They Spend WHAT? The Real Cost of Public Schools, Cato Policy Analysis No. 662

Although public schools are usually thebiggest item in state and local budgets, spendingfigures provided by public school officials andreported in the media often leave out major costsof education and thus understate what is actually spent.To document the phenomenon, this paperreviews district budgets and state records for thenation’s five largest metro areas and the District of Columbia. It reveals that, on average, per-pupilspending in these areas is 44 percent higher thanofficially reported.Real spending per pupil ranges from a low of nearly $12,000 in the Phoenix area schools to a high of nearly $27,000 in the New York metroarea. The gap between real and reported per-pupilspending ranges from a low of 23 percent in theChicago area to a high of 90 percent in the Los Angeles metro region.To put public school spending in perspec-tive, we compare it to estimated total expendi-tures in local private schools. We find that, inthe areas studied, public schools are spending93 percent more than the estimated medianprivate school.Citizens drastically underestimate currentper-student spending and are misled by officialfigures. Taxpayers cannot make informed deci-sions about public school funding unless they know how much districts currently spend. Andwith state budgets stretched thin, it is more cru-cial than ever to carefully allocate every tax dol-lar.This paper therefore presents model legisla-tion that would bring transparency to school dis-trict budgets and enable citizens and legislatorsto hold the K–12 public education system ac-countable.

They Spend WHAT?

The Real Cost of Public Schools

by Adam Schaeffer

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Adam B. Schaeffer is a policy analyst with Cato’s Center for Educational Freedom and author of “The Poverty of Preschool Promises: Saving Children and Money with the Early Education Tax Credit,” Cato Institute Policy Analysis no. 641, August 3, 2009.

Executive Summary

No. 662March 10, 2010

Introduction:Why Education Spending isTHE State Budget Issue

State and local budgets are in sorry shape.Collectively, the states came up more than$158 billion short of projected tax revenuewhen planning their budgets for 2010 in2009.

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In response, more than 30 statesraised taxes and 43 reduced services.

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As theeconomy deteriorated and tax revenue plum-meted more quickly than expected, 39 statesdiscovered additional budget shortfalls of nearly $34 billion.

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Together, these shortfallsadd up to the largest gap on record, 28 per-cent of the general fund budgets for 2010.

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The near future looks even bleaker than thepresent. As unemployment remains high andhome prices fall or stagnate, states are facing aneven larger estimated shortfall of $180 billionfor 2011 and another $120 billion for 2012.

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Compounding the growing problems at thestate and local levels, federal stimulus fundsused this year and next year to close shortfallswill evaporate, and most states’ reserves weretapped long ago. The worst, in other words, isyet to come.So what is to be done? Where can we cutunnecessary programs or increase efficiency in core services? Where can we save the mostmoney? The answer is education.K–12 schooling is the biggest item on stateand local budgets. How big? Based on the2005–2006 totals from the National Center forEducation Statistics updated to 2009 dollars,state and local governments are spending wellover $500 billion on public K–12 education.The Bush and Obama administrations haveoverseen a startling increase in the federal in- volvement in and funding of K–12 education,but state and local governments still providethe vast majority of funds. The federal govern-ment provides just 9 percent of educationfunds, compared to 44 percent from localsources and 47 percent from states.

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The National Association of State BudgetOfficers reports that state governments spent35 percent of their general funds on K–12 edu-cation in 2007.

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In contrast, Medicaid, contin-ually singled out as a problematic state budgetitem, accounted for just 17 percent of general-fund expenditures.

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The majority of Medicaidfunds, however, come from the federal govern-ment. Looking at all state-derived funds, wefind 25 percent devoted to K–12 educationand 13 percent going to Medicaid.

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The com-parison is even more dramatic when we con-sider local funds in the equation. A sobering27 cents of every dollar collected at the state orlocal level is consumed by the government-runK–12 education system, while only 8 centssupport Medicaid.

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The amount we spend on education hasincreased dramatically and consistently overthe past century, with a 25 percent increase inper-pupil expenditures, in constant dollars,between 1995 and 2005.

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This upward trajec-tory shows no sign of flagging, with total stateeducation spending increasing even duringthis serious recession and amidst plummetingtax revenue, with the assistance of federalstimulus funds. The White House reports thatelementary and secondary education spend-ing at the state level increased from over $228billion in 2007–2008 to $236 billion the next,leveling off at $235 billion for 2009–2010.

