:7F-46(a); 
  2. the per pupil amount for full-day preschool; 
  3. the weights for grade level, county vocational districts, at-risk pupils, bilingual pupils, and combination (at-risk and bilingual) pupils; 
  4. the cost coefficients for security aid and transportation aid; 
  5. the state average classification rate for general special education services pupils and for speech-only pupils; 
  6. the excess cost for general special education services pupils and for speech-only pupils; and 
  7. the extraordinary special education aid thresholds.

The Formula

The SFRA has created a comprehensive model school district by which state aid is distributed to New Jersey school districts. It is an artificial construct created by Professional Judgment Panels (PJP) made up of educators, school finance experts and other practitioners for the distribution of state aid and looks like no existing New Jersey school district. 

The core funding component of the SFRA is equalization aid; aid which, when combined with local tax levy, is designed to provide a thorough and efficient education to the students in the school district. The basic formula for the calculation of equalization aid is: 

Adequacy Budget – Local Share = Equalization Aid

For FY 2023, this formula was used to distribute $ 7.8 billion to New Jersey school districts.

Let’s take a look at the components of this formula.

Adequacy Budget

The Adequacy Budget for each school district starts with a calculation of the amount that SFRA, through the EAR, has determined is necessary for the core thorough and efficient education for each student at that student’s grade level. 

Each school district takes the number of students at each grade level, multiplies it by the per pupil amount at each grade level and includes it in the Adequacy Budget. These per pupil amount numbers are determined through the model school district calculation.

At-Risk, Bilingual/LEP and Combination Students, Special Education Census and the Geographic Cost Adjustment

Also included in the Adequacy Budget calculation are cost factors for the additional resources and services of students that are above and beyond the base educational needs; At-risk students (income eligible for free or reduced-price lunch), Multilingual learners (MLs) and combination students (students who are both at-risk and MLs). Each one of these categories has an assigned weight which will be multiplied by the number of identified students and added to the Adequacy Budget. Each of these weights are multiplied by the number of students in the school district identified in each area and is included in the Adequacy Budget calculation. Two thirds of the special education census calculation, discussed later in this section, is also added to the Adequacy Budget. 

The total Adequacy Budget calculation is then multiplied by a Geographic Cost Adjustment; an adjustment that reflects county differences in the cost of providing educational services that are outside the control of the district. The Geographic Cost Adjustment is calculated by the Commissioner of Education and is revised every 5 years.

The significance of including at-risk, bilingual/LEP, combination students and 2/3 of the special education census in the Adequacy Budget is that these components will be funded through Equalization Aid; aid that is provided in accordance with the socio-economic status of the school district. By including it in the equalization aid calculation, aid is provided for these additional resources and services based on the school district’s ability to pay; lower socio-economic school districts get more aid and more affluent school districts get less aid. 

Special Education Census

The special education census calculation under SFRA has been a part of the SFRA school funding formula since its inception.

  • The calculation is based on state average classification rates and the state average excess costs in each of these areas, rather than being based on actual district rates and costs. 
  • 2/3 of the special education census aid is equalized. It is included in the Adequacy Budget as part of the calculation of equalization aid, which is provided to school districts based on the wealth of the school district. Prior to SFRA, special education aid followed the student. That is no longer the case for 2/3 of the aid. 1/3 of the calculation is provided regardless of wealth as categorical aid.

The Special Education Census calculation for each school district has two components:

  • General Special Education Services – take the total enrollment of all students in the school district, multiply that number by the state average classification rate for General Special Education Services, and multiply that answer by the average excess cost for General Special Education Services. 2/3 of that answer is added to the Adequacy Budget calculation; 1/3 goes directly to the school district as categorical aid. 
  • Speech-Only Services – take the total enrollment of all students in the school district, multiply that number by the state average classification rate for Speech-Only Services, and multiply that answer by the average excess cost for Speech-Only Student Services. 2/3 of that answer is added to the Adequacy Budget calculation; 1/3 goes directly to the school district as categorical aid.

 

Local Share Calculation

The Local Share Calculation for the SFRA school funding formula is the means by which the state calculates local school district wealth for the purpose of allocating equalization aid to school districts. It is made up of two components; school district equalized valuation and school district income, each equally weighted (50%).

School district equalized valuation is a measure of the property wealth of a school district; the ratable properties upon which school districts, through their local governing body and county can levy taxation and raise money for education purposes. Every municipality values its properties differently for tax purposes; some at 100% of market value, some at 50% or some other number. In order to compare apples with apples, the Department of Treasury, every October, issues a table of equalized valuation for school districts and municipalities that smooths out the differences in property assessment rates and provides a uniform system of property assessment that can be used to compare, for purposes of the school funding formula, school district to school district. 

The Local Share Calculation contains a Statewide Property Value Rate; a multiplier that is roughly calculated by taking the amount of equalization aid to be distributed in a given year as determined by the Legislature and dividing it by the total equalized valuation for the entire state of New Jersey. 

The Local Share Calculation contains a Statewide Income Rate; a multiplier that is roughly calculated by taking the amount of equalization aid to be distributed in a given year as determined by the Legislature and dividing it by the total aggregate income for the entire state of New Jersey ]based on State Income Tax returns.

