Column: NH’s education funding transition means reduced aid for 109 communities

New Hampshire is going through a small but meaningful transition in the method the State uses to fund local public education. New Hampshire’s state education funding formula included provisions in State Fiscal Years (SFYs) 2024 and 2025 that protected schools from losing funds relative to the prior year, even as changes in the formula shifted more funding toward a component known as Extraordinary Needs Grants. This provision that maintained funding, which distributed dollars through Hold Harmless Grants, will phase out between SFYs 2026 and 2033. As a result of this policy shift and other funding changes driven by the education funding formula, 145 municipalities will receive fewer funds from the state’s education funding formula in SFY 2026 than in 2025.

From SFY 2025 to 2026, 145 municipalities received less State Adequacy Aid. Among the 134 municipalities that receive Hold Harmless Grants, 109 did not receive enough Extraordinary Needs Grant funding to offset the 20% reduction in Hold Harmless Grants. Of those 109 municipalities, 83 received less total State Adequate Education Aid overall. Within that group, 30 municipalities relied on Hold Harmless Grants for at least 20% of their total Adequate Education Aid, including Statewide Education Property Tax, indicating communities with greater exposure to the planned phase-down.

For municipal officials, school boards, district staff, and the public, understanding this transition may aid long-term planning. The phaseout of the Hold Harmless Grants will result in a greater percentage of state funding being determined by a specific combination of local poverty metrics and property wealth differences in each community.

Key facts about adequate education aid

Hold Harmless Grants are a small portion of overall funding for state public education. In a pair of 1993 and 1997 decisions, together called the Claremont decisions, the New Hampshire Supreme Court determined that the State Constitution enshrined a right for New Hampshire students to receive an “adequate education” and that the state had an obligation to pay for an adequate education through a form of taxation that was more equitable than the reliance on local property taxes as structured at the time.

Adequate Education Aid is the state’s main form of education funding. The amount of money being sent to municipalities is calculated using the Average Daily Membership (ADM). ADM is the state’s method for counting students when determining the amount of funding provided to the students attending public schools and tracking their municipality of residence. ADM is calculated by counting the number of students and the length of time each student was present during the school year.

A student enrolled full-time for an entire school year is counted as 1.00 ADM, but if a student moves to a different town halfway through the year, then their time is split between the communities and would be counted as 0.5 in each town. The state uses the ADM from the previous year to calculate aid for the following year.

ADM is based on where a student lives, not where they attend school. The ADM calculation includes students at their local public schools, students whose district pays them to attend school elsewhere in the state, and students in specialized private programs. Home-schooled students taking individualized high school courses are counted at 0.15 per course. Preschool and charter school students are usually not included, with a few exceptions under New Hampshire law.

State law sets the Cost of an Opportunity for an Adequate Education, which is the foundational per-pupil dollar amounts provided by the state to support the costs of adequate education for every student. For SFY 2026, the state determined that the Base Grant would be $4,265.64 per pupil based on the amounts, with annual adjustment methods prescribed in state law. However, this Base Adequacy does not include all components of per-pupil aid in the formula. The state uses Differentiated Aid to provide additional per-pupil funding.

For students who qualify for free or reduced-priced school meals (FRPM), the SFY 2026 per-pupil allocation is $2,392.92. Eligibility is determined primarily by household income, while students who are under the care of a foster care agency or court, or meet certain definitions of homelessness, runaways, or migrants, may also be eligible. Students are eligible for FRPM if parents provide verified income information directly, or through an automatic verification process if they reside in households that receive Temporary Assistance for Needy Families (TANF) benefits or are enrolled in the Supplemental Nutrition Assistance Program (SNAP).

Additional Differentiated Aid includes a per-pupil allocation of $2,184.84 for Special Education students who have an individualized educational plan (IEP) and a per-pupil allocation of $832.23 for an English Language Learner (ELL). The Base Grant plus Differentiated Aid are then combined to determine the municipality’s Total Calculated Cost of an Adequate Education.

Funding for Adequate Education Aid

Following the Claremont decisions, New Hampshire established the Education Trust Fund in SFY 2000 to finance Adequate Education Aid. Several revenue streams flow in whole or part into the Fund, including the Utility Property Tax, which was newly-established with the Education Trust Fund; portions of the Business Profits Tax, the Business Enterprise Tax, the Tobacco Tax, and the Real Estate Transfer Tax; tobacco settlement funds; and revenue collected by the Lottery and Gaming Commission, with the exception of a portion of Video Lottery Terminal revenue that is sent to the state’s General Fund.

