Inefficient Education Spending in Public School Districts: A Case for Consolidation?

1. INTRODUCTION The passage of the No Child Left Behind Act of 2001 (Public Law 107-110) highlights the continuing problems associated with funding quality primary and secondary public education in the United States. In large part, this new legislation places greater responsibilities on state and local governments in terms of funding and standards. The variation in state-level education funding, fiscal capacity, and educational outcomes are all of interest in this legislation. Although debate will continue as to the effectiveness of the new legislation, one fact is clear: state and local governments must fund these new responsibilities while balancing tight budgets and facing a greater demand for education services (see National Education Association, 1998). The current state budget crises are creating a further obstacle to improving and funding public education. The National Conference of State Legislatures reported that collective state budget deficits for Fiscal Year (FY) 2003 could range from $22 billion to $30 billion. Projections for FY 2004 are more dire, with current estimates ranging from $54 billion to $78 billion (National Conference of State Legislatures, 2003). These fiscal pressures at the state level are equaled by financial pressures at the local level, forcing local officials across the country to make drastic cuts in school district expenditures. As an example, several school districts in California will experience cuts ranging from $23 million to $52 million over the next year; many Minnesota school districts are facing cuts in the $10 million to $20 million range. (1) Financing education is an important responsibility for state and local governments. In FY 1999, state governments spent $126 billion on higher education and local governments spent over $350 billion on primary and secondary education. These totals represent 13% and 38% of total expenditures, respectively. Of particular interest here are per pupil expenditures at the primary and secondary levels. (2) The national average per pupil expenditure in 1999 was $6638. Alaska ranks number one with per pupil expenditures of $10,600 and Mississippi ranks 50th with $4658 per student. Regarding the state studied here, Arkansas invested $5545 of state funds per enrolled student (rank of 42) during the 1999 academic year. This figure includes expenditures on capital outlays, interest on debt, and programs that support adult education. Excluding these categories produces current expenditures that are more representative of spending on instruction and student support activities at the primary and secondary levels. On this basis, Arkansas per student funding was $4752. (3) To meet legislated responsibilities and ease increasing budget pressures, the authors argue that state and local governments can attend to the inefficiencies that plague their K-12 education production process. The inefficiency is the distribution of education funding across far too many and far too costly administrative units. A consolidated school district can produce an equivalent level of output at a lower cost per student by avoiding redundant expenditures. For example, a consolidated district would require fewer administrators or specialized instructors than is required when the same enrollment level is disjoint across separate districts. The authors show that exploiting the economies of scale in the education production functions of Arkansas school districts may provide measurable cost savings. (4) Although these costs are easily quantified, there are also several implicit costs from consolidating that may prevent the full dollar savings from being realized. Previous research on education scale economies is extensive (see Fox, 1981; Callan and Santerre, 1990; Duncombe et al., 1995, 1996; and Andrews et al., 2002, for a sample of the work done is this area). This article contributes to the literature in several ways. First, it estimates scale economies for school districts in Arkansas, a state that has not received attention in the literature. …