‘This the Season for Budget Negotiations 

When we released our last Leading Indicator issue in early October, we were on day seven of a federal government shutdown that would ultimately last 43 days, the longest in U.S. history. The shutdown ended in mid-November, not with a budget deal, but with a temporary continuation of the fiscal year 2025 budget that expires at the end of January for all but a handful of federal agencies, including the U.S. Department of Education. So, we might be in the same spot in February 2026 as we were in October 2025: lacking clarity on federal budget with a federal government barely keeping the lights on.

Speaking of the U.S. Department of Education, the Trump administration’s recently announced “agency partnerships” partially break up its functions without technically eliminating the agency, using interagency agreements rather than law. Under one of these agreements, the U.S. Department of Labor will administer major K-12 federal education funding streams, including Title I. According to the administration, states will continue to receive funds in compliance with statutory requirements, just from a different agency. 

It seems unlikely this bureaucratic reshuffling will “better serve students and grantees,” or cut “layers of red tape in Washington” as promised: States will have to navigate grant processes from a different set of federal agencies, and this new arrangement could obscure funding accountability and transparency. The theme of continued federal retrenchment and unpredictability is among the key pressures state lawmakers will have to consider when they return to a new legislative session in January. While Congress continues to debate the current fiscal year budget, state and school district leaders are already turning the page to serious planning for the 2026-27 school year (SY). 

Our team’s latest school finance publication “Under Pressure: The Factors Squeezing K-12 Budgets — and How States and Advocates Can Respond,” examines federal, state, and local factors shaping education funding, including recent changes to Medicaid and Supplemental Nutrition Assistance Program benefits, stagnant state revenues, and rising district costs for salaries, facilities, and everything else.  

These are nationwide dynamics that show up differently in different states. That’s why we created an interactive Under Pressure data dashboard with risk ratings across six indicators, such as enrollment, federal revenue share, and state tax collections to equip state policymakers and advocates with the information they need to translate tool insights into action. These dynamics are sure to be challenging: 47 states and territories are “high risk” in at least one indicator, and 30 are at “high risk” in at least two indicators.  

The states that navigate best will prioritize student needs fairly, instead of making hasty cuts or using blunt reduction strategies that disproportionately affect some school systems more than others.  

We’ll be ramping the newsletter back to a monthly cadence in the new year to provide timely insight and information that cuts through the noise as state legislative sessions and budget deliberations begin. Stay tuned for more in January and beyond. 

—Bonnie O’Keefe and Jennifer O’Neal Schiess

The Big Picture: Trends We’re Watching  

Lately, we’ve heard increasing interest from state leaders and advocates about outcomes-based funding in K-12 education (or “pay for performance”). Although this structure is more common in postsecondary education, a handful of states (e.g., Tennessee and Texas) distribute a small portion of their K-12 funding based on districts’ achievement against certain outcomes.

Outcomes-based funding is appealing to many policymakers who want to align incentives in state K-12 funding policy to the state’s goals for students. Funding can be a powerful lever to influence decision-making, after all.  

However, we approach outcomes-based funding with caution because it can be both inefficient and inequitable in practice. Inefficient, because states risk giving more money to districts doing well with the resources they already have. Inequitable, because rewards purely based on academic achievement tend to benefit wealthier districts that serve students with more support and resources outside school. Plus, withholding resources from a struggling district is unlikely to make things better without other interventions. Arizona discontinued its former outcomes-based funding initiative for some of those reasons.

What design strategies are states with outcomes-based funding policies using to mitigate potential downsides? And what other policy ideas can state leaders consider?

• Modest Size: Both Tennessee’s and Texas’ outcomes-based funding streams represent only about 1% of the overall state funding formula funding for public schools (~$80 million in Tennessee and ~$216 million in Texas, annually). This approach enables the state to sustain its core responsibility to fund public schools, while still providing financial incentives tied to student success. 

• Priority Student Groups: Tennessee’s outcomes-based funding system provides funding equivalent to 10% of base formula funding for each student who meets a performance target. However, for students who are economically disadvantaged, English learners, or who have a disability, funding increases to 20%. Eligibility for Texas’ College, Career, Military Readiness outcomes-based funding is based on the number of high school graduates who exceed readiness metrics, with higher funding amounts per student for economically disadvantaged students and those with disabilities. 

• Focus on Growth: Rewarding growth, especially among traditionally underserved student groups, might also help ensure that schools are incentivized to focus on all students, and not just those at or above a specific achievement threshold, and ensure funding doesn’t predominantly go to districts with a more advantaged student population. Tennessee’s system includes a growth component, providing awards for year-over-year improvement in outcomes on state assessments. 

• Program-Specific Incentives: Outcomes-based funding can bring more attention to performance in specific types of programs and schools. States could specifically reward high performance in programs with an uneven track record, like career and technical education, alternative education, or virtual schooling, for example. 

• Sharing best practices: States could require districts who receive an outcomes-based reward to share their approaches with other district leaders, to spread those practices more broadly. State education agencies can play the role of a convener, codifying best practices and providing forums in which district and charter leaders can share their success with peers.

Outcomes-based funding in K-12 is not yet well-supported by research, but with careful design, it can be an additive component to a robust, fair student-based funding system.  

State Spotlights: Notable News From Statehouses  

• Alabama leaders and advocates are thinking about how to implement the state’s new funding reforms. Learn more in Bellwether’s recent webinar with leaders from A+ Education Partnership.

• Alaska’s Task Force on Education Funding convened for the third time in early November, featuring a presentation from professors at the University of Alaska Anchorage comparing Alaska’s approaches with other states. Funding reform will be a priority during the state’s 2026 legislative session, as the Task Force will supplant the state’s Senate Education Committee meetings.

• California is facing a lawsuit alleging that the state’s School Facility Program underinvests in school facilities in low-property wealth districts. The suit was filed in October by civil rights law firm Public Advocates, on behalf of a coalition of students, families, and educators.  

• Delaware is targeting funding reform for implementation in SY27-28, with the Public Education Funding Commission in the process of designing a hybrid model that emphasizes student-based weights while maintaining much of the structure of the state’s current system. Formula redesign, and the Commission’s intention to address wealth inequities, must also contend with the tense backdrop of this summer’s release of statewide property reassessment values, which has already provoked emergency legislation and lawsuits.

• Montana’s School Funding Interim Commission convened leaders to build a core vision for Montana’s youth, examine stakeholder input, and inform leaders on the current school funding system. They have additional meetings scheduled throughout 2026.

Thanks to our colleague John Bellaire for gathering news from statehouses this month! 

Follow the Money: What We’re Reading  

• Excess Revenue, Unequal Opportunity, a joint analysis by Bellwether and Policy Analysis for California Education, and the first major study of excess local revenue in California since the passage of its Local Control Funding Formula.  

• A four-part series on district financial sustainability in the current moment from Education Resource Strategies.  

• An interactive map, dataset, and research publication examining local tax base fragmentation, created by researchers at the University of Michigan, UCLA, and Harvard University. 

• Nationwide data on trends in state education expenditures compiled by Reason. 

• Reimagining What’s Possible, Bellwether’s 2026-2030 strategic plan that explains how we’ll meet the moment in education.