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Compensatory Revenue in 2026

Compensatory Revenue in 2026

What is it?

Compensatory revenue is site-based revenue. The revenue is calculated based on the characteristics of each school site, and through fiscal year 2028 at least 40 percent of the revenue must be distributed to qualifying programs at each site.

Compensatory revenue must be used to meet the educational needs of pupils whose progress toward meeting state or local content or performance standards is below the level that is appropriate for learners of their age. Eligible uses of compensatory revenue include the following:

  • providing remedial instruction in reading, math, and other core curriculum;
  • adding teachers and teacher aides to provide more individualized instruction;
  • lengthening the school day, week, or year (including summer school);
  • operating programs to reduce truancy; providing counseling, guidance, and social work services; and coordinating services from other governmental agencies;
  • providing bilingual and bicultural programs for English learner students;
  • providing early education programs, parent training programs, and home visiting and other outreach efforts;
  • enabling transition programs for special education students until the age of 22; and
  • using professional development for teachers on meeting the needs of EL students, using assessment and tools, reducing the use of exclusionary discipline, and training for tutors and staff in extended day programs.

Compensatory revenue must be reserved in a separate account, and each district must produce an annual report describing how compensatory revenue has been spent at each site within the district.

The compensatory revenue increases as the number of compensatory pupil units goes up, which is driven by the federally defined number of free and reduced-price meal eligible students as well as the percentage of such students at the school site. A higher percentage concentration of free and reduced-price meal students leads to a higher count of compensatory pupil units. Compensatory Pupil Units.”  (Minnesota School Finance, Minnesota House Research Department, Nov. 2025, pp. 26-27)

The History of MREA Involvement and the Story of One Rural School District

Vernae Hasbargen, retired MREA Executive Director and Lobbyist, recalls that up to 1997, Compensatory Revenue was a smaller metro revenues stream as it was based on Aid to Families with Dependent Children (AFDC).  Vernae recalls that Sally Toby, who was SW/WC Finance Director and MREA analyst, brought to Vernae the data that using Free and Reduced lunch counts as the basis for Compensatory Revenue would do a better job of distributing this revenue state-wide including rural school districts.

Vernae can’t recall when she shared this with Sen. Larry Pogemiller, Chair of the Senate Education Finance Committee. What she does clearly remember is that while attending a hearing in the Capitol late at night during the ’97 session, Sen. Pogemiller asked her to join him outside.  He meant outside the Capitol, under the north portico in the bitter cold. While she froze, he was jumping around as he explained the potential of using Free and Reduced lunch to expand Compensatory Revenue to rural MN and benefit Minneapolis as well.

Vernae recalled, “Pogemiller was honest in dealing [with me]. He had a big target that year and was willing to share the pie, because he needed rural Senators’ votes.”

MREA through Vernae supported the effort to get this expansion of Compensatory Revenue, which included an additional $50 m in the first year and targeted Compensatory Revenue to individual school sites, passed and signed into law.  Sadly, Sally Toby died that February and never saw the results of her research and insight.

Fred Nolan, MREA’s current Interim Executive Director, was Superintendent of Eden Valley-Watkins in Central MN at that time. He vividly remembers that surge in funding as well. AFDC produced maybe $10,000 annually.  Free and Reduced lunch produced close to $100,000. He remembers advising the board that this is a once in a lifetime opportunity to improve education of the children of the district, to put the increase of funds in a reserve for year and appoint a study committee to research the most effective uses of these funds and make recommendations to the board.

The study committee, led by teachers, reported that next winter that best uses were to fund all-day-every-day kindergarten and add a secondary reading teacher who would teach a semester of reading in 7th and 8th grades and support struggling readers grades 9-12.  The Board implemented the recommendations, and it made a big difference by increasing test scores and lowering the number of Title I eligible students.

Now 29 years later, Eden Valley-Watkins will lose an estimated ($59,529) which is -16.8%, very close to the median statewide loss of -16.5%, of its Compensatory Revenue.

What is the issue?

This one sentence inserted into the 2023 Legislation is the primary driver: “Beginning October 1, 2024, the commissioner shall determine the number of children eligible by means of direct certification to receive either a free or reduced-price meal on October 1 each year.” (MS 126C.10 Subd 3(c))

This one sentence tossed out the long-standing practice in which “the compensatory pupil count is conducted during the fall at each school site. In addition to parent-reported income data, school districts may also qualify students through “direct match” with income information held by the state for participants in certain public assistance programs including medical assistance (MA) and SNAP (the Supplemental Nutrition Assistance Program). (Ibid, p. 27)

In education jargon, ‘parent reported income’ are ‘paper applications,’ and ‘direct match’ is ‘direct certification.’

That one sentence affected FY ’26 and beyond.  For FY ’26 the 2025 legislature and the Governor produced a $55 million “hold harmless” package and established a Compensatory Revenue Task Force. Learn more

Other drivers are each building sites’ total enrollment and the compensatory pupil units at each site, and a fixed factor linked to the formula used to calculate the revenue for each compensatory pupil unit.  Learn more

Who does it affect?

