How the Composite Index Hurts Rural Communities

The Composite Index of Local Ability-to-Pay was designed to equalize education funding across Virginia — but critics say it increasingly punishes rural and coastal localities by measuring wealth they can’t actually spend.

Every two years, the Virginia Department of Education publishes a number for each of the Commonwealth’s 132 school divisions: the Local Composite Index (LCI) of Ability-to-Pay. This single figure determines how much of a school division’s basic education costs will be covered by the state versus how much the local government must provide. A lower index means more state support; a higher index means the locality is expected to shoulder more of the burden itself.

This year, Northampton County is facing more than $1 million in added school-related costs because of changes in the local composite index.

The overall system is designed to maintain a statewide split of 55% state funding and 45% local funding for Standards of Quality (SOQ) costs — the minimum staffing and resource requirements the Commonwealth mandates for all public schools. The LCI is the mechanism that distributes that local 45% unevenly across localities based on their presumed financial capacity.

These three revenue indicators are each divided by a blend of the locality’s student enrollment (2/3 weight) and total population (1/3 weight), then compared to statewide averages. The result is multiplied by 0.45 — the nominal local share of SOQ costs. No locality’s index may exceed 0.8000, regardless of how wealthy it is.

Localities with an index near 0.8000 are considered to have sufficient local resources to cover 80% of their SOQ costs; those near 0.2000 receive far more state support. The formula has roots stretching back to the 1970s and the adoption of Virginia’s modern Constitution — making it one of the oldest continuous education-finance formulas in the country.

The Problem with Paper Wealth

In theory, the LCI is an equalizer. In practice, a growing chorus of school superintendents, county administrators, and state researchers argues that it systematically misrepresents the economic reality of rural and coastal Virginia — demanding more from communities that have less.

“The LCI captures wealth on paper — not necessarily the reality of the communities we live in.”

— Virginia school superintendent writing in Cardinal News, April 2026

The core issue lies in the formula’s heaviest indicator: property values, which carry a 50% weight. In many rural and coastal communities, land and structures have appreciated significantly — driven not by local economic prosperity, but by outside forces like vacation home markets, scenic landscapes, and the migration of wealthier retirees and remote workers seeking affordable second homes.

How Rural Communities Are Hurt

Rising LCI, stagnant wages

27 of the 30 school divisions with the highest LCI increases in the current biennium are members of the Coalition of Small and Rural Schools of Virginia — despite having no booming local economies.

Incomplete income data

The AGI metric only counts residents who file Virginia tax returns. Rural areas have disproportionately more non-filers — low-income residents who earn below the filing threshold — leaving their communities looking wealthier than they are.

The enrollment penalty

When rural schools lose students — a common trend due to demographic decline — the enrollment denominator shrinks, paradoxically pushing the LCI value upward and requiring the locality to pay more.

No economies of scale

Larger suburban and urban divisions can spread fixed costs across thousands of students. Small rural divisions cannot — yet the formula does not account for the higher per-pupil cost of running small schools.

Case in Point: Craig County — ranked seventh-poorest in Virginia by median household income and among the least valuable in land and retail sales — found itself assessed on par with significantly more affluent areas like Chesterfield, Culpeper, and Prince William. As researchers from Craig County wrote in 2024: “This disparity is not merely a statistical anomaly; it has real-world implications for the students of Craig County.”

The Rural Coastal Distortion

Coastal communities face a particularly acute version of the property-value problem. In localities along the Chesapeake Bay, the Eastern Shore, the Northern Neck, the Middle Peninsula, and the oceanfront of Hampton Roads, waterfront properties have seen dramatic appreciation — driven primarily by second-home buyers, vacation rentals, and wealthy retirees, not by the working families whose children fill the local schools.

3%–Under state law, localities where at least 3% of their total adjusted gross income comes from nonresidents may exclude that outside income from the LCI calculation — an acknowledgment that not all income in a jurisdiction reflects local wealth. But property values from those same nonresidents are still fully counted.

This creates a structural mismatch: a beachfront parcel owned by a Northern Virginia or Washington D.C. professional inflates the assessed value of a rural coastal county, signaling to the state that the county has significant wealth — even though that wealth belongs to someone who doesn’t send children to local schools and doesn’t pay local income taxes. The county’s LCI rises, its state funding share falls, and its local school budget suffers.

In the Northern Neck and Eastern Shore, communities grappling with high poverty rates, outmigration of working-age adults, and underfunded infrastructure are simultaneously told by the formula that they can afford to fund a greater share of their children’s education. Teachers are hard to recruit, facilities are aging, and the tax base — despite the nominal property values — cannot generate the revenues the formula assumes.

A Formula Sensitive to State Revenue, Not Student Need

The Virginia Municipal League has noted that both the SOQ and LCI formulas are “more sensitive to the state’s revenue situation than the educational needs of Virginia’s students.” In practical terms, this means that when the state faces budget pressure, the formulas — rather than protecting vulnerable school divisions — often shift more burden onto local governments that are least equipped to carry it.

A 2023 JLARC report found that Virginia school divisions receive roughly $1,900 less per student than the national average, once adjusted for cost-of-labor differences — less than most neighboring states. Almost all local governments are forced to supplement state funding above what the LCI formula requires, but wealthy jurisdictions can supplement far more generously than struggling ones. The result is a system that launders inequality through a formula rather than addressing it.

“Students in communities with fewer resources are too often left behind. This isn’t new — Virginia has had the same basic system since 1971.”

— The Commonwealth Institute for Fiscal Analysis, December 2025

Proposed Reforms

JLARC’s 2023 report and subsequent legislative debate have produced a number of proposals to fix or replace the LCI. Progress has been mixed:

• Under studyUse a 3-year rolling average for LCI data instead of a single year — reducing volatile swings that leave school budgets unpredictable.
• Under studyWeight student enrollment and general population equally (50/50) instead of the current 66/33 split, which amplifies the enrollment penalty on shrinking rural divisions.
• Under studyReplace the LCI entirely with a Revenue Capacity Index (RCI) that measures what localities could realistically raise at average tax rates — potentially saving rural divisions $85M annually.
• PartialStrengthen the at-risk student add-on to better account for poverty’s true cost in education — partially funded but not fully integrated into the SOQ model.
• VetoedA bill incorporating multiple near-term JLARC recommendations (SB105) passed both chambers 96-0 and 40-0 but was vetoed by the Governor.

Behind every index value is a school division making painful choices. When an LCI rises — whether because a wave of vacation homes boosted county assessments, or because enrollment declined and the denominator shrank — the locality must either raise taxes on residents who may not have seen their incomes rise, cut school services, or both. Teachers go un-hired or unretained. Programs are cut. Facilities go unrepaired.

For communities on Virginia’s rural fringes and coastal edges, the Composite Index has become a symbol of a system that mistakes the presence of wealth for the ability to tax it — and mistakes a formula’s internal logic for justice.

Fairness isn’t about equal treatment. It’s about recognizing different realities — and funding our schools accordingly.

Sources: Virginia Department of Education; JLARC K-12 Funding Report (2023); The Commonwealth Institute for Fiscal Analysis; Virginia Association of Counties; Virginia PTA; Cardinal News; Virginia Municipal League; Fiscal Analytics, Ltd. Statistics from the most recent 2024–2026 biennium LCI cycle unless otherwise noted.

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Wayne Creed

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