Posts filed under ‘Financial data’
Why School Financial Statements Need an Overhaul
Wasting resources intended for our children or our retired public servants would seem to be reprehensible. Ironically, the government accounting systems that were created to protect these beneficiaries from fraudulent use of funds have become culprits. Regulatory accounting impedes analysis of the linkage between funding and mission. Further, its details are inadequate for building the robust models needed to evaluate the effectiveness of the delivery system.
Just a few of the problems with financial statements for public education…
- There is no direct link between the sources of funds and the students served.
- District accounting reflects compliance with regulations instead of education priorities. There is no standard for distribution of funds across content areas, cohorts of students, or programs (e.g., STEM).
- School-based accounting shows only a partial list of accounts. It does not capture full measure of resources invested in the educational effort or allow assessment of return on investment.
- School financial management guidelines are preoccupied with petty cash – vending machine and event cash receipts – not big picture funding of the school’s mission.
- Governmental Accounting Standards Board (GASB) guidelines for pensions do not require accurate assessment of plan solvency.
- Lack of transparency renders fiscal oversight dependent upon translation by insiders.
Incumbents in school district finance or building leadership are specially trained in the esoteric demands of the existing regulatory model. Many have never worked outside of the industry. The echo chamber cannot be expected to identify the problems and agitate for change. Indeed, inexperience, lack of knowledge, or comfort with the status quo may conspire to obstruct progress toward a fiscal model that informs decisions without loss of integrity to regulatory intent. Nevertheless, we need change now.
More Musings on School Finance
School finance is definitely not mission driven and procedures reflect policy and compliance. Further, an emphasis on Federal compliance guarantees that the details do not reflect the state and local exigencies, despite the fact that most of the money and all of the children are local.
The big headings in school finance include…
- General instruction
- Student services (special ed, guidance, etc.)
- Food
- Transportation
- Facilities
These topics fit the federal funding concerns. To think and manage locally, wouldn’t it be better if the last four items were subheadings to the bigger heading of educating children at each school?
Looking at the details, or lack thereof, in the federal requirements for school district reporting…
- Details are in the sideshows, not the main event. For example, there are as many mandatory line items for the Agriculture subcategory of Vocational Education as there are for Instruction in general.
- Mandated reporting is at the LEA (Local Education Authority) or district level.
What if we changed the details to recognize priorities within the mission of education and mandated that the reporting start at the school level and build up to the LEA aggregates?
Looking at how the business management functions within school districts are managed, there is a distinct shift toward, then away from, decentralization based on school district size.
- School districts seem most like to decentralize business functions when they hit the 10,000 to 19,999 student size
- Business functions are re-centralized for districts with 20,000 students or more.
Is there a creative shift that occurs in the moderate sized districts that could be exemplary for effectiveness within functions that is lost in larger districts? Or is it that a cumbersome collection of processes can be better underwritten centrally in the largest districts?
Anyway, just a few thoughts on a topic in development. Yeah, I can be boring…but I hate wasting the money dedicated to those who are least able to defend themselves.
Mortgaging the Future of Schools
What is a healthy debt load for a school district or other education authority to carry? Taking a first glance at the funds flow and balance sheets of a handful of school districts, there seems to be a wide variation in debt and debt servicing obligations. Investments in facilities and carrying unfunded pension benefits would account for most of these liabilities. So who is minding this store?
One of the key strategies for elementary and secondary education reform is decentralized funding of students. Directing dollars to mission just makes good financial sense. So does economic analysis of the production function that supports student learning. However, a less tangible benefit of this movement would be the improved transparency of financing decisions overall. In fact, to keep the primary mission of educating children intact, we need to get a handle on prior commitments of funds that will crowd out future investments in our children.
School districts across the nation have spent money on facilities or promised generous pensions to retirees in a manner that belies the shallow pockets of finance available to them. Cities and towns generally share control over their district school budgets and building funds with school committees, composed of elected or appointed local citizens. Often, a small number of committee members drive fiscal decisions, and they tend to be tightly aligned and like-minded incumbents. The depth of insight into the long-term financial impact of politically expedient decisions cannot be underestimated.
