School Finance 101

Public schools in the state of Texas are funded from three main sources: local school district property taxes, state funds, and federal funds, with the majority of funding coming from local property taxes collected by school districts and state funds.

Texas School Funding

Texas lags behind the national average in per pupil spending. 

Basic Allotment

The Basic Allotment (BA) is set by the Texas legislature, guaranteeing every school district a certain amount of funding for each student based on their Average Daily Attendance (ADA). The BA is currently set at $6,215 per student, with additional funding based on district and student characteristics. The district’s Tier 1 Entitlement is determined by this Basic Allotment and the characteristics of students in the district.

The Tier 1 Entitlement is covered by a sharing of the state with the local district. The state covers a specific portion from the Available School Fund and then local tax collections are applied to determine whether or not the state contributes additional funds.

School budgets and tax rates are made up of two parts: Maintenance and Operation (M&O) and Interest and Sinking (I&S). The money generated from each part can only be used for specific types of expenses.

Funding coming into this bucket is primarily used for operating the district. Employee salaries and benefits; student educational resources; classroom supplies and equipment; and contracted services – like utilities, insurance, legal and audit services, etc. – are paid from this source of funding. 

To relate this to the average community member, this is similar to things like car fuel and routine maintenance, groceries, clothing, cleaning supplies, and utilities like electricity and water.

Compression of the M&O tax rate – or the automatic reduction of the M&O portion of the tax rate introduced as part of HB3 – is meant to limit revenue growth from local property taxes to about 2.5 percent each year. Because of this, an increase in property values does not equal a proportional increase in revenues to the district.

The M&O funding source is split into two tiers: Tier 1 and Tier 2.

Funds from this portion of the tax rate can only be used 1) to pay off bonds sold for construction and capital improvements to facilities and 2) to buy furniture, equipment and/or to purchase land. I&S funds cannot be used for operational costs, such as salaries and benefits, nor can these funds be used to construct facilities. They can only be used to pay down outstanding debt. A school district can only take on new debt through a voter-approved bond election.

To relate this to the average community member, this is similar to the purchase of big-ticket items like a new home, house renovations, kitchen appliances, new mechanical systems or a new car.

Revenue generated from this portion of the tax rate is not subject to recapture and is directly linked to property value growth without a cap. Because of this, an increase in property values does equal an increase in total revenues for debt repayment.

Money Not Staying with a School District 

Recapture is the state’s mechanism for making sure that a district with really high property values does not have more funding than a neighboring district without those high values.

The state provides more funding to school districts with lower local property tax revenues; less state funding to districts with a strong source of local property tax revenues; and requires districts with the highest local property wealth per student to give some of their local tax revenue back to the state. This latter option is referred to as recapture payments, also known as Robin Hood payments.

The money sent back to the state through recapture comes from money generated from the M&O portion of the tax rate that generates more revenue than needed. 

A visual breakdown of the district’s budget is represented in the pie chart below. A large portion of each dollar is spent in the classroom on instructional costs. When looking for cost reductions, it is difficult to make a significant reduction without impacting the classroom.

In Keller ISD, payroll costs made up 87% percent of the 2025–26 budget. Payroll costs included 3,903 employees such as teachers, librarians, instructional aides, custodians, principals, administrators and more.

A fund balance is like a savings account or emergency account that includes money that school districts do not allocate in budgets and hold in reserve. Fund balance is generated when annual revenues exceed actual operating costs. These funds are used to manage fluctuations in cash flow and to cover unforeseen expenses. Districts with a healthy fund balance also typically earn a higher credit rating because they are viewed as financially sound.

HB3 created a system of funding meant to limit the amount of additional revenue generated from the M&O tax rate on rising property values to approximately 2.5 percent year over year. As a result, as property values grow, a school district is required to reduce the M&O tax rate to meet this 2.5-percent cap. Because of this, an increase in property values does not equal a proportional increase in revenues for a school district.