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«Introduction This paper examines the fiscal condition of school districts in Nebraska. Our methodology is a new one that has been applied to ...»

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These results concerning economies to scale are complicated by a fifth factor, namely unexplained spending differences across classes of school districts. After controlling for all identifiable cost (and other) factors, including district scale, we find that some classes of school districts spend less per pupil than others. Compared to either class 2 (small, with elementary and secondary students) or class 6 (secondary only) districts, class 1 (elementary only) districts spend $2,810 less per student and class 3 districts (large, with elementary and secondary) spend $345 less per pupil. These Class 3 results also apply to Omaha and Lincoln.

We cannot determine whether these differences in spending across classes of school districts reflect cost differences or differences in educational quality. Nevertheless, we assume that these "left-over" spending differences reflect differences in cost across districts. For example, class 1 districts may have lower costs than other districts, all else equal, because they may not have to pay as much as other districts to attract teachers. We regard this assumption as conservative in the sense that it makes the current system, with its predominance of class 1 districts, look as favorable as possible.

When these left-over spending differences between classes are interpreted as cost differences they offset, to some degree, the economies of scale described earlier. The total enrollment variable indicates that costs per pupil decline as district enrollment increases, but the spending differences by class indicate that class 1 districts, many of which contain less than 10 students, have lower costs than other districts.

In other words, we discover strong economies of scale within any given class of district, but also find that many class 1 districts would have to be consolidated for the cost-savings through economies of scale to be large enough to offset the potential cost-increases from eliminating class 1 districts. By combining these two results, we find that the cost per pupil is about the same for a class 1 and a class 3 district that is 100 times as large. To place this result in perspective, note that consolidating several tiny class 1 districts with a large class 6 or class 3 district could easily result in a single district that was more than 100 times as large as the individual class 1 districts--and could therefore lower per pupil costs. In most cases, for example, a single county-wide district would contain more than 100 times as many students as the individual class 1 districts currently in the county, and would therefore face lower costs per pupil than the class 1 districts. To the extent that the left-over spending differences across district classes reflect differences in educational quality instead of costs, the economies of scale that can be captured by combining class 1 districts with each other or with other districts are larger than these examples suggest.

We combine these five cost factors (handicapped students, transportation costs, elementary vs.

secondary students, economies of scale, and interclass cost differences) into a single cost index for each school district in the state. A district with favorable cost conditions, such as few handicapped students or low transportation costs, will have to spend less than the state-wide average per pupil, $3,504, to obtain educational services of average quality. A district with unfavorable cost conditions will have to spend more than the average per pupil to obtain an average-quality education.

District expenditure needs, expressed in dollars per student, are presented in Table 7. A district's expenditure need is the dollars per pupil that it must spend to provide an average-quality education.

Expenditure needs range from a low of $1,285 (or 35 percent of the average) to a high of $6,116 (or 175 percent of the average). The average expenditure need of districts with fewer than 10 students is relatively high compared to that of districts with enrollments between 10 and 100 students, but districts with 100 to 499 students have the highest average expenditure need of all. As enrollment increases above 500 students, the average expenditure need falls. Table 7 also indicates that expenditure need is highest, on average, in district classes 3 and 6 and lowest in Lincoln and Omaha. The single district with the greatest need is a high school in a rural county. This high school has a need of over $6,000 per student because it educates secondary students only and has high overhead costs in providing this education to its small enrollment.

Need-Capacity The need-capacity gap is the difference between expenditure need and revenue-raising capacity. For ease of interpretation, this gap is standardized to be zero in the average school district. This standardization technique, which does not alter any district's ranking, allows us to readily see how each district's fiscal capacity compares to the average. A positive gap means that a district cannot provide an average-quality education to its students at the average tax burden; it either must lower its service quality below the average or raise its tax burden above the average--or both. A need-capacity gap of $50, for example, indicates that a county would have to receive $50 per student from outside sources to be able to provide the same service quality at the same tax burden as the average school district. Conversely, a negative gap indicates that the school district could provide the average service quality at the average tax burden and still have money left over to finance higher service quality or to lower the tax burden on its residents.

Need-capacity gaps, expressed in dollars per student, are presented in Table 8. These gaps vary dramatically from one district to another, with a minimum of -$27,159 to a maximum of $4,346. For reasons outside the control of school officials, some districts could provide education of average quality at an average tax rate and still have an enormous amount left over, up to $27,159 per student, for higher quality education or a lower tax burden. Other districts could not provide education of average quality at an average tax burden without a large infusion of revenue, up to $4,346 per student, from outside sources.

The enrollment group with the largest average gap is the one with 100 to 500 students. The groups ranging from 500 to 999 students and from 20 to 29 students also have positive average gaps. All other groups have negative average gaps; these districts are able to generate more than enough revenue, with an average tax burden, to cover the expenditure need associated with providing an average quality education. In addition, need-capacity gaps are positive for district classes 2 and 3, but negative for all other classes.

State Policy

In this section we describe the existing state aid programs in Nebraska and present evidence that these aid programs do not help to offset disparities in fiscal condition among school districts. We also show the potential of consolidation to lessen fiscal disparities across school districts and to lower the cost of education in the state.

