In the Summer 2013 issue of Education Next, Marguerite Roza and Jon Fullerton examine one of my favorite topics, how public education is actually financed and how the money is spent. The first phenomenon they highlight is “The Economics of Enrollment,” with the following example and accompanying table:
Consider a 10,000-student district that has an enrollment increase of 200 students from one year to the next. The district receives $10,571 in state and local funds per student enrolled, the national average in 2010. As Table 1 illustrates, insofar as state and local revenues are generated on a per-student basis, the school district will receive roughly $2.1 million in additional revenues for the new students.
Direct costs are unlikely to increase as dramatically. Even assuming that the additional students are all placed into newly created classes with new teachers making the average national salary, the additional costs are likely to be much less than the additional revenues. Assuming that no new schools are built to house these students, the district will have a large surplus to spend on other things, such as new district-wide programs, class-size reductions, and employee raises.
Now consider what happens in the same district when enrollment shrinks by 200 pupils and state and local funding declines accordingly. Assume the district reduces its teaching force by 10 teachers and no longer pays for these students’ supplies. It could reduce its expenses by about $910,000, but it is losing more than $2.1 million in revenue. If the $1.2 million surplus from prior growth is indeed being spent across the district, it will need to make general budget reductions or “cuts due to declining enrollment.” With their tendency to spend all that they have, districts create financial asymmetry around enrollment growth and decline.
Yes, it’s the old “marginal per-pupil spending” conundrum, first examined in, egad, 2003 (item #4). For years teachers’ unions and school systems have complained about losing full per-pupil funding when students move to charters, or voucher schools, or private schools, or home schools – even though their costs don’t drop commensurately. In other words, the marginal cost of teaching additional students is low.
However, they never mention that fact when enrollment grows. Or, as I put it back then, “If a school system’s marginal costs are low (as the unions are claiming), each new student who enrolls in a regular public school brings with him or her revenue in excess of costs, or, as economists like to call it, profit.”
I’m afraid this is noting more than an academic exercise. School systems do not compute costs and then seek revenue to cover those costs. They match spending to available revenue, “computed” through the political process.