Feature Pages 20-25
Quantifying the Successes of
An economist measures the significant fiscal impact of a school district and its graduates on its metropolitan region
BY MICHAEL L. WALDEN
We live in an era when everybody has to prove themselves. Maybe blame it on globalization, a frugal consumer or a tight-fisted taxpayer, but every public body and government office is increasingly being pushed to show what it does justifies its costs.
Of course, such justification is not new to the business world. Business success is measured by the size of the profits, which is just the difference between a business’ revenues (what it receives from sales) and its costs. If a business doesn’t make a profit, it won’t last long — or if it does endure, it will be under new management. Private businesses rise and fall as profits and losses change where resources and talent go.
The attitude of proving yourself has been coming speedily to the public sector. Politicians frequently run on a platform of “bringing business principles to government,” implying that government and government agencies can be run like proprietary companies.
But can they? Government doesn’t exist to make a profit. Indeed, a strong argument can be made that government exists to perform those functions that private companies can’t do and make a profit.
So does this mean government agencies should throw up their hands and say, “Our success and performance can’t be measured”? Of course not. While profits may not be an appropriate metric for government, other meas-ures can be developed and used. Indeed, for decades, performance-based budgeting has been applied to evaluate the degree to which government programs and agencies are meeting their stated goals in a cost-efficient manner.
Applied to Schools
The same thinking is applied to public education. In today’s times of tight budgets and higher expectations, public schools are being asked to justify their budgets and their perform-ance like never before. While not necessarily calling for a profit calculation, citizens, parents, elected officials and some in the news media want reference points for judging the value of the spending in public schools.
Several standards have been developed, including graduation rate, dropout rate, scores on standardized tests and admissions to higher educational institutions. However, these measures are difficult to translate into dollar terms. While not every outcome can be “monetized,” if dollar values can be developed and applied, they are easy for stakeholders to comprehend and easy to compare to other factors, such as costs.
For these reasons, it is important for public schools to develop approximate monetary values of their outcomes. Previous research indicates these outcomes are centered in three areas: (1) the economic value of degrees awarded by public schools; (2) the reduction in future public costs associated with graduates of public schools; and (3) the economic impact on local wealth of successful public schools.
Economic value of degrees awarded by public schools. The idea here is simple. Perhaps like never before in history, our economy now values education. The evidence clearly shows the workplace values — and therefore pays — someone with a master’s degree more than someone with a bachelor’s degree, someone with a bachelor’s degree more than someone with a high school degree and — importantly for public schools — someone with a high school degree more than a high school dropout.
Therefore, we can expect a person graduating from high school to earn more than someone who did not graduate. But the value of the high school degree is more than the one-year difference in earnings. The value of the high school degree is the difference in the lifetime earnings of a high school graduate and nongraduate.
Yet there’s more. Research also shows that high school graduates who performed better in high school (for example, better scores on standardized tests or a high GPA) have better academic performance in college and a greater likelihood of attaining a college degree. So public schools that improve the academic perform-ance of their graduates can claim some of the additional lifetime earnings of those graduates who go on to receive college degrees.
Reduction in future public costs. Another positive outcome of public schools is the impact of their graduates on future public costs, particularly public costs for crime control and health care. Again, the evidence is clear. Public costs for crime control and health care are lower for high school graduates than for high school dropouts.
Two possible reasons exist. First, the education students acquire in high school may teach them how to better care for themselves and lead to safe and healthy lifestyles. Second, because high school graduates have higher lifetime earnings than high school dropouts, graduates have more motivation to stay healthy and safe in order to achieve those earnings.
Economic impact on local wealth. Public schools can have an impact on local wealth, primarily property wealth, in two ways.
First, as local schools generate graduates who remain in the local economy, those graduates will spend more money due to their higher earnings. This additional spending creates more local economic activity, which, in turn, makes local property more valuable. So there is a positive relationship between the higher spending from high school graduates (as compared to high school dropouts) and local property values. Economists call this relationship “capitalization,” meaning the additional spending is capitalized into local property values.