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Education spending is the single most seriousburden on state budgets, and it will remain themost delicate and important state spendingitem with which tax and budget reformersmust contend. As this fiscal crisis continues to unfold,revenues continue to decline, federal stimu-lus funds run dry, and state and local govern-ments will find themselves at the bottom of a deep financial hole. Local governments, al-ready hit with huge declines in tax revenuefrom property taxes and other sources, willadd to the state burden by falling short ontheir close to equal share of education fund-ing, leading to calls for even more state aid.Since runaway education spending is a majorcause of current and future budget problems,it is the best place to look in state and localbudgets for serious savings.But it is currently far too difficult for tax-payers and political representatives to get a

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A sobering27 cents of every dollar collectedat the state orlocal level isconsumed by thegovernment-runK–12 educationsystem.

handle on school finances. Without a clearidea of current spending levels in public andprivate schools, it is hard for the public andpolicymakers to know whether the currentsystem is cost-effective or to assess the fiscalimpact of expanding families’ options withprivate school choice programs. To redressthat knowledge gap, the final section of thispaper presents model legislation requiringdistricts to publish up-to-date spending fig-ures, fully inclusive of every dollar spent onbehalf of K–12 education.

Step One for Saving Money:Know How Much You Spend

It’s so simple as to seem trivial. To get con-trol of a budget, you need to know how muchyou make, how much you spend, and whatyou’re spending it on. Every financial plannerstarts with these basics, which provide thekeys to fiscal responsibility. If you’re not ableto afford the rent that consumes half of yourincome, you can reap savings from renting a cheaper apartment. We know that K–12 edu-cation is the biggest single cost to state andlocal governments, eating up close to a thirdof their revenues. And yet most citizens andpoliticians have little or no idea how muchwe are spending on education at a per-pupillevel.Each year, the National Center for Edu-cation Statistics publishes public-schoolspending data for the nation. However, thedata they publish is three or four years out of date. More recent national data are unavail-able. To make matters worse, many educationanalysts pay less attention to the

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spendingfigures than to what are called “current”expenditures. In this context, “current” hasnothing to do with the timeliness of the data.Instead, it refers to a subset of school spendingthat excludes whole categories of expendituresthat are necessary for schools to function,such as capital costs, debt service, and employ-ee benefits. Knowledge of what is spent at thelocal level tends to be even more skewed andless widespread, even among “experts.” Andthe general public is, according to nationalsurveys, completely in the dark about suchfacts.Most citizens don’t have any idea how much is spent per child in public schools.When asked how much was spent in theirstate, only about 7 percent of Floridiansguessed a figure that was close to or higherthan the NCES figure of about $9,800 for thatyear.

Sixty-three percent

thought their state wasspending $6,000 or less.This information gap isn’t limited to citi-zens of the Sunshine State. In Idaho, only 26percent of citizens picked the answer closestto or higher than the NCES figure of about$7,800; in Illinois, only 11 percent answeredclose to or higher than the NCES figure of about $10,600; and in Maryland, only 8 per-cent answered close to or higher than theNCES figure of about $13,000.

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So the public doesn’t know how much isspent to educate children in their state. Andfor good reason: it’s very difficult to findgood, up-to-date information on how muchpublic school systems are spending per child. And it’s most difficult at the district level.States collect information on districtexpenditures, but the level of detail, clarity,and availability varies widely from state tostate. The federal government collects infor-mation as well, but it doesn’t provide timely or well-publicized data on individual dis-tricts, the most important level of informa-tion for taxpayers to know about. And as not-ed above, the out-of-date “current” spendingfigures from official federal and local sourcesdo not represent the total spending per child.The best place to look for timely informa-tion on

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spending at the district level is inindividual school district budget documents.Unfortunately, these documents suffer frommany of the same problems found in stateand federal data, while adding a few of theirown. Some district budgets are not publishedonline, and hard copies are usually difficultto secure. The budgets are complex and oftenconfusing, and it can be a time-consumingchallenge to find an official who is both capa-ble and willing to help decode them.

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It’s very difficultto find good,up-to-dateinformation onhow much publicschool systemsare spendingper child.