Ms Parata agreed that schools in some gentrified areas, especially in Auckland, could lose hundreds of thousands of dollars, while others would gain similar amounts.
She described the decile regime as a "blunt instrument".
Despite the Government spending a record $9.7 billion on education this financial year, achievement levels weren't reaching the 85 to 100 per cent New Zealand needed.
The most successful funding systems narrowed the gap between high-achieving rich kids and under-achieving poor kids by "strongly incentivising" pupil progress, Ms Parata said.
"You've got to work out which school is delivering achievement, which schools are focusing on how they raise the quality of their teaching and leadership practice, and how is that translating into kids demonstrating that they're learning more?"
However, the minister has since backtracked, claiming her comments were misunderstood and the Government had no intention of changing the decile funding system before the election.
The decile debate
New Zealand's decile rating system has long been a contentious issue for schools.
According to ministry figures, the funding difference between a typical 1000-pupil decile 1 and decile 10 school can amount to more than $900,000 a year.
This often means "wealthy" schools are forced to seek hefty donations from parents to make up the apparent shortfall.
With property prices rocketing around the country since the decile ratings were last reviewed in 2006, ratings at a number of mid-range schools are likely to rise - losing schools thousands of dollars in funding.
Those in the higher range will have to be increasingly reliant on donations and fundraising - or lucrative fee-paying foreign students - to fund day-to-day operations.
Decile ratings as a marker of quality is also vexed, with many understanding the decile number as a reflection of standard.
Education expert Professor John Hattie says there is "little evidence" of lower deciles as indicators of lower school quality.
"A lower decile school may be far more successful at enhancing achievement than a top-decile school."
Yet, parents around the country shy away from lower-decile schools in fear they won't deliver the same results.
Use the money wisely
New Zealand Secondary Principals' Association former president and John Paul College principal Patrick Walsh says most people in the education sector agree decile-rated funding is a "blunt instrument".
"The research doesn't show a lot of value added. Low-decile schools do get a lot of money and the question then is asked, 'Can you show the difference it makes to student achievement'?"
The difference between the money decile 1 and decile 10 schools receive is "huge", says Mr Walsh.
"I certainly wouldn't question that lower socio-economic communities have a significant disadvantage and the schools actually deserve that money."
Rather, it's about demonstrating that the money is used wisely, he says.
An effective alternative wouldn't allocate funding based on results, but test students on arrival and follow their progress over time.
"And at the very least, if they haven't made progress ... because sometimes schools have problems with truancy, absenteeism, hunger and so on ... . being able to provide a reasonable explanation for it."
New Zealand Educational Institute president Judith Nowotarski doesn't agree, saying Ms Parata's comments on performance-related funding have "horrified" teachers.
"The minister seems to think that waving big sticks and carrots around are going to be wonderful motivators for schools to improve students' progress, as if teachers aren't already doing their absolute best for their students.
"National Standards only cover a tiny part of the curriculum and are absolutely no way to measure genuine progress, because you can't fit every child into a one-size-fits-all box."
Labour's education spokesman Chris Hipkins joined the outcry last week, releasing a statement saying the suggested shakeup was "fatally flawed".
"Taking money from schools that are struggling and giving it to ones that are already doing well is only going to exacerbate the problem.
"Like George W Bush's 'No Child Left Behind' policy, it will widen the gap between schools and rob hundreds of thousands of kids of their best shot at education."
A child's achievement hinged on a wide range of factors, including whether they were living in a cold, damp house and whether their parents were educated and had time to spend with them, he said.
The vulnerable kids will suffer
Post Primary Teachers' Association (PPTA) president Angela Roberts says outcomes-based funding is not the answer.
"That was how George Bush's 'No child left behind' policy worked. The best performing schools got more federal funding. That seems weird because what you should be doing is targeting your resources to whoever's struggling."
Ms Roberts uses a school economics test as an example of how she believes the system would play out.
"It's like if I said to the [high-scoring] kids ... 'You guys are doing really well, I'm going to resource you, I'm going to spend more time with you.' And the kids who did really badly ... I'm not going to give them as much time."
The underpinning argument is that schools and their students will strive to perform, but that isn't what motivates kids to succeed, she says.
The PPTA wants to see the present system reviewed, but performance-based funding shouldn't even be an option.
"What [Ms Parata] has said is, 'All options are on the table'. And what I would argue is that ... they shouldn't even bother wasting any time on the models that have been proven to fail elsewhere.
"When you target your resources to the schools that are doing the best ... then our most vulnerable students are the ones who miss out."
Performance-based rewards
In January, Prime Minister John Key announced the Government would spend an extra $359 million over the next four years on the creation of new roles in New Zealand schools - including "executive principals" and "expert teachers".
And though the plans - which will see outstanding teachers and principals financially rewarded - isn't being called "performance pay", many say it's the same thing.
"We want the best teachers and principals to lead a step change in achievement and we are going to pay them more to get it," he said. It is intended all roles will be fully in place by 2017.
How are school deciles calculated?
Household income - percentage of households with income in the lowest 20 per cent nationally.
Occupation - percentage of employed parents in the lowest skilled occupational groups.
Household crowding - number of people in the household divided by the number of bedrooms.
Educational qualifications - percentage of parents with no tertiary or school qualifications.
Income support - percentage of parents who received a benefit in the previous year.
