USING THE CONSUMER PRICE INDEX (CPI) TO ADJUST FOR INFLATION

The Consumer Price Indexes (CPIs) represent changes in the prices of all goods and services purchased for consumption by households. Indexes vary for specific areas or regions, periods of time, major groups of consumer expenditures, and population groups. Finance indicators in The Condition of Education use the “U.S. All Items CPI for All Urban Consumers, CPI-U.”

The CPI-U is the basis for both the calendar year CPI and the school year CPI. The calendar year CPI is the same as the annual CPI-U. The school year CPI is calculated by adding the monthly CPI-U figures, beginning with July of the first year and ending with June of the following year, and then dividing that figure by 12. The school year CPI is rounded to three decimal places. Data for the CPI-U are available on the Bureau of Labor Statistics website (given below). Also, figures for both the calendar year CPI and the school year CPI can be obtained from the Digest of Education Statistics 2002 (NCES 2003–060), an annual publication of NCES.

Although the CPI has many uses, its principal function in The Condition of Education is to convert monetary figures (salaries, expenditures, income, and so on) into inflation-free dollars to allow comparisons over time. For example, due to inflation, the buying power of a teacher’s salary in 1998 is not comparable to that of a teacher in 2002. In order to make such a comparison, the 1998 salary must be converted into 2002 constant dollars by multiplying the 1998 salary by a ratio of the 2002 CPI over the 1998 CPI. As a formula, this is expressed as

For more detailed information on how the CPI is calculated or the other types of CPI indexes, go to the Bureau of Labor Statistics website (http://www.bls.gov/cpi/).

In The Condition of Education 2004, this description of the CPI applies to indicators 14, 35, 37, 38 and the special analysis.

CLASSIFICATIONS OF EXPENDITURES FOR ELEMENTARY AND SECONDARY EDUCATION

Indicator 35 uses three categories of expenditure in its analysis: total public expenditures, current expenditures, and capital expenditures.

Total public expenditures for elementary and secondary education include all expenditures allocable to per student costs and include current expenditures for regular school programs, interest on school debt, and capital outlay. Expenditures on education by other agencies or equivalent institutions (e.g., the Department of Health and Human Services and the Department of Agriculture) are included. Total expenditures exclude expenditures for nonelementary and secondary programs including community services, adult education, and other.

Current expenditures, generally the largest component of total expenditures, are expenditures on goods and services consumed within the current year, which need to be made recurrently to sustain the production of educational services. Current expenditures for indicator 35 include those incurred for elementary and secondary instructional as well as noninstructional programs. Expenditures for instructional programs include expenditures for instruction; support services (for pupils, instructional staff, general administration, school administration, operation and maintenance of plant); student transportation; and business/central/other support services. Current expenditures for noninstructional programs include food services, enterprise operations, and other expenditures.

Compared with total expenditures, current expenditures exclude expenditures for debt service, capital outlay, and reimbursement to other governments (including other governments/school systems). Also excluded are payments made on behalf of the school systems by other governments including employee retirement payments made by state governments to state retirement funds and to social security. Employer contributions made by those few school systems that have their own retirement system/funds are also excluded.

Capital expenditures are the second component of total expenditures. Capital expenditures include interest on school debt and capital outlays. Capital expenditures represent the value of educational capital acquired or created during the year in question—that is, the amount of capital formation regardless of whether the capital outlay was financed from current revenue or by borrowing. Capital expenditures include outlays on construction, land and existing structures, instructional equipment, and all other equipment.

Capital expenditures together with current expenditures equal total expenditures.

GEOGRAPHICAL COST OF EDUCATION INDEX

In indicator 35, the Geographical Cost of Education Index (GCEI) is used to adjust the estimates of expenditures per student for geographic differences in the price of hiring and retaining comparable personnel for delivering education. This price is primarily the slary of these personnel. School districts having teachers with similar degree attainment, age, and years of teaching experience can result in very different levels of total expenditure per student depending upon differences in the salaries paid to personnel with these characteristics in different geographic areas. The adjustment of education expenditures by the GCEI provides a measure of the resource level devoted to education that is less sensitive to differences in the price of these inputs among geographic areas than is the level of expenditures alone. For further information on the GCEI, see http://nces.ed.gov/edfin/adjustments.asp.

In indicator 35, expenditures per student are adjusted only for 1994–95 because 1993–94 is the most recent year for which School and Staffing Survey (SASS) data were used to create the GCEI. An example of the effects of cost adjustment on conclusions drawn from using expenditures compared to price-adjusted expenditures, or “resource levels,” is that inflation adjusted expenditures in 1994–95 were $7,685 per student in large city school districts and $7,074 in rural school districts. When also adjusted for differences in the price of education resources in large cities and rural areas using the GCEI, expenditures were $7,156 per student in large city districts and $7,674 in rural school districts.

CLASSIFICATION OF EXPENDITURES FOR INTERNATIONAL COMPARISONS

Indicator 36 presents international data on public and private expenditures on instructional and noninstructional educational institutions. Instructional educational institutions are educational institutions that directly provide instructional programs (i.e., teaching) to individuals in an organized group setting or through distance education. Business enterprises or other institutions providing short-term courses of training or instruction to individuals on a “one-to-one” basis are not included. Noninstructional educational institutions are educational institutions that provide administrative, advisory, or professional services to other educational institutions, although they do not enroll students themselves. Examples include national, state, and provincial bodies in the private sector; organizations that provide education-related services such as vocational and psychological counseling; and educational research.

Public expenditures refer to the spending of public authorities at all levels. Total public expenditures used for the calculation of data in indicator 36 correspond to the nonrepayable current and capital expenditure of all levels of the government that are directly related to education. Expenditure that is not directly related to education (e.g., culture, sports, youth activities, and so on) is in principle not included. Expenditure on education by other ministries or equivalent institutions (e.g., Health and Agriculture) is included. Public subsidies for students’ living expenses are excluded to ensure international comparability of the data.

Private expenditures refer to expenditures funded by private sources (i.e., households and other private entities). “Households” mean students and their families. “Other private entities” include private business firms and nonprofit organizations, including religious organizations, charitable organizations, and business and labor associations. Private expenditures comprise school fees; the cost of materials such as textbooks and teaching equipment; transportation costs (if organized by the school); the cost of meals (if provided by the school); boarding fees; and expenditures by employers on initial vocational training. Private educational institutions are considered to be service providers and do not include sources of private funding.

Current expenditures include final consumption expenditures (e.g., compensation of employees, consumption of intermediate goods and services, consumption of fixed capital, and military expenditure); property income paid; subsidies; and other current transfers paid.

Capital expenditures include spending to acquire and improve fixed capital assets, land, intangible assets, government stocks, and nonmilitary, nonfinancial assets and spending to finance net capital transfers.

Please note that for the purpose of international comparability, the definition of total public expenditures used in the analysis for indicator 36 is slightly different from that used for indicator 35.