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Scott Jay Lewis
Texas Education Agency

About the Author

Scott Lewis graduated from the LBJ School of Public Affairs with a M.A. Degree in Public Affairs in 1991. Mr. Lewis currently works as a Planner IV in the Department of School Finance and Fiscal Analysis at the Texas Education Agency.

Administrative Expenditure Limits
For Texas Public School Districts

Scott Jay Lewis
Texas Education Agency

Introduction

As resistance to local and state tax increases sweeps the nation, policy makers have sought new revenues for programs and proof that tax dollars are being spent efficiently. The Texas Legislature enacted legislation in 1993 intended to achieve each of these goals. By requiring school districts to limit their administrative expenditures to a percentage of their instructional expenditures, the legislature sought to limit administrative spending. This limit, in turn, provided a mechanism to increase instructional expenditures within existing educational revenues.

Texas' 1993 school finance statute, referred to as Senate Bill 7 (SB 7), requires the establishment of administrative expenditure standards for school districts, the monitoring of administrative expenditures by the Texas Education Agency (TEA), and the recovery of funds from districts that do not meet these standards. This presentation reviews the implementation of the administrative expenditure provisions of SB 7, the use of the state's educational and financial data in that implementation, and the policy implications and findings from application of this statute to 1992-1993 school district expenditures.

Overview of the Administrative Expenditure Limit Plan

Administrative Expenditure Calendar

The statute to limit administrative expenditures in Texas can be found in Section 16.205 of the Texas Education Code. Table 1 provides the implementation calendar created in the statute.

Table 1.--Implementation timeline for administrative expenditure limits

--------------------------------------------------------------------------------------------------------------------------
        First Cycle          		     Second Cycle                            Third Cycle
--------------------------------------------------------------------------------------------------------------------------
Year 1  Prior year actual expenditures
        examined; Notification sent to
        districts exceeding their standard.
Year 2  Notified districts plan budgets      Prior year actual expenditures
        accordingly and expend funds         examined; Notification sent to
                                             districts exceeding their standard.
Year 3  Prior year actual expenditures       Notified districts plan budgets         Prior year actual expenditures
        examined.  If notified districts     accordingly and expend funds.           examined; Notification sent to
        exceed standard in prior year,                                               districts exceeding their standard.
        state recovers excess.
Year 4                                       Prior year actual expenditures          Notified districts plan budgets
                                             examined.  If notified districts        accordingly and expend funds.
                                             exceed standard in prior year,
                                             state recovers excess.
Year 5                                                                               Prior year actual expenditures
                                                                                     examined.  If notified districts
                                                                                     exceed standard in prior year,
                                                                                     state recovers excess.
------------------------------------------------------------------------------------------------------------------------

SOURCE: Texas Education Agency.


The implementation calendar runs in overlapping three year cycles. In the initial year of each cycle, prior year expenditures are analyzed by computing a ratio of specific administrative and instructional expenditures. This ratio is compared to a standard established by the commissioner of education. Districts exceeding their standard are placed on a notified status. These districts are required to submit a plan by which their expenditures will meet their standard in the subsequent school year. This gives districts time to design and adopt a budget knowing the standard to which they will be held accountable. Only notified districts are examined in the final two years of the cycle.

In the cycle's third year, the TEA examines each notified district's prior year expenditures. If these expenditures generate a ratio below the standard, the district completes its obligation in the first cycle. If the district's ratio is above the standard, the state recovers the amount by which the district would have to reduce its administrative expenditures to meet the standard.

A new three year cycle begins with every school year. Because of this, a district that is notified in the first year of one cycle could be below its standard in the next cycle's first year, or vice versa. The decision to re-evaluate the standards is up to the commissioner of education.

Evaluation Groups

Recognizing that expenditure patterns vary with enrollment differences, the statute requires the commissioner of education to establish standards for five categories of districts defined by average daily attendance (ADA). The commissioner of education may re-evaluate the standards as necessary. To promote stability during the initial phases of implementation, the commissioner chose to maintain the same set of standards for the first two implementation cycles.

The statute also allows the commissioner to make allowances for districts that receive a funding adjustment due to their scarcity or that educate a large proportion of students with special needs. The commissioner established a sixth category for districts that contain between 40 and 130 students and are at least 30 miles or more from the nearest high school district.

Early staff proposals anticipated dividing each category of districts into quartiles based on percentage of special needs students. Districts would have received an adjustment based on their quartile ranking. However, analysis of historical data showed that the standards ultimately adopted did not affect districts as a function of special needs students. This finding, plus the fact that a district could not directly calculate its `special needs' rank, led the commissioner to drop an explicit special needs population adjustment.

