ADJUSTING SCHOOL AID FORMULAS FOR THE HIGHER COST OF EDUCATING DISADVANTAGED-STUDENTS

In this paper, we consider the problem of determining the appropriate method for adjusting state aid to compensate for cost differentials ac ross localities. The feasibility of using cost and expenditure functio ns to estimate these adjustments is considered Data from Arizona are u sed to determine adjustments for districts with at-risk students (stud ents with limited English proficiency or eligible for subsidized lunch ). We find districts with at-risk students face higher costs, and we s how that failing to account for temporally stable effects of omitted v ariables leads to inaccurate estimates of cost differentials. We also discuss advantages of using cost functions for determining aid.