For a local school district, the Local Share Calculation is 

Local Share = ½ (School District Equalized Valuation x Statewide Property Value Rate) +

½ (School District Income x Statewide Income Rate)

The Local Share is not the tax levy for the school district. It is part of the artificial construct used by the state to determine the distribution of equalization aid. It varies from year to year depending on a number of factors including the multipliers which change annually since the amount of equalization aid, the amount of state equalized valuation of property and the amount of state aggregate income varies from year to year. What some school districts have experienced recently is a disproportionate rise in equalized valuation because of a rise in development in the school district; more development, more ratables. If district ratables have increased at a rate greater than most school districts, the equalized valuation for the school district increases and with it the local share. What some school districts have also experienced recently is a significant increase in school district income as more affluent residents move into the community, particularly into some of the new development homes, and bring their larger income levels with them, increasing the local share. When both phenomena occur in the same district in a given year, as many districts have experienced, the increase in local share increases even more and with it a significant reduction in equalization aid to the school district. 

Ultimately, we come back to the basic formula for the distribution of equalization aid:

Adequacy Budget – Local Share = Equalization Aid

Categorical Aid to School Districts

SFRA provides for a number of categories of state aid that are outside of the general funding formula and are generally not constrained by the wealth of the school district. These categories are generally referred to as categorical aid. 

    • Preschool Education Aid is provided to school districts which provide preschool programs for the three and four-year-old students in their school districts. 
    • Special Education Categorical Aid – School districts receive 1/3 of the Special Education Census calculation, described in detail previously in this article, as categorical special education aid. 
  • Extraordinary Special Education Aid –School districts receive 
  • For inclusion programs in an in-district public school setting, 95% of the cost of the program in excess of $ 40,000.
  • For separate programs in an in-district public school setting, 75% of the cost of the program in excess of $ 40,000.
  • For separate private provider programs, 75% of the cost of the program in excess of $ 55,000.
  • Security Categorical Aid – Pursuant to N.J.S.A. 18A:7F-56 school districts receive $ 86 per student for security aid for every student in the district. The second component of security aid is an additional amount that applies only to at-risk students. The at-risk security amount per pupil varies according to a sliding scale that increases as the district’s at-risk concentration increases
  • Transportation Aid – Pursuant to N.J.S.A. 18A:7F-57 school districts are provided transportation aid for general transportation services and for special education transportation services provided pursuant to students’ Individualized Educational Plans. The calculations include average home to school mileage, the number of regular education students, the number of special education students and an incentive factor. The formula applies to the student counts a base per pupil amount and a per mile amount for either regular or special transportation. 
  • Adjustment Aid – Pursuant to N.J.S.A. 18A:7F-58, the SFRA provided, as part of the legislative compromise needed for passage, Adjustment Aid, so that no school district would receive less than a 2% increase in state aid in 08-09 from the previous year. Had the formula been run in the first year of SFRA, many school districts would have received a significant reduction in state aid, since the failure to run the CEIFA formula and simply hold school districts harmless as to state aid from year to year meant that school districts were receiving state aid based on enrollment numbers going back to the McGreevey administration. Adjustment aid was to be held harmless in 09-10 and 10-11 and then phased out over the next four years so that funding would be based on actual pupil counts in the school district. However, that did not occur, as discussed below.
  • Educational Adequacy Aid – Pursuant to N.J.S.A. 18A:7F-58 Educational Adequacy Aid is provided to those school districts that received Educational Opportunity Aid in 07-08, typically the lower socio-economic urban and rural school districts, plus several other factors. 
  • School Choice Aid – Pursuant to N.J.S.A. 18A:7F-62, school districts, which provide school choice programs, receive state aid for each student received in the amount of the “adequacy budget local levy per pupil amount.” This aid is designed to supplement the local tax levy as the school district is receiving students from other school districts which are not paying tuition and do not get the benefit of the other school districts’ tax levy. For school districts which are of a higher socio-economic status, this can be a significant amount of state aid that can reach over $ 10,000 per choice student. 
  • Budget language – Annually the state budget often contain language at the end of the education appropriation section that states “notwithstanding any law to the contrary…” and then provides funding to specific school districts for certain purposes. This funding is outside the school funding formula and in essence circumvents the purposes of the school funding formula.  

Recent Legislative Changes

  • P.L. 2018, c.67, enacted 7/24/18, otherwise known as S-2, – This legislation modified the SFRA to eliminate adjustment aid over a six-year period. It also eliminated the State aid growth limit and allowed for an adjustment to tax levy growth limitation in certain school districts.
  • S-2 defined a new and significant term, the State Aid Differential; State aid received by a school district in the prior school year (not including educational adequacy aid and school choice aid) minus SFRA school aid for the current year. The State Aid Differential essentially measures whether a school district has received more state than its pupil count would dictate. The State Aid differential was established to phase in losses of state aid over a 6-year period, in order to cushion the final blow.  
  • P.L. 2024, c. 13, enacted 5/14/24 – This legislation established the Stabilized School Budget Aid Grant Program to restore certain portions of State school aid reductions and permitted certain school districts to exceed tax levy growth limitation in 2024-2025 school year. The Department of Education Stabilized School Budget Aid Grant Program. Aid provided grants equal to 45 percent of the amount of the school district’s State school aid reduction, as calculated pursuant to P.L.2018, c.67 (C.18A:7F-68) S-2. 
  • In a broadcast memo issued on February 18, 2025, the NJDOE has indicated that no school district will face a state aid loss greater than 3% for the 2025-26 school year.

Conclusion

The funding of New Jersey’s public schools is a complex process with many variables, not the least of which are property taxes and state aid distributed through the current school funding formula, SFRA. Legislative discussions are currently taking place looking at key components of the SFRA including the PJP developed model school district, the amount of Equalization Aid determined annually, the calculation of the Local Share, the Special Education Census and other components. It remains to be seen what the Legislature will do for 2025-26 and beyond.