Setting Standards

The statute also prescribed the fund types, functions, and objects of expenditure that would be used for calculating the administrative expenditure ratio. Only non-federal funds were used in evaluating both instructional and administrative expenditures. A policy decision was made to exclude state funded expenditure arrangements for districts because including these expenditures tended to hurt districts that acted as cooperatives' fiscal agents. Although involving relatively little revenue, this decision created an additional incentive for districts to develop cooperative arrangements.

The statue also specifically limited administrative expenditures to accounting functions 21 (Instructional Administration) and 41 (General Administration). Instructional costs were similarly limited to accounting functions 11 (Instruction), 22 (Instructional Resources and Media Services), 25 (Curriculum and Instructional Staff Development), and 31 (Guidance and Counseling Services).

Finally, the administrative expenditure ratio was calculated using only operating expenditures - payroll, contracted services, supplies and materials, and other operating expenses.

These provisions were summarized in a worksheet provided to school districts for calculating the administrative expenditure ratio (Table 2).

Table 2.--Computation of District Administrative Expenditure Ratio for the 1992-93 School Year

---------------------------------------------------------------------------------------------------
Expenditures from P.Actual 93 (PEIMS) in Funds 11 (Local Maintenance) and 14 (Technology)
                                Administrative Expenditures
                                                Objects
                                -------------------------------------------------
                                6100            6200       6300      6400
                                -------------------------------------------------
        Functions               Payroll Costs   Purchase   Supplies  Other
                                                Contracted and       Operating
                                                Services   Material  Expenses
21 - Instructional Administration
41 - General Administration
Total of Administrative Expenditures            Total = A
                                Instructional Expenditures
                                                Objects
                                ------------------------------------------------
                                6100            6200       6300       6400
                                ------------------------------------------------
        Functions               Payroll Costs   Purchase   Supplies   Other
                                                Contracted and        Operating
                                                Services   Material   Expenses
11 - Instruction
22 - Instructional Resources
25 - Curriculum and Development
31 - Guidance and Counseling
Total of Instructional Expenditures             Total = B
                 1992-93 Administrative Cost Ratio (A/B) = Ratio
---------------------------------------------------------------------------------------------------

SOURCE: Texas Education Agency.


School District Finance Data in Texas

The TEA has two independent systems for collecting financial information from school districts. The major educational data collection effort is called PEIMS (the Public Education Information Management System). PEIMS is designed to provide "useful, accurate, and timely information on student demographics and academic performance, personnel, and school district finances." (16.007 (c), Texas Education Code). Through PEIMS, the TEA receives budget and actual financial information from school districts on an annual basis.

SB 7 requires that PEIMS expenditure data be used for the implementation of the administrative expenditures provision. Actual financial data is available for analysis through PEIMS for a given school year around the start of the next calendar year. For example, the first implementation of the statute considered 1992-93 school year actual expenditures in January 1994. This lag is part of the reason for the administrative expenditure statute's three year cycle.

The second type of financial data that districts submit is their annual audited financial statement. Because of timing, expenditure data submitted under PEIMS is compiled prior to certification by an independent auditor. It often takes districts several months to submit a corrected audit to the TEA. In the event, audit data was used to check the administrative expenditure ratio results derived from PEIMS data. The audit information was valuable in finding districts with inaccuracies in their PEIMS submissions.

Findings and Policy Implications

Findings

The statewide average instructional to administrative expenditure ratio has declined each year since 1988 and is shown graphically in the chart. It is anticipated that the ratio will continue to fall as the number of students in Texas increases through the end of the decade.

Table 3 summarizes the first year's implementation of the administrative cost provisions of SB 7. It includes a breakdown by the six district groups, their standard ratio, the number of districts in the group, the number and percent of districts in excess, and the amount of excess dollars.

Table 3.--Application of Administrative Expenditure Standards to 1992-93 Actual Expenditures

---------------------------------------------------------------------------------------------------
                                Greater  5,000   1,000     500     Less
                                 than     to      to       to      than
ADA Group                       10,000   9,999   4,999     999     500   Sparse  TOTALS
---------------------------------------------------------------------------------------------------
Standard                        0.1105   0.125   0.1401   0.1561  0.2654  0.3614
Districts in Group                  68      49      329      205     301      94   1,048
Districts Exceeding                  5      11       52       22      20      11     121
    Standard
    Percent of District              7      22       16        7      12      12      12
    Exceeding Standard
    Exceedind Administrative    $5,955  $2,659   $4,600     $966    $733    $157 $15,074
    (in thousands)
    Dollars given to
    Instructional Expenditures
---------------------------------------------------------------------------------------------------

SOURCE: Texas Education Agency.