Decisions to mortgage the future of schools cannot go unchecked. Nor can they be swept into a blanket funding formula that rewards the highly leveraged at the expense of those who have been more prudent fiscally. We need to assess the solvency of all school systems and develop policies to serve the children equitably in the future. In the meantime, we need to go forward with attempts to develop weights for direct student funding that goes to current operating expenses, not to finance excess liabilities.
Student Funding and the Healthcare Precedent
It is in our children’s best interest to match school finance to the mission of providing them the best education services. Weighted-average student funding could drive this focus on education’s mission, and lessons from other industries have shown how it can be accomplished. The question remains…Is the education leadership ready to take up this challenge?
In 1983, structural change began in the healthcare industry, driven by a new Medicare reimbursement program. In an attempt to control costs and create a path to case management, the Health Care Finance Administration organized hundreds of procedures that involved hospitalizations into Diagnosis Related Groups (DRGs) and set global payments for hospital care. Administrators were overwhelmed as they rushed to tweak accounting and data systems that had been rendered obsolete overnight. At the same time, they looked to quality assurance programs and utilization review with new urgency. Previously, hospitals had been compensated for their costs, without regard to efficiency or outcomes. Industry leaders were extremely concerned about financial failure and deterioration in quality of care. So what does this have to do with education?
School finance has been driven by costs, not outcomes for students, and financial accounting has been tailored to fit that model. DRGs in healthcare could be considered analogous to weighted-average student funding in education. Conversion to DRGs for healthcare reimbursement created a lever for change that cut across the entire industry. Hospitals were challenged to create data systems that informed them about individual episodes of care, both in terms of costs and outcomes. A new mindset was needed for case management and, while the transition was difficult, the emergence of patient-focused treatment, within hospitals and beyond, had to happen.
Lessons from the conversion to DRGs could be useful for educators as they begin the journey to student-centered finance and education services. Despite student centrism in the classroom, education’s mission and financial incentives have not been in synch. Like the hospital model, administrative overhead and bureaucratization have generated a burden for school districts that detracts from direct student services. Further, case management from a revenue, expense, and outcome perspective only occurs in isolated situations.
Charter schools have shown the benefits of direct student funding and outcomes management. Is it time for education finance to begin the transition to this model for all schools?
Updating Decision Architecture for Student Success
The decision architecture for education was designed to support macro level management of Federal exigencies. Micro level decision support has been cobbled out haphazardly across the nation by educators without the strategic vision of economists, production planners, or profiteers. These are dirty words in education, but there are lessons from microeconomics that could guide the way we create decision architecture for local management of student outcomes. In the meantime, there is no need to give up accountabilities.
The debate over the role of Federal and State governments led me to an analysis that, for the first time, gave me insight into why we keep our books the way we do in education. It also explained why we don’t seem to fund student learning. Now, there will always be questions about how firm a hand government should have in local operations. However, the real solution lies in teaching the States how to micromanage the learning process, and I mean that in a good way. Perhaps, we can reframe our argument at the Federal level to address setting guidelines for interstate transferability of our systems and targeted outcomes during the transition period as we await the impact good microeconomic conditions.
The Federal role in public education could be suggested to include…
- Funding and financial standards
- Core curriculum standards for interstate portability
- National data standards
- Management of “market” imperfections
- Food and transportation for the poor
- Disability benefits
- Incubation of innovation
If data and reporting is any indicator, we already have much of the accounting and decision architecture in place for these functions at the macro level. A continuing dialogue is needed, of course, especially in the following areas…
- An extension of macro and micro financial standards to include those that are student-centered
- Core curriculum standards across States
- Refinement of data needs for student outcomes
In addition, today’s emerging global economy demands that the US take a stronger role in the education of its people to remain competitive. This policy shift seems like Federalism, but it may just be a temporary course of good medicine in a nation whose invisible hands are severely injured. Now for the micro level…
At a local level, States and their school districts address the following exigencies…
- Student populations and their learning needs and distributions
- Matching of resources to students
- Creating the milieu/incentives, for effective learning
- Managing the quality assurance process
Trouble is…we have been try to do this while accounting for budgets for
- general education,
- special education,
- food,
- transportation, and
- capital spending.
In a world where our mission should be maximizing student outcomes while minimizing costs, we have been managing the costs alone. And we have been linking the money to the Federal concerns, not the local students. Financial accounting standards made business performance transparent nearly a century ago. Absence of a profit motive does not eliminate the need for mission-driven budget development and measurement of performance. Further, any system that places undue control over resources in the hands of specialists who operate in a relative vacuum and, without whom, leaders cannot read or present results of operations is flawed. Inefficiencies, myopic vision, and episodes of corruption are guaranteed.
