School & District Management

Study Tallies a District’s Return on Investment

By Christina A. Samuels — December 05, 2011 6 min read
Virginia Beach Superintendent James G. Merrill checks on construction for a new school. A study says such investments pay off.

How much is a good school system worth?

The Virginia Beach, Va., school district believes its own system is worth about $1.53 for every $1 spent from the 70,000-student district’s operating fund.

Not content with making an argument that good schools have an economic value that is unmeasurable, the district asked a university economist to calculate just what it brings both to the city and the Hampton Roads region in southeastern Virginia.

The report generated for the district, the third-largest in the state, is more than an academic exercise for James G. Merrill, the Virginia Beach superintendent. The district is one of the few in the state that receive money from local taxpayers based on a revenue-sharing formula, which is currently under fire. As the city and the school district head into budget season, Mr. Merrill said he wanted to make an argument for school funding based on business principles.

“I’m growing weary of that public sentiment that we’re a drainer of public resources,” Mr. Merrill said. “Yes, we use public resources, but look at what we get in return. You really need to couch funding for schools in terms of investment and return.”

Virginia Beach’s move is part of a trend to frame educational impacts in terms of their projected economic payoff. For example, in 2009, the London-based consulting firm McKinsey & Co. attempted to calculate the financial impact of achievement gaps. Its study estimated that the nation’s gross domestic product would have been $1.3 trillion to $2.3 trillion higher in 2008 if the United States had closed achievement gaps between black and Latino students and their white counterparts, gaps between students based on socioeconomic status, and gaps between lower-performing and higher-performing states.

Returns on Teachers

More recently, Eric A. Hanushek, a senior fellow at Stanford University’s Hoover Institution and a consultant on the McKinsey study, created a report to gauge the financial value of good teachers. By his estimates, a teacher in the top 15 percent in terms of effectiveness can, in one year, add more than $20,000 to a student’s lifetime earnings. “Student achievement, which provides a direct measure of later quality of the labor force, is strongly related to economic growth. Improving achievement leads to a better-prepared workforce and to greater growth, and this growth translates into higher levels of national income,” Mr. Hanushek wrote last summer in the magazine Education Next.

The Virginia Beach school district has a revenue-sharing agreement with the city of Virginia Beach that provides it with 51.3 percent of seven revenue streams, which include taxes on real estate, general sales, personal property, and cable franchises. Fewer than 10 of the state’s 133 districts have such revenue-sharing agreements. For the school system, that equaled more than $363 million for this fiscal year.

Plans sit for the new Kellam High School.

Some city council members argue that the city should reduce the school district’s share in the formula, or ditch it entirely. That percentage has been slowly shrinking since the revenue-sharing agreement was put in place in 1997, when it was 53.1 percent.

School districts have been talking about their economic value for some time, said Reginald Felton, the assistant executive director for congressional relations for the National School Boards Association, based in Alexandria, Va.

“School districts in many parts of the country are the major employers,” Mr. Felton said. In addition, “we know that school districts with high reputations for quality educational services draw people who are willing to pay more for property.”

What is more unusual is for districts to offer economic-impact studies. Michael L. Walden, a professor of agricultural and resource economics at North Carolina State University in Raleigh, who wrote the report for Virginia Beach and has done similar reports for colleges and university systems, said he did not find any reports of similar depth.

Methodology

Mr. Walden divided Virginia Beach’s worth into four categories: the spending impact on the regional economy; the economic value of high school and college degrees received; future savings in public costs; and the economic impact on local wealth.

The report notes that for the past five fiscal years, the district’s operating budget has been around $680 million. Of that, about 85 percent is spent on salaries and benefits, which are then partially recirculated in the region, Mr. Walden said. A certain percentage is spent outside the region, and on other costs such as taxes.

Mr. Walden calculated that every dollar spent by the school system and retained in the region results in total regional spending of $1.53.

For capital spending, the report estimates that every dollar the district spends results in $1.55 in total regional spending. Every $1 million of capital spending, such as for school modernization or construction, is associated with about 13 jobs, by Mr. Walden’s calculations.

The report goes on to note that Virginia Beach graduates will receive a total of more than $800 million more in lifetime income than students who drop out of high school. The on-time graduation rate for the 2010-11 school year was 86.7 percent, virtually the same as the state’s rate of 86.6 percent.

After studying five years of graduating classes in the district, the report also says that the school system can take credit for some benefits—about $22 million over students’ lifetimes—from graduates that go on complete college.

High school graduates also are more healthy and law-abiding than people who drop out of high school, which has a worth of about $260 million to $280 million of savings in public crime and health-care expenditures.

Mr. Merrill says that more school districts should consider creating such reports. But Neal McCluskey, an education policy analyst with the Cato Institute, in Washington, has studied economic-impact analyses for colleges and universities and found that the Virginia Beach report shares a common, major flaw with them.

Opportunity Costs

“The first thing you have to say is, what are the opportunity costs? What could be done with that money if it stayed with taxpayers? There’s none of that in here,” Mr. McCluskey said. “That is something that is forgotten whenever we talk about education and its cost at any level.”

There’s also no attempt in the report to gauge if there are less expensive ways of providing the same benefits to the region, Mr. McCluskey said. For example, private or parochial schools often spend less per student and achieve results comparable to or better than those of some public schools, he said.

Mr. Walden agreed that the question of opportunity costs is appropriate, but would require developing similar economic-impact studies for other areas where taxpayer money might go—well beyond the scope of this report.

It’s unclear what effect the report will have on politics in Virginia Beach. Last summer, the results were presented to the school board and delivered to the city council. Louis Jones, the city’s vice mayor and a critic of the funding formula, said he has not read it.

“It’s good public relations for the schools to say we have a positive economic impact on the community—I don’t think anybody doubts that,” Mr. Jones said. “There’s still the issue that there’s a limited amount of money that is available,” he said.

A version of this article appeared in the December 07, 2011 edition of Education Week as Economist Calculates the Taxpayer Return on District

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