In 1992-1993, 12 percent of all Texas districts exceeded their expenditure standard. These districts had a combined $15 million more in administrative expenditures than their standards allowed for given their level of instructional expenditures. The five largest districts of the 121 accounted for almost $6 million of the excess, while the smallest 57 percent of the districts accounted for only 12 percent of the excess.

Districts between 5,000 and 9,999 ADA were the most likely to be above their standard. This category contains the fewest and probably the most heterogeneous collection of districts. Included in this category are large suburban districts and stable non-metropolitan districts.

Not one of the state's 27 largest districts exceeded its administrative expenditure standard. This is probably due to the economies of scale enjoyed by large districts.

While not simply related to district wealth, the probability that a district exceeds its ratio was related to district tax effort. As tax rates increase so does the probability that a district will exceed its administrative expenditure standard.

Figure1.--Ratio of Administrative to Instructional Costs

figure 1

SOURCE: Texas Education Agency.


Limiting Administrative Expenditures with a Ratio Approach

The basis for Texas' administrative expenditure limits is a ratio between administrative and instructional expenditures. Such an approach has advantages and disadvantages. If the intent is to reduce total expenditures, a ratio approach is not a good option. During the development of the administrative expenditure proposal, policy makers hoped to save the state hundreds of millions of dollars by trimming supposed administrative fat from school district budgets. However, evaluation of the 1992-1993 expenditures revealed only $15 million of administrative expenditures beyond what standards allowed given instructional expenditures of $7.9 billion.

Since the ratio approach only compares instructional to administrative spending, many Texas districts will simply and legally alter accounting practices to reduce their administrative expenditure ratios. For example, a small district may employ a superintendent who functions as a transportation coordinator and classroom teacher. Instead of charging the superintendent's salary entirely to general administration, it could be proportionally charged to transportation and instructional functions. This change would lower the districts administrative expenditure ratio.

The ratio approach has the advantage of being a good planning tool for districts. It can easily be incorporated into all phases of a district's budget process. Expenditures can also easily be tracked to determine year-to-date compliance with the standard.

The ratio can be used as a comparison between districts. As such, it could lead to finding more efficient ways of operating school districts.

Problems for Small Districts

Districts with low enrollments can have particular problems meeting their standard. First, such districts may not have administrative staff members with expertise in school district accounting principles to take full advantage of the opportunities mentioned earlier. Prior to this legislation, districts did not have a financial incentive to charge proportionally the salary of employees that perform more than one function to each function. This statute has caused many districts to reconsider such practices.
Small districts also spend a higher proportion of their administrative budgets on obligatory expenditures. Examples of such expenditures include an independent financial audit of the district's books and tax collection and property appraisal fees levied by the district's county appraisal district. It is possible for districts that educate only a few students to find their allowable administrative expenditures below the amount they expend on non-discretionary items.

Among small districts, those that are gaining students have an easier time meeting their standard than do those that are depopulating. As the number of students increases, a greater percentage of new spending occurs in instruction. However, when student enrollment drops, districts have a harder time reducing administrative expenditures, many of which act as if fixed. Simply stated, student population changes affect instructional expenditures (i.e., teacher salaries) more directly than administrative expenditures. Because of this, a depopulating district's administrative expenditure ratio becomes less favorable as instructional expenditures fall while administrational expenditures remain stable.

Excess Expenditures

Under the provisions of SB 7, a district is notified that is has exceeded its standard whether that excess is $100 or $100 million. The amount of that excess does not predict whether the notified district will again exceed its standard or, if it does, the amount by which it will exceed that standard. However, this initial excess amount becomes the focus of the legislature, media, and subsequently the taxpayers. Policy makers and the public should be educated to the fact that excess money is not immediately available to districts for new programs or recovery by the state.

Conclusions

The implementation of a new statute limiting administrative expenditures in Texas school districts has had some interesting effects. Regardless of the amount of funds recovered by the state, the new law has caused many districts to look at administrative efficiencies while maximizing expenditures for instruction. Specifically, school districts now have explicit standards to follow in planning budgets. As the implementation of this statute proceeds, the yield from this effort to develop more efficient district administration will become more obvious.



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