Formula budgeting procedures used in several states for allocating resources to public institutions of higher education are reviewed and criteria to be considered in developing a formula budget for public institutions in Pennsylvania is recommeded in this report. Section 1 summarizes the history of formula budgeting in Pennsylvania. Section 2 reviews the use of formula budgeting procedures nationally and discusses the advantages and disadvantages of these procedures. Further it reviews the philosophy, rationale, and components that are considered in different types of formulas. Section 3 provides a description of the various types of formulas that have been, currently exist, or are proposed by 10 different states: Alabama, Louisiana, New Mexico, Ohio, Oklahoma, Tennessee, Texas, Virginia, and Washington. Section 4 reviews the process employed by three states, California, Illinois, and Texas, in the development and maintenance of formula budgeting and problems associated with this process. Finally, Section 5 presents a set of recommendations concerning the major components that should be considered in the development of formula budgets for state-owned, state-related, and community college sectors of the Pennsylvania system of higher education. The appendix provides a summary of each formula used and provides a technical description of the formula budget of each state. (Author)