A major State revenue source supporting the Education Trust Fund is the Statewide Education Property Tax (SWEPT). SWEPT is a state-level tax that is raised and retained entirely locally, yet is counted toward state support. The State requires local governments to raise a certain amount in SWEPT based on the state’s $363 million total target, set in 2005 and unadjusted for inflation, and apply a statewide property tax rate on taxable property in each community required to reach that target. Based on that calculation, each community must raise a certain amount from its property tax base to fund public education.

For 56 communities with high taxable property wealth relative to the number of resident students, the SWEPT amount covers the entire state’s obligation for the Total Cost of an Adequate Education. However, the remainder of the communities in the state receive aid from the other revenue sources that support the Education Trust Fund.

Supplemental Adequate Education Aid Grants

In SFY 2011, the State made significant changes to the education funding formula’s calculations, which would have reduced aid by $158 million to cities and towns that generally had lower property values and a greater percentage of students in households with low incomes. Policymakers introduced Stabilization Grants to provide assistance to these communities that would have experienced losses, effectively filling the gap that would have been created by these formula revisions. These grants were fixed dollar amounts determined by the difference between a municipality’s SFY 2011 funding calculations and the lower SFY 2012 estimate under the new formula, for communities that would have experienced a decline in funding. In SFY 2017, the State began reducing these grants annually but restored the Grants to their SFY 2012 amounts in SFY 2020. These Stabilization Grants remained fully funded until SFY 2024, when education funding formula revisions in the State Budget enacted in June 2023 eliminated the Stabilization Grants.

The elimination of Stabilization Grants had the potential to disproportionately impact communities with low relative taxable property wealth. The revisions to the education funding formula included changes to the per-pupil Base Grant and Differentiated Aid components of the funding formula, significant modifications to Extraordinary Needs Grants, the elimination of targeted Relief Aid based on the concentration of FRPM-eligible students, and the elimination of reading proficiency scores for third graders as a factor in the formula. Some communities would have seen state aid reduced under this new formula relative to the amounts received for SFY 2023; however, the State Budget offset any losses from the elimination of Stabilization Grants in SFY 2024 by establishing new Hold Harmless Grants.

Under state law, the Hold Harmless Grants will end by SFY 2034. Every two years, coinciding with State Budget biennia, the Grants will drop by 20% of their original values from the previous period. During the current SFYs 2026-2027 State Budget, eligible municipalities receive 80% of their SFYs 2024-2025 Grant amounts. The Grants will keep decreasing in steps until reaching the new cap in SFY 2034.

The state’s primary targeted aid program, based on community-level factors rather than the characteristics of individual students, is called the Extraordinary Needs Grant. This Grant allocates additional state funding to municipalities that have a combination of a relatively high percentage of FRPM-eligible students and a relatively low amount of property wealth to tax.

Eligibility is based on a calculation of the Equalized Valuation per Free & Reduced-Price Meal Student (EVFRP). The calculation uses the total taxable value of all property in a municipality and divides it by the number of FRPM students in the municipality.

Under State law, municipalities are broken down into three categories based on the EVFRP, as defined below for SFY 2026.

• Municipalities with an EVFRP at or below $1.66 million will receive the maximum grant amount of $11,500 per eligible student.
• When municipalities have an EVFRP between $1,664,640 and $6,866,640, the state provides about two‑tenths of a cent ($0.00221) for every dollar below $6.866 million for each eligible free‑or reduced‑price‑meal student.
• Municipalities at or above $6.866 million will not receive any funds from the Extraordinary Needs Grant.

Distribution of Adequate Education Aid

In SFY 2026, approximately 34% of the State’s total Adequacy Education Aid is funded by SWEPT. The remaining 66% of Adequate Education Aid comes from the Total Adequacy Grant, funded by other parts of the Education Trust Fund.

The Total Adequacy Grant includes the remaining amount of the Cost of an Adequate Education not covered by SWEPT, plus the Extraordinary Needs Grants and, where applicable, Hold Harmless Grants. Together, these non-SWEPT payments make up the remaining amount of aid received by a municipality.

Statewide, the Adequacy Education Aid amount will remain relatively similar between SFY 2025 and 2027, but the distribution of Adequate Education Aid will likely vary significantly over this period. The primary driver of this shift in funding is the reduction of the Hold Harmless Grant. Communities that did not receive much Extraordinary Needs Grant funding to offset those reductions may see a net loss in Total State Adequate Aid.

Several municipalities facing largest drops in Adequate Education Aid in 2026

Between SFY 2025 and SFY 2026, 145 municipalities saw declines in total Adequacy State Aid, while 99 municipalities saw increases. Statewide, total Adequate Education Aid is estimated at about $1.079 billion in SFY 2026, up from about $1.064 billion in SFY 2025, before it will decline to about $1.062 billion in SFY 2027. The statewide total does not show the variation in Adequate Education Aid across municipalities.

