Funding formulas are the mechanism by which governments distribute funds to serve difficult-to-educate students. Special-education finance scholar William T. Hartman identifies seven types of state-level funding models: flat grant, unit, personnel, percentage, weighted student, resource-cost model. Some of these models may also be applicable to at-risk education, and to a lesser extent corrections education. Each type of formula creates incentives influencing how children will be served; no funding formula is perfect. Hartman encourages policy makers to analyze the motivational effects of each formula to determine how local, state, and federal administrators will respond.131 (See Table 5.) Typically, regulations are used, with varying degrees of success, to combat some of the adverse incentives inherent in each model.

In addition to the type of model used, the degree to which those agencies making the placement decision are also responsible for paying the costs will also influence how students are served. Writes Hartman:132

(L)ocal agencies will exhibit greater restraint in incurring special-education costs if they are responsible for a share of those costs. The belief is that the greater the district’s share, the more cost conscious the local agencies will be. Consequently, funding systems that incorporate a high local contribution to the cost of special education are thought to provide a greater incentive to control costs than those in which the local share is low.

Hartman cites as an example the case of Pennsylvania, where the state paid all excess costs generated by special education. Says Hartman, "the local districts had little incentive to control costs, and the state had funding shortfalls of $60 million to $100 million for years."133 In response, the state implemented a new formula, which capped the amount of available state aid.