The second effect comes from school quality as indicated by various performance measures. A substantial body of literature has found that home buyers prefer to locate in towns and cities with better-quality schools, and they are willing to pay a higher price to live in such locations. This means the value of better--performing schools will also be capitalized into local property values.
Virginia Beach’s Case
In 2011, the Virginia Beach City Public School system, under the leadership of Superintendent James Merrill, decided to directly confront the issue of valuing the school system’s work. He commissioned me, a professional economist, to undertake a study of the economic impact of the Virginia Beach City Schools on the metropolitan Virginia Beach economy.
The Virginia Beach City Public School system is the third largest public school system in Virginia and among the 50 largest systems in the country. It serves approximately 70,000 students in 85 schools. It is located in the vibrant and growing Virginia Beach-Norfolk-Newport News metropolitan area, which has a population of more than 1.6 million.
In my over-three-decade career, I had conducted numerous impact studies for private ventures and public institutions. Most of my work with public institutions had been with universities and colleges or state government. I had never done an economic impact study for a public school district.
In fact, in my literature review for the Virginia Beach study, I found few comprehensive economic studies for public schools along the lines of the outcomes discussed above. Most of the work focused on the impact of inputs rather than outputs (see Measuring the Impact of Inputs).
The Virginia Beach City Public Schools was enthusiastic about the study. The data and information I needed to complete the work were provided promptly, and the analysis was completed in time for the school district’s retreat in July 2011.
The first impact addressed by our study — the additional earnings of Virginia Beach’s high school graduates — was calculated in the following way. Using graduates from the last five graduating classes, a work lifetime of 47 years (age 18 to 65) was assumed. The most recent national data showed an annual earnings increment of $9,000 between a high school graduate and high school dropout.
This annual salary bump, owing to the high school degree, was converted to a single value today for each graduating class using a technique called present value. The concept of present value accounts for the lower value of future dollars due to continuing inflation. An appropriate long-term interest rate was used to discount, or reduce, the levels of future dollars.
The result was that each of Virginia Beach’s recent graduating classes would be expected to realize a total increment to their lifetime income of between $800 and $900 million, depending on the number of graduates. Also, we estimated the recent improved performance (in GPA) of Virginia Beach graduates added another $20 million in value due to the greater likelihood of those graduates entering and graduating from college.
Of course, it is impossible to apportion these economic benefits between the training provided by the school district and the innate skills and talents of the students. Researchers have struggled with this issue for decades without finding a suitable solution.
The expected savings in public crime control and health care costs were also substantial for Virginia Beach graduates. Applying monetary values found in other studies, each of the recent graduating classes would be expected to save between $260 and $280 million (in discounted dollars) in these costs over their lifetime.
The two impacts of Virginia Beach graduates on the local real estate market also were calculated in our study.
The additional spending associated with each graduating class was calibrated to add $60 million to regional property values. More important, however, was the estimated impact of the improved performance of Virginia Beach students on the attractiveness of Virginia Beach property to buyers.
By all measures (SAT, ACT and GPA scores), the school district’s students have increased their academic performance in recent years. Using a range of empirically derived linkages between public school student performance and local property values, it was calculated that the higher academic performance meant property values in the city of Virginia Beach were between $2.8 billion and $9.5 billion higher than they would have been without the student gains.
Benefits and Costs
In summary, the major findings I derived for the Virginia Beach City Public Schools were these. For an annual budget of almost $700 million, each year’s graduates earn between $800 and $900 million more over their lifetime (expressed in today’s dollars), they reduce future crime control and public health care costs between $260 and $280 million over their lifetime (again expressed in today’s dollars), and they add $60 million to local property values due to greater spending.
Moreover, the recent enhanced performance in student academic results is estimated to have added between $2.8 and $9.5 billion to local property values as a result of making Virginia Beach a more desirable location for home buyers.
These are numbers the Virginia Beach City Public Schools can tout. (See Measuring the Impact of Inputs) They are numbers citizens, parents and public decision makers can understand. Public schools are being asked to defend their perform-ance and expenditures. They can, and they should!
Michael Walden, an economist, is the William Neal Reynolds Distinguished Professor at North Carolina State University in Raleigh, N.C., and the author of North Carolina in the Connected Age. E-mail: email@example.com