## Note 9: Finance (2005)

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 16, 36, 37, 38, 39, and 40 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, etc.) 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/).

CLASSIFICATION OF EXPENDITURES FOR ELEMENTARY AND SECONDARY EDUCATION

Indicators 36 and 38 examine expenditures for public elementary and secondary education. Indicator 36 uses two categories of expenditures in its analysis: total expenditures and current expenditures. Indicator 38 uses six categories of expenditure: total expenditures, instructional expenditures, administration expenditures, operation and maintenance expenditures, capital expenditures, and other expenditures.

Total expenditures for elementary and secondary education include all expenditures allocable to per student costs: these are all 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.

Current expenditures include expenditures for instruction, administration, operation and maintenance, and other expenditures with the exception of capital expenditures (capital outlays and interest on debt) and current expenditures for nonelementary and nonsecondary programs (see Total expenditures above). Thus, current expenditures include such items as salaries for school personnel, fixed charges, student transportation, school books and materials, and energy costs.

Instructional expenditures include salaries and benefits for teachers and instructional aides, supplies, and purchased services such as instruction via television. Also included are tuition expenditures to other local education agencies.

Administration expenditures include expenditures for general administration (salary, benefits, supplies, and contractual fees for boards of education staff and executive administration) and school administration (salary, benefits, supplies, and contractual fees for the office of the principal, full-time department chairpersons, and graduation expenses).

Operation and maintenance expenditures include salary, benefits, supplies, and contractual fees for supervision of operations and maintenance, operating buildings (heating, lighting, ventilating, repair, and replacement), care and upkeep of grounds and equipment, vehicle operations and maintenance (other than student transportation), security, and other operations and maintenance services.

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.

Other expenditures include funds for student support (health, attendance, and speech pathology services), instructional staff (curriculum development, staff training, libraries, and media and computer centers), student transportation, other support services including business support services and central support services, food services, enterprise operations (operations funded by sales of products or services together with amounts for direct program support made by state education agencies for local school districts), and other current expenditures (adult education, community colleges, private school programs funded by local and state education agencies, and community services).

CLASSIFICATION OF REVENUE

In indicator 37, revenue is classified by source (federal, state, local). Revenue from federal sources includes direct grants-in-aid to schools or agencies, funds distributed through a state or intermediate agency, and revenue in lieu of taxes to compensate a school district for nontaxable federal institutions within a district’s boundary. Revenue from state sources includes both direct funds from state governments and revenue in lieu of taxation. Revenue from local sources includes revenue from such sources as local property and nonproperty taxes, investments, and revenue from student activities, textbook sales, transportation and tuition fees, and food services. Intermediate revenue comes from sources that are not local or state education agencies, but operate at an intermediate level between local and state education agencies and possess independent fund-raising capability, for example, county or municipal agencies. Intermediate revenue is included in local revenue totals. In indicator 37, local revenue is classified as either local property tax revenue or other local revenue.

In indicator 37, alternative local government revenue numbers for Texas were used in the calculation of the percentage distribution for the South in 1992–93 because, for that state, much of the revenue that was classified as local government property taxes was classified as revenue from intermediate sources. The alternative Texas local government property tax revenue for 1992–93 was calculated by applying the average of the proportions of the 1991–92 and 1993–94 local government property tax revenue to all local government revenue to the 1992–93 total for all local government revenue. Other local government revenue was calculated in a similar fashion.

MEASURES OF EFFORT TO FUND EDUCATION

There are several ways effort to fund education can be measured. The Condition of Education presents two measures: revenues per student and governmental effort. Indicator 39 uses as a measure of revenue per student the public revenue for elementary and secondary education divided by the total number of public elementary and secondary students in constant dollars. Indicator 40 uses as a measure of revenue per student the public revenues for postsecondary education in public degree-granting institutions divided by the total number of students enrolled in these institutions in constant dollars. (No adjustments are made in indicator 40 for part-time enrollment.)

Indicators 39 and 40 use as a measure of governmental effort the total public revenue divided by gross domestic product (GDP) for the United States. This is meant to measure the amount of public resources provided for education in relation to available societal resources.

