## Note 10: Finance (2010)

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. The CPI reflects spending patterns for two population groups: (1) all urban consumers and urban wage earners and (2) clerical workers. The all urban consumer group represents about 87 percent of the total U.S. population. Indicators 17, 27, 33, 34, 35, 36, 44, 46, 47, 48, and 49 in The Condition of Education 2010 use the U.S. All Items CPI for All Urban Consumers (CPI-U).

CPIs are calculated for both the calendar year and the school year using the CPI-U. 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 (BLS) website (http://www.bls.gov/cpi/). Also, figures for both the calendar year CPI and the school year CPI can be obtained from the Digest of Education Statistics 2009 (NCES 2010-013), an annual publication of the National Center for Education Statistics (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 for comparisons over time. For example, due to inflation, the buying power of a salary of a person holding a bachelor's degree or higher in 1995 is not comparable with that of a teacher's salary in 2009. In order to make such comparisons, the 1995 salary must be converted into 2009 constant dollars by multiplying the 1995 salary by a ratio of the 2009 CPI over the 1995 CPI. As a formula, this is expressed as

1998 salary × (2009 CPI) = 1995 salary in
(1995 CPI) 2009 constant dollars

The reader should be aware that there are alternative price indexes to the CPI that could be used to make these adjustments. These alternative adjustments might produce findings that differ from the ones presented here. For more detailed information on how the CPI is calculated or on the other types of CPI indexes, go to the BLS website (http://www.bls.gov/cpi/).

Classifications of Expenditures

Indicators 34, 35, and 36 examine expenditures for public elementary and secondary education. indicator 36 uses total expenditures as a whole, together with the three major functions (categories) of total expenditures: current expenditures, capital outlay, and interest on school debt. Current expenditures, in turn, is broken into seven subfunctions (subcategories): expenditures for instruction, administration, student and staff support, operation and maintenance, transportation, food services, and enterprise operations. indicator 35uses expenditures for instruction (usually referred to as instruction expenditures) in its analysis. indicator 36 uses current expenditures in its analysis.

Total expenditures for elementary and secondary education include all expenditures allocable to per student costs: these are all current expenditures for regular school programs, capital outlay, and interest on school debt. 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 "Other current expenditures" such as community services, private school programs, adult education, and other programs not allocable to expenditures per student at public schools.

Current expenditures include expenditures for the day-to-day operation of schools and school districts. Includes instruction, administration, student and staff support, operation and maintenance, transportation, food services, and enterprise operations. Thus, current expenditures include items such as salaries for school personnel, benefits, supplies, purchased services, student transportation, schoolbooks and materials, and energy costs. Current expenditures and each of its seven subfunctions can be further broken down by the object of the expenditure: salaries, employee benefits, purchased services, supplies, and tuition and other.

• Instruction expenditures include expenditures for activities related to the interaction between teachers and students. Includes salaries and benefits for teachers and instructional aides, textbooks, supplies, and purchased services such as instruction via television. Also included are tuition expenditures to other local education agencies.
• Administration expenditures include expenditures for school administration (i.e., the office of the principal, full-time department chairpersons, and graduation expenses), general administration (the superintendent and board of education and their immediate staff), and other support services expenditures.
• Student and staff support expenditures include expenditures for student support (attendance and social work, guidance, health, psychological services, speech pathology, audiology, and other student support services), instructional staff services (instructional staff training, educational media [libraries and audiovisual], and other instructional staff support services), and other support services (business support services, central support services, and other support services not reported elsewhere).
• Operation and maintenance expenditures include expenditures 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.
• Transportation includes expenditures for vehicle operation, monitoring, and vehicle servicing and maintenance.
• Food services includes all expenditures associated with providing food to students and staff in a school or school district. The services include preparing and serving regular and incidental meals or snacks in connection with school activities, as well as the delivery of food to schools.
• Enterprise operations include expenditures for activities that are financed, at least in part, by user charges, similar to a private business. These include operations funded by sales of products or services, together with amounts for direct program support made by state education agencies for local school districts.

