Diverting funds intended for California's high-needs students for other spending "dampens" the potential to significantly close the achievement gap between high-poverty and low-poverty students, new research from the Public Policy Institute of California has found.

School districts on average are directing only 55 cents of every dollar of extra funding from the Local Control Funding Formula to the schools that high-needs students who generate the money attend, research fellow Julien Lafortune concluded in a policy brief and full report.

Lafortune examined school-level financial data reported to the state for all districts with more than 250 students and with more than 10 schools. He was able to do the research using federally mandated school-level data available for the first time.

The “imperfect targeting of resources to high-need students within districts remains a concern,” he wrote, adding that there are big differences among districts in the extent to which they target the additional resources.

The money that didn’t reach the high-needs students wasn't necessarily wasted, he said; instead of being targeted, it was spread evenly among all students across a district.

PPIC’s research also indicates that the funding formula is having a positive impact on improving test scores and college eligibility, particularly in districts that receive the most funding.

The Local Control Funding Formula provides the bulk of the general funding that school districts and charter schools receive from the state. Along with a base grant for all students, it provides supplemental money for every high-needs student plus funding that sharply increases when they comprise most of the students in a district. Under the funding formula, high-needs students are low-income, foster and homeless students, as well as English learners, who are targeted for additional funding.

As of this year, districts in which targeted students make up at least 60 percent of enrollment, which is about the statewide average for high-needs students, receive an extra 15 percent in funding. Districts in which targeted students make up 80 percent of enrollment receive about a third more in additional funding.

The money is paying off, particularly in the districts with the highest-needs students, Lafortune found, raising test scores on the Smarter Balanced standardized tests in math and English language arts and enabling more to meet the course requirements for admission to the California State University and the University of California.

In the highest-need districts -- those with 80 % or more students targeted with extra funding -- the share of students meeting or exceeding standards increased by 10 and 9 percentage points in English language arts and math, respectively, while at lower-need districts, the share increased 4 and 5 points from 2014-15 through 2018-19. Low-income districts narrowed the achievement gap by 6 percentage points in English language arts and 4 percentage points in math.

However, the overall statewide progress in narrowing the gap between all low-income students and non-low-income students was less: only 2.5 percentage points in English language arts and 0.6 percentage points in math.

Lafortune found the same pattern when analyzing the course requirements, known as A to G, for qualifying for admission to the University of California and the California State University. In the decade preceding the enactment of the funding formula in 2013-14, there was no change in the gap in A to G completion rates between low- and non-low-income districts. Since then, the gap between the highest-need districts and the lowest-need districts, with less than 30 percent of low-income students, narrowed by 9 percentage points. For the districts in between, which received some concentration money, the gap closed only 5 percentage points.

Previous studies of Local Control and Accountability Plans, in which districts lay out annual plans for supplemental and concentration spending, had found some districts had underused or misdirected the money.

A state auditor's analyses of three districts’ spending concluded that the funding formula law “has not ensured that funding is benefiting students as intended.”

This year, Gov. Gavin Newsom adopted one of the auditor's key recommendations, eliminating a loophole that allowed districts to spend leftover money for high-needs students however they wanted the following year.

The money also has been difficult to track in schools with high-needs students. However, through a requirement under the federal Every Student Succeeds Act, California for the first time is reporting accurate spending data by school; previously, California calculated teacher salaries, the largest component of school spending, using a districtwide average, not actual salaries.

The new mandate is not a complete remedy, since it remains difficult to make spending comparisons among districts. However, it does reveal which high-needs schools are disparately funded.

Lafortune attributes the differences in spending on high-needs students to two issues he raises in the report:

•  Extra funding is intended to fund additional programs and services for high-needs students, but it is funded by district, not by school, giving districts flexibility on where to spend the money;
• Although districts with the biggest proportions of high-needs students (80 percent or more of enrollment) get the most concentration funding, many other districts have nearly the same total number of high-needs students yet get considerably less funding. And non-low-income districts that get no concentration funding still contain a quarter of the state's schools where a majority or more of the students are low-income.

That is all the more reason why the state “must ensure that supplemental and concentration funding is benefiting the students who generate it in a more direct and significant way,” said Samantha Tran, senior managing director of education policy at Children Now, a nonprofit advocacy organization.

It appears that the funding formula is working in districts that receive the most funding, “which is great, but there is absolutely more the state needs to do to actually close achievement gaps,” she said.

Lafortune recommends several options to spread the additional funding more evenly. One way would be lowering the threshold for districts to receive concentration funding. Another would be to fund concentration dollars by school instead of by district, ensuring that the money would go to students who generated the extra funding.

The challenge with the latter is that it might encourage further segregation -- redrawing school boundaries to include larger concentrations of low-income families, Lafortune said.

In a study two years ago, Lafortune documented that districts were using the additional funding to hire counselors and teacher aides for low-income schools, but they also had disproportionate numbers of novice teachers. He once again recommends that the Legislature address this issue.

"Key policies, therefore, should involve additional funding and incentives that allow districts to hire and retain qualified staff in the highest-need schools, especially given teacher shortages around high-demand subjects," he wrote.

John Fensterwald is a reporter with EdSource, a publishing partner with CalMatters.