April 10, 2008

RESEARCH: RISING SCHOOL BUDGETS CAN POINT TO INEFFICIENT SPENDING RATHER THAN IMPROVED EDUCATION

When school administrators have opportunities to increase district budgets and few disincentives for doing so, the budgets may rise. But do these budgetary increases result in better educations for students? Often, no.

These are among the major findings in "Budget Adjustments in Response to Spending Variances: Evidence of Ratcheting of Local Government Expenditures," a study published in the December 2007 Journal of Management Accounting Research.

The study, by Dr. Elizabeth Plummer of the  Neeley School of Business at  Texas Christian University in Fort Worth and Dr. Tanya M. Lee of Robert Morris University in Pittsburgh, was the first to examine the phenomenon of "ratcheting" in the public sector.

Ratcheting refers to how public school administrators respond to government spending. If a governmental unit's expenditures exceed its budget (overspending), the administrators respond by increasing the budget for the next year.  If the unit under spends, administrators are less likely to adjust next year's budget downward.

"Our study shows that when public school administrators overspend, they ratchet up the budget for the next year, but under spending is seen as transient so they don't ratchet down by the same proportion," says Dr. Plummer. "We did not find evidence that more spending necessarily equates with better schools."

Plummer and Lee chose to investigate this behavior among public school districts because of the economic impact of school spending on local taxpayers, and the budget-boosting incentives and opportunities inherent in the system.

 "Even when we looked for legitimate reasons for this behavior and controlled for it in our study, we still found ratcheting upward but not equally downward," she says. "Our results are consistent with undesirable growth in government."

The study examined the year-to-year budgets for the 1,034  Texas school districts for an eight-year period and found per-student incremental rises in all categories (total expenditures, operating expenditures, instructional expenditures, and non-instructional expenditures) in nearly every year. All amounts were adjusted to 2002 dollars, to account for inflation.

What Goes Up
While ratcheting occurred across all categories, it was most evident among non-instructional expenditures.

"Instructional budgets exhibit more accountability. They're not soft numbers like those for non-instructional budgets," explains Dr. Plummer.

Instructional costs include teacher salaries and educational supplies, and are tied to hard numbers such as enrollment. Non-instructional costs include administrative overhead and social services such as counseling. Without an objective standard, non-instructional costs are more easily manipulated upward, such as by labeling more students as having special needs and thus requiring more resources.

Incentives for administrators to increase budgets include heightened prestige from heading bigger-budget districts.  They also include enhanced job security and opportunities for promotion resulting from that prestige, funding to increase salaries, money for perks, and the chance to build financial slack into the budget as a comfort factor.

Accountability
While controls exist to guard against unnecessary budget increases, they're often not as tight as they could be. The study shows that stricter constraints are often effective.

"We found less ratcheting in environments where there was more accountability," says Dr. Plummer. "Specifically, ratcheting was weaker for school districts in environments with more competition from neighboring school districts and for districts with more voter influence."

Other budget constraints include legislative and regulatory limits on property-tax hikes for school expenditures, financial reporting and review requirements, and reporting by local news media.

Plummer and Lee believe their results are applied to other states, because school financing systems are similar from state to state.

Taxing
Ratcheting has a real impact on taxpayers, Plummer says. As school budgets rise, so do the tax bills of property owners.

"The money has to be well spent to be worth it. More money doesn't necessarily mean better services. Most taxpayers don't know how their dollars are being spent because often there isn't enough accountability," she says.

Plummer and Lee say local policy makers could become more alert for signs of ratcheting while examining school spending, especially non-instructional budgets. Such watchfulness may be particularly beneficial in regions having little competition among districts or weak voter involvement in district decisions.

Citizens can also take action, Plummer says. "Taxpayers should better educate themselves about what they're getting for their dollars so they can make informed decisions."

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MEDIA CONTACT
Elaine Cole
Public Relations Manager
Neeley School of Business at TCU
817-257-5724
e.cole@tcu.edu