Decentralization in the education system has become a trend in many developing countries. However, it is not a solution to the many problems in education faced by these countries. One of the adverse effects of decentralization is disparity between regions or schools in terms of educational achievement. This paper offers a justification for such a view by studying the case of the Indonesian education system. Data was collected from about 5,000 "Sekolah Lanjutan Tingkat Pertama" (SLTP) schools (junior secondary schools). The method of covariance structure analysis was used to identify the influences and effects of factors related to educational environment upon educational outcome, and to make a comparison between before and after the introduction of decentralization in Indonesia. The main finding of this research is that increase in the school budget improves the quality of the educational environment and leads to higher test scores and lower dropout rates. Such positive results, however, turned out to be less significant, and the relationship between factors became weaker, during the period after decentralization had started. This was particularly the case for the group of schools whose budget level was relatively small. Therefore, there is a need to consider measures aimed at correcting the disparity between schools as well as regions.