Capital outlay includes direct expenditures for construction of buildings, roads, and other improvements and for purchases of equipment, land, and existing structures. Includes amounts for additions, replacements, and major alterations to fixed works and structures; the initial installation or extension of service systems and other built-in equipment; and site improvement. The category also encompasses architectural and engineering services, including the development of blueprints.

Interest on debt includes expenditures for long-term debt service interest payments (i.e., those longer than one year).

Classifications of Revenue

In indicator 33, revenue is classified by source (federal, state, or 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 non-taxable 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 that operate at an intermediate level between local and state education agencies and possess independent fundraising capability—for example, county or municipal agencies. Intermediate revenue is included in local revenue totals. In indicator 33, local revenue is classified as either local property tax revenue or other local revenue.

The Variation in Expenditures per Student and the Theil Coefficient

indicator 35 uses the Theil coefficient to measure the variation in expenditures per pupil in regular public school elementary and secondary schools in the United States.

The Theil coefficient was developed by Henri Theil to measure the amount of information conveyed by a single message saying that an event has occurred. It was derived from the study of what Theil called the "information concept." If we know an event is likely (i.e., the probability of the event is close to 1.0), then the amount of information conveyed is low (i.e., it is no surprise that the event occurred). But if the probability is low (i.e., near zero), a message saying it occurred provides a significant amount of information. Intuitively, and later rigorously proven by Theil and others, the function of the amount of information conveyed is logarithmic (i.e., h(z) = ln(l/z), where h = information function and z = probability of event).

Having developed the information function as a measure of the amount of information conveyed, Theil then suggested that this information function could also be used as a measure of dispersion. For example, if instructional expenditures per pupil in the nation are relatively close together (i.e., low disparity), then relatively little information would be provided by random draws of the districts (i.e., the 1/z;—the probabilities—are high, but the value of the information function—the sum of the logarithms—is low). In contrast, if instructional expenditures per pupil are very dissimilar, then probabilities for drawing a given level of expenditures are lower, and the information gained from a random draw will be high. Thus, the information function can be a measure of dispersion, and a comparison of the values of Theil coefficients for groups within a set (i.e., districts within the nation) will indicate relative dispersion and any variations that may exist among them. The Theil coefficient was subsequently used to measure the trends in variation of a number of items, including expenditures per student (see NCES 2000-020 and Murray, Evans, and Schwab 1998).

The Theil coefficient has a convenient property when the individual units of observation (e.g., school districts) can be aggregated into subgroups (e.g., states): the Theil coefficient for the aggregation of all the individual units of observation can be decomposed into a measure of the variation within the subgroups and a measure of the variation between the subgroups. Hence, in the examination of the variation in instructional expenditures in the United States, the national variation can be decomposed into measures of between-state and within-state variation.

The between-state Theil coefficient, TB, equals

where Pk is the enrollment in state k, Xk{bar} is the student-weighted mean expenditure per student in state k, and X{bar} is the student-weighted mean expenditure per student for the country.

The within-state Theil coefficient, Tw, equals

where Tk is the Theil coefficient for state k.

Tk equals

where Pjk is the enrollment of district j in state k and Xjk is the mean expenditure per student of district j in state k.

The national Theil coefficient, T, is

T = TW + TB

Classifications of Expenditures for International Comparisons

indicator 38 presents international data on public and private expenditures for 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 that provide 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 institutions.

Public expenditures refer to the spending of public authorities at all levels. Total public expenditures used for the calculation in indicator 38 corresponds to the nonrepayable current and capital expenditures of all levels of the government directly related to education. Expenditures that are not directly related to education (e.g., culture, sports, youth activities, etc.) are, in principle, not included. Expenditures on education by other ministries or equivalent institutions (e.g., Health and Agriculture) are 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 are composed of 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 expenditures); 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 non-military, nonfinancial assets, as well as spending to finance net capital transfers.