There are uneven effects from the transition away from Hold Harmless Grants. There are 134 municipalities that receive the Hold Harmless Grant. Of those, 109 did not receive enough Extraordinary Needs Grant funding in 2026 to offset the 20% reduction in Hold Harmless Grants.

Some communities are receiving more adequate funding from increases in Extraordinary Needs Grants that offset Hold Harmless Grant losses, while others face reductions in both adequacy aid categories. Manchester and Nashua together accounted for $16.3 million of the $22.7 million in increased Extraordinary Needs Grant gains from SFY 2025 to SFY 2026.

From SFY 2025 to SFY 2026, municipalities were allocated less in fiscal State aid for local public education. The municipalities with the largest dollar decreases were Derry, Laconia, Concord, and Weare. Conversely, the largest increases were in Manchester, Nashua, Claremont, Berlin, and Keene. These changes reveal the impact of the Hold Harmless Grant phase-out and the state’s change to more targeted aid.

Hold harmless phase-out beginning in 2026

The 20% biennial phase-out in Hold Harmless Grants will drop the statewide total from $59.4 million in SFYs 2024-2025 biennium to $47.6 million in SFYs 2026-2027, then fall again to $35.7 million in SFYs 2028–2029. By SFYs 2034-2035, the phase-out of Hold Harmless Grants will be complete.

Some municipalities may be more exposed to the phase-out because Hold Harmless Grant funding still makes up a large share of their total State Adequate Education Aid. Orange, Groton, Columbia, Albany, and Lyman are all communities that receive at least a quarter of their total State Adequate Education Aid from Hold Harmless Grants, and it makes up at least 50% of their Adequacy Grant funding.

Madison and Woodstock appear most reliant on Hold Harmless Grants when measured against the Adequacy Grant, but when measured against total State Adequate Education Aid, SWEPT accounts for much of the State’s education aid in both communities, with 78% in Madison and 80% in Woodstock.

Municipalities with a high share of Hold Harmless funding will not all face the same effect in future years. Enrollment, free and reduced-price meal eligibility, property values, and Fiscal Capacity Disparity Aid will all shape future funding levels. The data suggests two broad patterns. Municipalities with lower property values and higher poverty rates will often receive enough Extraordinary Needs Grant funding to offset part of the Hold Harmless reduction. Municipalities with moderate poverty and moderate property values may face larger losses because they are less likely to receive enough Extraordinary Needs Grant funding to replace that aid.

How targeted aid affects funding to municipalities

There are 109 municipalities whose reduction in Hold Harmless Grants are not offset by increases in Extraordinary Need Grant assistance. For some, the changes in the Extraordinary Needs Grant formula will increase their total Adequate Education Aid. Derry, Pembroke, Haverhill, and Canaan are examples of some of these municipalities. Derry had the largest net loss among the municipalities listed, with a Hold Harmless Grant reduction of $903,727 and an Extraordinary Needs Grant decline of $627,615, for a combined loss of $1.53 million. Pembroke lost about $695,143, Haverhill lost about $558,652, and Canaan lost about $493,269.

The examples provided by these municipalities show how important property value relative to student need is for determining Adequate Education Aid in the modern education funding formula. In Derry, equalized valuation per free or reduced-price meal pupil (EVFRP) increased 15.3% to $5.632 million. As that measure moved closer to the top of the Extraordinary Needs Grant sliding scale, the municipality qualified for less aid. This is a similar trend across many municipalities that lost both Hold Harmless and Extraordinary Needs Grant aid.

There are municipalities that are seeing an increase in Adequacy Grant, even with the Hold Harmless reductions. Claremont, Berlin, Hinsdale, Milton, and Allenstown had the largest net gains among the municipalities listed. Although it lost about $329,386 in Hold Harmless Grant funding in SFY 2026, its Extraordinary Need Grant increased by $2.63 million, resulting in a total net gain of about $2.3 million. Claremont’s EVFRP fell by $138,523.8, allowing the municipality to become eligible for more funds in the EVFRP sliding scale.

How property values and poverty rates affect Adequacy Aid

In SFY 2026, 120 municipalities saw declines in both Hold Harmless Grant funding and Extraordinary Needs Grant aid. Canaan illustrates how that change can affect communities that still have meaningful student need but no longer meet the property-value test for additional support. The FRPM Average Daily Membership in Canaan remained high at 77.8 students, but its equalized valuation per FRPM student rose to $8.049 million, which was more than $1 million above the top of the sliding-scale threshold.

This pattern suggests that communities may lose aid not because student needs have disappeared, but because rising property values place them outside the Extraordinary Need Grant formula’s eligibility range. Municipalities like Canaan, where poverty remains statistically higher than the statewide median, but property values are comparatively high, are likely to feel the loss of Hold Harmless Grants more sharply than communities that are both more property-poor and have higher concentrations of poverty.