State Aid To Schools

The three main components of state aid in Nebraska are foundation aid, incentive aid and equalization aid. In school year 1985-1986, aid through these programs totaled $131,041,778. Of this amount, foundation aid constituted 72 percent, incentive aid 3 percent, and equalization aid 25 percent.

In Nebraska, "foundation" aid is a flat grant per pupil using an indexing system that is intended to reflect the higher costs of educating students in higher grade levels. This program is not a true foundation aid program. In other states, foundation aid is designed to insure that every district can provide some minimally acceptable level of education at a reasonable property tax rate. As a result, this aid, unlike the "foundation" aid in Nebraska, is higher for districts with relatively small property tax bases. Incentive aid is given in proportion to the levels of education achieved by teachers within each district and for offering summer school programs.

To determine a district's equalization aid, the state calculates each district's "need" using the enrollment weighted index in the foundation aid formula and additional factors, namely scarcity of population, an enrollment increase, an enrollment decrease, a program for gifted students, a program for special-needs students, and transportation. This "need" is compared to the estimated "capacity" of school districts.

The "capacity" is the total amount of revenue that could be raised with a base levy ($0.42 per $100 valuation for K-12 districts, $0.28 for all other districts) added to total revenue from foundation aid, tuition payments received over 125 percent of per pupil costs, license fees, and transportation receipts.

Finally, "need" is subtracted from "capacity" to arrive at the net need of the district. (This usage of "need" and "capacity" is similar but not identical to our own usage in this paper.) The equalization aid is then proportioned, based on individual "net need," among the qualifying districts. In school year 1985only 192 school districts qualified for equalization aid.

To evaluate current aid programs, we determine whether school districts in poorer fiscal condition, as measured by their need-capacity gap per pupil (as we define it), receive more total aid from the state.

We find that the opposite is true; the better is a district's fiscal condition, the higher is the state aid it receives. To be specific, if District A's need-capacity gap is $1 lower than District B's, then District A can expect to receive $0.016 more state aid than District B, all else equal. These results come from a bivariate regression of total state aid on the need-capacity gap. The coefficient of the need-capacity gap is highly significant statistically, but the R-squared is very low, namely.014.

To some degree, this result reflects the fact that the bulk of state aid dollars are not allotted to equalization aid but are instead granted through the foundation and incentive aid programs. Foundation aid accounts for one aspect of a district's fiscal condition, the share of it students in secondary school, but does nothing else to direct funds to the districts in the poorest fiscal condition. Because it is based on teachers' educational levels, incentive aid is directed primarily toward districts in good fiscal condition, which can afford to hire the most educated teachers. In fact, relatively large and rich districts receive far more aid per pupil through this program than do districts in poor fiscal condition, such as medium-sized districts.

By focusing on the difference between "need" and "capacity" the equalization aid program helps direct aid to the districts in poor fiscal condition, but it is not large enough to offset the impacts of the other aid programs. Moreover, its formula contains several factors, such as enrollment changes, that do not appear to be related to a district's fiscal condition and excludes several factors, such as economies of scale, that have an important bearing on a district's fiscal condition. Overall, therefore, the current state aid programs do a poor job of identifying and compensating school districts that are, through no fault of their own, in poor fiscal condition.

Fiscal Aspects of School District Consolidation

Perhaps the most unusual feature of public education in Nebraska is the large number of tiny school districts. This feature has been widely debated and many plans for consolidating school districts have been proposed. In this section we examine two key fiscal aspects of consolidation, namely the impact of consolidation on the fiscal condition of school districts and the impact of consolidation on the overall cost of educating students in the state.

We do not attempt a complete analysis of consolidation. We focus on fiscal issues and do not consider nonfiscal issues, such as the relative merits of various educational environments or the importance of local control over schools that are also important to any decision about consolidation. We also do not propose a particular consolidation plan, but instead analyze a consolidation "experiment" to determine the potential gains and losses from consolidation. In our original report (Ratcliffe, Riddle, and Yinger, 1988), we also present a second, more modest "experiment," namely to consolidate each Class 6 district with all its affiliated Class 1 districts. In other words, we make no attempt to resolve the consolidation debate but instead try to contribute to this debate some important information on fiscal issues.

As explained earlier, a school district's fiscal condition can be summarized by its need-capacity gap, which is the amount of money per student it would have to receive from outside sources to be able to provide an average-quality education at an average tax burden on its residents. This gap, which is standardized to be zero in the average district, varies widely across districts. Although the gap equals zero in the average district, it is below zero, -$1,017, in the district that contains the average student in the state, because the large districts, which contain most of the students, are in relatively good fiscal condition. Our principal objective in this section is to determine what might happen to these results with consolidation.

Our experiment is to consolidate all the school districts in a county, except in Douglas and Lancaster counties where we consolidate only those districts outside Omaha and Lincoln. We also consolidate the two districts in the city of Omaha, namely Omaha and Westside.

Thus, this experiment replaces the 865 school districts in our data set with 93 hypothetical county school districts, plus Omaha and Lincoln. We do not regard county-wide school districts as the best consolidation option in every county, but we believe that this experiment does provide insight into the fiscal impacts of large-scale consolidation.

In this experiment we recalculate expenditure need for each new consolidated school district on the basis of its pooled characteristics. Ratcliffe, Riddle, and Yinger (1988) present another version of this experiment in which consolidation simply pools the existing revenue-raising capacities and expenditure needs of all the districts in a county.

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