New York State provides aid to local schools in a way that is unfair to the neediest school districts with high educational needs or low property wealth. Proposed in this policy brief is a new formula for state aid based on a comprehensive educational cost index and a school performance index that reflects an average passing rate on the new English and math high school Regents tests. The cost index, derived from a regression analysis of the determinants of district spending per pupil in 1999, is similar to one used by Massachusetts. It determines the impact of one variable on spending, holding other variables constant. It takes several steps to separate cost factors outside a school district's control from those due to inefficiency. The first component, teacher wage-cost variation, allows the wage-cost index to control for teacher quality and account for both competition from the private sector and for the harshness of the classroom conditions. The second component is the cost of at-risk students, who are defined as those from a poor family, those with limited English proficiency, or those with a severe handicap. A foundation program based on the cost index would need to make up the difference between the spending required to meet the minimum performance and the revenue raised at the minimum allowable tax effort. The plan will require a minimum local tax effort provision. Aid to larger cities would increase significantly, and aid to rural and suburban districts would decrease dramatically, more closely approximating differences in teacher pay and number of at-risk students. (RJK)