The Quest for Flexibility

As of Oct. 1, 2025, the federal government officially shut down as Congress and the Trump administration failed to negotiate a budget deal before the start of fiscal year (FY) 2026. The broad long-term effects of a potential sustained shutdown remain to be seen. However, in K-12 education, states and schools across the country may not feel the effects of a shutdown in the shorter term, as most large federal funding streams are disbursed on a schedule that isn’t as subject to immediate disruption.  

Regardless of the duration of the shutdown and outcome of ongoing congressional budget negotiations, the Trump administration has sent consistent signals that it wants to give states more flexibility under federal education law through its rhetoric, executive orders, budget requests, and July 2025  “Dear Colleague” letter explicitly inviting requests for increased state flexibility through waivers under the Every Student Succeeds Act (ESSA). While the federal government cannot waive certain provisions of the law, including civil rights protections and funding allocation formulas, ESSA waivers could substantially shift policy state by state. States commonly request waivers to specific ESSA provisions, and past administrations have used waivers to encourage states to align to policy priorities. The Obama administration leveraged waivers to create various flexibilities for states, many of which were codified in ESSA when it was reauthorized in 2015. 

In response to the current call for proposals, two states have published draft plans that include requests for K-12 funding flexibility, among other provisions. 

• Iowa has proposed a “unified allocation plan” to consolidate federal funds at both the state and local levels from multiple programs into single, pooled funds. At the state level, Iowa proposes creating one unified fund in place of more than 20 separate state set-aside funding streams.** At the local level, local education agencies (LEAs) would continue to receive funds through any separate formulas in federal law. Under the requested waiver, the state would be permitted to pool those allocations rather than managing each program separately. Iowa argues that this approach would reduce duplication, streamline planning, and allow resources to be directed more flexibly to state and local priorities.  
• Indiana has also proposed a waiver to allow the state and LEAs to consolidate funds under multiple ESSA Titles into a single fund. The fund would be used for any purpose allowed under the federal law. Indiana argues that this approach reduces administrative burden, streamlines its ability to tailor expenditures to state and local priorities, and increases progress monitoring and intervention supports. Like Iowa, Indiana does not seek to alter the allocation of funds, but rather to enable consolidation of funds once they reach the state or LEA for flexible use.  

Critics of both the Iowa and Indiana waiver proposals cite limited transparency and the likelihood of reduced supports for specific K-12 student populations (e.g., students from low-income households, English learners) as potential risk factors. 

While Iowa and Indiana are among the first states to request this kind of ESSA flexibility, they are unlikely to be the last. We’re watching these developments closely alongside the federal budget and shutdown to see how states shape their waivers. If states ultimately have less federal funding, with some exercising more flexibility in the use of those funds, the K-12 funding picture will get much more complicated.   

—Jennifer O’Neal Schiess and Bonnie O’Keefe 

Join Bellwether for a conversation about how state education finance determines what’s possible for schools, and students, on Wednesday, Nov. 12. Featuring our partners at A+ Education Partnership, the webinar will focus on the RAISE Act, passed in 2025, that overhauled Alabama’s three-decade-old school funding formula, and what lessons other states can learn from this policy reform. 

Register to join the conversation!

The Big Picture: Trends We’re Watching  

This month, we’re watching state revenue projections closely. As state legislatures gear up for 2026 sessions, many states are facing flatter revenue outlooks than in recent years. Official forecasters in multiple states have trimmed projections for FY26, with particular weakness in corporate income taxes. This matters for education advocates: K-12 remains the largest line item in most state budgets, and sluggish state revenue means less flexibility for new investments. 

Education leaders should expect more conservative revenue assumptions heading into the legislative session, with potential trade-offs between protecting school funding and covering rising costs in health care, infrastructure, and personnel. A few states with stronger tax receipts have more breathing room, but the overall trend is one of belt-tightening. 

Recent State Updates: 

• California: As of August 2025, the state’s “big three” taxes (personal income, sales, and corporate) are now on track to beat June 2025 budget assumptions, thanks mainly to stronger personal income tax tied to stock market gains. 
• Kentucky: September 2025 forecasts reduced revenue by about $305 million (approximately 2%), signaling tighter budgets despite a $3.7 billion rainy-day fund.  
• Maryland: FY26 revenue productions were revised downward by $19.1 million (0.07%), a modest revision reflective of 3.7% year-over-year growth.  
• Tennessee: August 2025 revenues came in $15.6 million above estimate. 
• Washington: September 2025 reporting revises revenue forecasts downward by $903 million through FY29, citing weaker sales tax returns, lower state agency revenues, and reduced real estate taxes. 

We will keep watching revenue forecasts, as many states will issue consensus forecasts later this year as they prepare budget proposals for January. 

State Spotlights: Notable News From Statehouses  

In our last issue we talked about “task force season” in states and the factors that set a successful K-12 school finance task force apart. Our team’s latest state school finance publication “Setting A Benchmark: An Analysis of Arkansas’ K-12 Education Finance System,” dives deep into Arkansas’ formula and compares it against a group of regional peers and national research, to explore opportunities for improvement as a state task force continues its work. K-12 task forces/working groups/commissions/etc. continued their work in other states: 

• Missouri’s school funding modernization task force began smaller working groups focused on topics such as student counts, local funding, and performance-based incentives. 
• Nebraska’s school finance review commission met to define their goals and dig into the facts of their existing formula, with a focus on examining the balance of local and state funds, and how that relates to property tax. 

Follow the Money: What We’re Reading  

• Estimates on the impact of different federal funding proposals on school districts (EdTrust), congressional districts (New America), and states (Learning Policy Institute), plus an interactive calculator version (Urban Institute). 
• Overview of national budget trends and implications via a recent National Association of State Budget Officers  Budget Blog, “Despite Slow Growth, FY25 Revenue Mostly Exceeded Forecasts.” 
• Analysis of PIT, CIT, and sales tax performance across states via the Urban Institute, “Revenue Growth Uneven across States as Fiscal Challenges.” *(Urban Institute). 
• Leveraging artificial intelligence to reimagine school district boundaries, including interactive data tools from New America, “Redrawing the Lines: How Purposeful School System Redistricting Can Increase Funding Fairness and Decrease Segregation.” 
• “Principles of a sound education finance system” framework that builds upon core principles of state school finance first articulated in a 1996 report, from the perspective of state legislators via the National Conference of State Legislatures.