Districts with a higher reliance on parents’ reported income (paper applications) to more thoroughly count families who qualify for free and reduced lunch and who did not apply or are not willing to apply for public assistance programs. The following is a reprint of an MREA post Feb. 2, 2024

For FY ’25, when Compensatory Revenue calculations were based on Oct 1, 2023 counts of Free and Reduced meal eligibility and meals were universally free to all students for the first time, paper applications still accounted for 11% of Compensatory Pupil Units statewide with a district median of 7%.

Description Statewide Average Percent Difference between ’22 and ‘23 Districts’ Median Percent Difference between ’22 and ‘23
Paper Applications resulting in eligibility for Free meals 9.7% -24.1% 5.3% -43.8%
Paper Applications resulting in eligibility for Reduced meals 24.2% -47.0% 19.9% -52.4%
Percent Paper Applications of Compensatory Pupil Units 11.0 -30.1% 7.0 -47.1%

When the statewide percentage of CPUs, or any Minnesota educational statistic, exceeds the statewide district median, that means that more larger districts are above the statewide median.  This can be seen in the map below where Anoka-Hennepin, St. Paul and Minneapolis, as well as other metro districts, are above the median of percent paper applications in their CPU counts.

As always, statewide averages and medians obscure the wide district variability of the effect of paper applications on Compensatory Pupil Units which ranges from 0% to 56%.  Even a 5th to 95th percentile analysis reveals a range from 1.4% to 19.5% difference in the effect of paper applications on Compensatory Revenue.  The map below shows the distribution.  Find your district’s percent of paper applications effect on Compensatory Pupil Units here.

percentpaper

What is the Effect of the 2026 Legislation on School Districts FY 27 Compensatory Revenue

Despite a $10 million one-time infusion for Compensatory Revenue, the 2026 statewide distribution of these funds systemically redistributes revenue away from 75% of rural school districts and rural children in poverty. The $867 million in total Compensatory Revenue for FY ’27 is a 2.7% reduction from the previous fiscal year.

The state-wide big picture, which includes Charters, Intermediates and Cooperatives, masks for school districts the effects of the redistribution of revenue in the current law based solely on direct certification.  When one looks only at school districts, nearly $62 million Compensatory Revenue was lost in 235 school districts.   75% of rural school districts lost revenue.  The redistribution effect raised $21 m for 92 districts.  44% of metro districts saw an increase in revenue while only 25% of rural districts saw an increase.  As a result, rural districts took 62% of the net state-wide district hit (losses minus gains) in school districts’ compensatory revenue.

Compensatory Fatigue

The attention to changes in Compensatory Revenue has gone on for years. When you search the MREA website for ‘Compensatory Revenue,’ you get 81 hits. It is understandable why some feel a growing problem is “Compensatory Fatigue” among legislators and policy makers.

Here are some of the more significant posts over the last three years:

  • The roller coaster of Compensatory Funding and How Compensatory Pupil Units are Counted, 2023
  • The Rebound – Going Up the Compensatory Revenue Rollercoaster 2021-24 with USDA’s Medicaid Direct Certification, Jan. 2024
  • High Schools’ Rocket Ride up the Compensatory Revenue Roller Coaster FY23 – FY24, Jan 2024
  • Compensatory Revenue for FY25 and Beyond including 2023 legislative mandate to transition to all Direct Certification and the sustainability of this level of funding 2024
  • Compensatory Funding Runs Released including concerns about revenue losses due to the impending shift to all direct certification. 2025
  • The 2025 Legislature established a Task Force to study the Compensatory Revenue program and provide a report to the legislature October 2026. Learn more
  • Preliminary Compensatory Funding Formula Raises Alarm, 2026
  • Minnesota Compensatory Revenue Task Force Issues Preliminary Report, March 2026
  • 75% of Rural MN School Districts lose Compensatory Revenue June 1, 2026

Key Takeaways

  • Compensatory Revenue as a total state expenditure has grown dramatically since the addition of Medicaid eligible direct certification;
  • The move to direct certification, modified by only a $10 m hold harmless for FY ’27, negatively affected districts with a higher reliance on parents’ reported income (paper applications) to more thoroughly count families who qualify for free and reduced lunch and who did not apply or are not willing to apply for public assistance programs;
  • The complexity of the Compensatory revenue formula calculated at the building site level adds its own volatility to this revenue stream for school districts;
  • School leaders need to re-engage legislative and gubernatorial candidates in the negative effects of 100% reliance on direct certification which disenfranchises children by limiting their educational support in school sites and districts in which parents are reluctant or unwilling to sign up for public assistance programs;
  • Going forward, a lot is riding on the Compensatory Revenue Task Force’s October report and its reaction by our new governor and ’27 legislature.

MREA Interactive Maps on Compensatory Revenue as of May 19, 2026