The largest single federal elementary and secondary education grant program to local school districts is title I of the Elementary and Secondary Education Act (ESEA) of 1965. Title I educational services may be financed by four funding formulas, which cover basic grants, concentration grants, targeted grants, and Education Finance Incentive Program grants. Title I's Education Finance Incentive Program would provide additional funds to states with high levels of "fiscal effort" for education (that is, high state spending relative to the state's ability to pay) and equity in per pupil spending. This General Accounting Office (GAO) report analyzes proposed measures of effort and provides options for improving them. Methodology included a literature review, consultation with experts, and analysis of school-district data from the Department of Education's National Center for Education Statistics (NCES) for school year 1991-92. It is recommended that the effort factor include an indicator of states' ability to pay that is comprehensive, reflecting all sources of potential revenue-raising capacity; avoid using indicators that are not directly related to state fiscal effort; and provide a direct incentive for increased effort. To assess the equity factor, the report recommends the following criteria: (1) the measure of spending disparities should be comprehensive; (2) the measure of students' needs should be as comprehensive as possible; (3) spending differences should be adjusted for differences in purchasing power across school districts; and (4) the equity factor should provide an incentive for states to further reduce spending disparities. Appendices contain background information, a description of methodology, formulas for measuring effort and equity, examples of alternative allocations, and implications for impact aid. Contains seven tables and three figures. (LMI)