The Obama administration gets the fact that we need to ramp up our microeconomics for education. The Bush administration understood that the schools needed help recognizing their mission of educating every child.
Now can we save the best of both worlds by keeping accountability targets AND fixing the local decision architecture?
Decentralized Accounting in Schools – The Carpenter’s Dilemma
To paraphrase an old saying…If the Principal’s whole budget is a personnel budget…every problem looks like a person.
Asset-based management depends on knowing the true value of all of one’s inputs. Every school has bricks and mortar, people, fixtures, equipment, and supplies. It also depends on intangibles in the form of community partners, public and private. It is not the habit of a government service such as education to apply market principles to the analysis of its enterprise, its investments and its returns. However, we may well benefit from borrowing the tools of the market to know where we stand for strategic planning purposes.
In addition to taking an inventory of assets, each school would benefit from understanding all the fully allocated costs it incurs, not just the staffing costs. This would be a stepping stone to decentralized accounting, which would send more resources to the schools along with more discretion in spending and accountability for results. We have a genuine need to know where the money is spent. Teachers must demonstrate their effectiveness, but so must the many and varied offices and materials that comprise district overhead. Would any good manager intentionally pay for all of their goods and services at the current cost?
Student-Centered Accounting
Student-centered accounting holds the potential to shrink bureaucracies, redefine resource allocation for teaching and learning, and improve student outcomes. How we achieve this will depend on how we respond to key questions in each education sector.
Under the current education finance system, governments fund bureaucracies and special programs; educators teach students. Financial incentives for innovation come in the form of short-term grant allocations that generate paper and accounting exceptions. In the end, they depend on economic factors and politics more so than their own merit. Over time, even the most enthusiastic educators experience learned helplessness where they once dreamed of possibilities for their students and designed programs to support them. To resolve the problem, we must sort out the financial data issues and retrain education managers to think like entrepreneurs.
How the money is counted impedes a district’s ability to intend its students’ outcomes. Each year, school districts receive general purpose funds and special purpose funds. They distribute general purpose funds at their discretion, while the special purpose funds target specific populations or programs and must be spent according to preset rules. Accounting systems have been set up for regulatory reporting that track expenditures in this way. Unfortunately, this approach makes it difficult to make a direct link between the overall money spent and the students who benefit from the resources. Outcomes of the education process get lost to retrospective analysis and remedial special programs.
In general, school leaders have tended to manage their share of general funds; district leaders have managed special programs. Ironically, while grant money targets student populations, supervision of each new program has created an overhead cost at the district level. The legacy of a burgeoning bureaucracy has outlived many education initiatives. In addition, centralized operations have further obscured the vision of money for outcomes. Never mind managerial accountability. It is totally diffused.
Innovative programs supported by grants do not have a systematic path to sustainability. Education programs have unnatural life cycles driven by the vagaries of government funding. In good times, particular programs that merit consideration receive generous grant funding. During economic downturns, spending is cut from all but the most politically viable programs.
Who says you have to end good programs that have lost their political backing? Once the availability of funding is threatened, program proponents publicly rally around the cause even as they privately begin to shut down. If an innovative program is to be truly effective, it must have a means to achieve more permanent funding on its own merit.
Student outcomes can be more predictable if districts knowingly maximize their investment directly in their students. Further, that investment must be stable enough to allow for orderly management of change.
Education finance is a complex issue. I have purposely simplified it to illustrate major inconsistencies between financial incentives and mission. Serious inquiry will be needed to realign the two. Some questions to ask as we explore possible solutions to the problem include…
- Can systems be developed that meet the needs of regulatory oversight while keeping student-centered budget data intact for districts and schools?
- Can we smooth education finance by accumulating trust funds during good times to use during lean years?
- Where does discretion for funding of ongoing innovation belong? Would districts benefit from more discretion in their use of special funds?
- How can we create an orderly transition to sustained funding for successful new programs that precedes the sunset clause on their grants?
- Diffusion of best practices means they become an integral part of business as usual…does that always mean a compensatory drop of outmoded practices?
