This article reviews the development of state funding formulas or guidelines for public higher education. Originally viewed as a means to distribute public funds in a rational and equitable manner, they now are complicated methodologies. Funding formulas are all-inclusive or itemized; most states use the itemized approach. There are three different computation methods for the itemized approach, all of which use variations of certain base factors such as head count, number of positions, area, full-time equivalent students (FTES), and credit hours. Formulas may differ among academic discipline, levels of enrollment, grades, and institution type. Functional areas where funding is used include research, instruction, public service, academic support, student services, institutional support, scholarships and fellowships, and plant operations. In 1996, 30 states reported using funding formulas for four-year institutions, although many are now eliminating formulas in favor of productivity and accountability methods to determine resource allocation since formula funding is as unable to recognize the range of objective and subjective differences among institutions. Although funding formulas do provide an objective allocation mechanism, they do not anticipate changes in the missions of institutions or changes in technology. Determining funding for higher education will continue to be part of a political process that involves compromise to preserve and improve quality of education while accommodating the changing condition of education. (Contains 21 references.) (NAV)