Statewide average daily membership declined from 157,397 students in SFY 2024 to 152,140 in SFY 2026, a drop of 5,257 students over two years. Over the same period, the number of students eligible for free or reduced-price meals, which directly shapes Extraordinary Needs Grant eligibility, fell from 41,749 to 40,468.

This decline matters because Extraordinary Needs Grant eligibility is tied to a district’s equalized valuation per free or reduced-price meal-eligible student. When the number of eligible students falls, a district’s valuation per eligible student can rise enough to push it above the eligibility threshold. As a result, the loss of aid can be abrupt rather than gradual. In smaller rural communities, where the number of free or reduced-price school meal-eligible students is already low, even a small decline in enrollment can be enough to eliminate the grant entirely. Lower enrollment does not always reduce costs at the same pace. Enrollment losses are often uneven across schools, grades, and districts, and many costs remain fixed in the short term.

Fiscal capacity disparity begins in 2027

The State is introducing new targeted aid starting in SFY 2027, which was used in prior iterations of the education funding formula as well. Unlike the Extraordinary Needs Grant, which is based on equalized valuation per free or reduced-price lunch for pupils, Fiscal Capacity Disparity Aid will be based on equalized valuation per pupil across a municipality’s full Average Daily Membership (ADM). This broader measure means that some municipalities that do not qualify for Extraordinary Needs Grants may still receive additional aid if their property wealth per pupil is relatively low.

Municipalities with equalized valuation per pupil of $1,000,000 or less will be allocated the maximum grant of $1,250 per pupil in ADM. Municipalities with equalized valuation per pupil between $1,000,001 and $1,599,999 will be allocated a smaller grant on a sliding scale. The grant is calculated by multiplying each dollar difference between the municipality’s equalized valuation per pupil and the $1,599,999 grant ceiling by a factor of $0.00208333. Municipalities with equalized valuation per pupil of $1,600,000 or more will not receive any Fiscal Capacity Disparity Aid.

This mechanism will result in Fiscal Capacity Disparity Aid providing support to municipalities with lower property wealth per pupil, while the amount of aid drops as property wealth increases. The grant floor, ceiling, and maximum grant will all increase by 2% each year. The factor will also be recalculated each year by dividing the updated maximum grant by the difference between the updated grant floor and grant ceiling.

This aid may soften the transition away from Hold Harmless Grants for some municipalities that have lower property wealth but may not receive offsetting support through the Extraordinary Needs formula alone. The Fiscal Capacity Disparity Aid will not fully offset Hold Harmless Grant losses for all municipalities. Communities with property values above the Fiscal Capacity Disparity Aid ceiling will not receive any money from this aid. Municipalities with moderate poverty but comparatively higher property values may still see net losses as Hold Harmless Grant funding phases out.

Beginning in SFY 2028, the State will limit how much targeted aid larger municipalities can receive. For municipalities with Average Daily Membership (ADM) of 5,000 or more, the combined total of Extraordinary Needs Grant aid and Fiscal Capacity Disparity Aid cannot exceed $3,750 per pupil. Currently, the cap will only affect Manchester, but could affect other larger municipalities such as Nashua in the future.

Conclusion

New Hampshire’s transition away from Hold Harmless Grants marks the start of the State moving away from a broad funding floor that protected municipalities from formula-led losses towards a system that places greater weight on the combination of local property wealth and student poverty. That change will direct aid to some municipalities with the least taxable property wealth relative to poverty level, but will also leave other communities more at risk as Hold Harmless Grant funding phases out.

The transition will not affect all municipalities to the same extent. Some communities, such as Claremont, Berlin, and Hinsdale, benefit from higher Extraordinary Needs Grants that offset losses in Hold Harmless Grant funding. Others, including Derry, Pembroke, Haverhill, and Canaan, face higher reductions because changes in Extraordinary Needs Grant eligibility do not cover the Hold Harmless Grants they are losing. In communities where property values are relatively high, but poverty remains significant among students attending local schools, the formula may reduce support even when student need is still there.

Looking ahead, the phase-out of Hold Harmless Grants through SFY 2034 means this transition is still at an early stage. For local officials and school district staff, understanding these changes in Adequate Education Aid that will be received from the state over the next three State Budget cycles will help communities plan for the investments they can make in their community’s children.

The New Hampshire Fiscal Policy Institute is sharing these articles with the partners in The Granite State News Collaborative. NHFPI is an independent nonprofit organization that explores, develops and promotes public policies that foster economic opportunity and prosperity for all New Hampshire residents. For more information visit nhfpi.org. These articles are being shared by partners in The Granite State News Collaborative. For more information visit collaborativenh.org.