Algebraically,

Government Effort = Public Revenue/GDP

Alternatively,

mental effort can also be expressed in a way that relates the level of public investment in education (as measured by revenues per student) to the per capita capacity for public investment in education (as measured by GDP per capita) and to the percentage of the population who are enrolled. The latter adjustment is important to isolate changes in governmental effort that are exclusively due to changes in the level of public investment in education (as measured by revenues per student) versus change in the extent of enrollment in education in the society (as measured by the percentage of people in the population who are enrolled). For example, if both total public revenue for education and GDP remain constant, governmental effort, as described in the formula above (where public revenue is divided by GDP), remains constant. As shown in the second formula, governmental effort can also remain unchanged if the level of public revenues per student decreases, while the percentage of the population enrolled in education increases by a commensurate amount. If both the level of revenues per student and the percentage of the population who are enrolled increase, the level of governmental effort necessarily increases. In this way, the measure of governmental effort used in indicators 39 and 40 implicitly adjusts for both the level of revenues per student invested in education and the percentage of students in the population who are enrolled.

Both the revenues per student and governmental effort measures are needed to provide a more complete picture of funding effort: revenues per student measures the average level of resources invested in the education of each student and the total amount of public resources invested in all students as a percentage of GDP measures the governmental effort.

In addition to providing measures of public effort to fund education, both the revenue per student and governmental effort measures can also be used to assess the total funding effort in education—that is, the total public and private funding effort—in comparison to the public funding effort. This is done in indicator 40 for revenues per student in postsecondary education. Public postsecondary institutions receive both government appropriations for educating students and private funds in the form of tuition payments, endowment contributions, and other sources. The difference between the total revenues per student received by institutions and the public revenues per student received is the private effort per student. As a measure of total funding effort, the “governmental funding effort” measure for postsecondary institutions would have to be redefined as total revenues as a percentage of the domestic GDP of the United States. This measure is not used in this volume.

Public revenue for elementary and secondary education is measured by the total revenue received by school districts providing public elementary and secondary education. Most of this revenue is used to fund the education of children in public schools from prekindergarten through grade 12. However, many school districts have adult education and community service programs that are funded out of this revenue. Also, in at least a dozen states, there is support for private schools (usually textbooks) that goes through the district. Altogether, public elementary and secondary education makes up 98 percent of the expenditures in public elementary and secondary schools. Also, a small percentage (2.3 percent in 2001–02) of the revenue received by school districts was from nongovernmental private sources (gifts and tuition and transportation fees from patrons).

In indicator 39, public revenue for postsecondary education is measured by government appropriations for public postsecondary institutions. Excluded from this measure are funds for certain student aid such as Pell grants and subsidies for student loans together with government appropriations for private institutions.

Revenue per student in indicators 39 and 40 is in constant dollars based on the CPI, prepared by the Bureau of Labor Statistics, U.S. Department of Labor. Gross domestic product is the market value of goods and services produced by labor and property in the United States.

Revenue data from elementary/secondary and postsecondary education are based on different accounting systems and are not entirely comparable. For example, public revenues for elementary and secondary education represent additions to assets (cash) from taxes, appropriation, and other funds, which do not incur an obligation that must be met at some future date (loans) in all public schools. These include revenues that are spent on construction of buildings and other investments in the physical plant. Due to the difficulty in constructing a comparable time series, public funds given to private schools (for Head Start, disabled children, etc.) are excluded. For postsecondary education, educational and general revenues are those available from public sources for the regular or customary activities of an institution that are part of its instruction or program. In contrast, revenue from (unrestricted and restricted) grants and contracts at all government levels are included. Overall, public revenue at postsecondary institutions includes salaries and travel of faculty and administrative or other employees; purchase of supplies or materials for current use in classrooms, libraries, laboratories, or offices; and operation and maintenance of the educational plant. Unlike public revenues for elementary/secondary education, postsecondary public revenues, as defined in indicator 40, do not include public funds used for expansion of a physical plant. As a result, readers should focus on the changes over time within the elementary/secondary and postsecondary education measures rather than making comparisons across measures.