State revenue currently flows to California school districts through so many channels that it is difficult to determine why some districts receive more funding than others. Each revenue program also has its own restrictions on the use of funds, reducing the latitude of school districts to use state funds most effectively. An alternative, simplified school finance system has been proposed that would allocate funds to districts according to student needs and district costs, using indicators of need and cost that are external to districts. The proposal includes five basic elements: (1) Base Funding; (2) Special Education Funding; (3) Targeted Funding; (4) Regional Cost Adjustments; and (5) Hold Harmless Condition (no district would receive less revenue than it currently receives from state and local programs serving the same purposes as the new programs.) This paper simulates the proposed system under a number of assumptions about parameter values. The authors conclude that two primary areas require in-depth further investigation, both of which are indicated to impact small school districts. The first concern is that, on average, small school districts would receive less revenue under the proposed funding formula than they currently receive. The higher average revenue of small districts may be an historical accident, but it may also reflect the realities of providing an adequate education to students living in sparsely populated areas of the state. If population density is an issue in the cost of education, a school finance formula might want to recognize it. A second and related issue is the financing of county offices of education, which provide many services to small districts. Under the proposal, many of the categorical programs providing revenue for those services would be eliminated, raising the issue of whether the services ought to be continued and, if so, how they ought to be financed. Data sources are appended. (Contains 14 footnotes, 20 figures and 16 tables.) [Report developed with research support from Bree Jones.]