Leadership in an Era of Expanding or Diminishing Resources: Remembering the Statistical Phenomenon of Regression to the Mean

By Shane Higuera, Ed.D.

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Economic booms never last, nor do economic busts; in the end, they always regress toward the mean. What a school district does during either period affects what it may do during the other. By applying a basic understanding of cycles, that conditions generally regress to their mean, new superintendents can implement effective leadership strategies regardless of where the economy is within the business cycle.

First, a warning: Some of the ideas presented here may challenge the status quo. Pursuing controversial strategies is always risky and even more so for a new superintendent, so some readers may wish to consider the merit of these ideas carefully before implementing them as a basis for practice. Other readers will immediately recognize the merit of these ideas and govern themselves accordingly. Either way, the school business administrator should be on board before superintendents take any action.

One Hundred-Eighty Seconds of Economics

Effective district leaders recognize the effects economic cycles can have on school districts. The emphasis here is on the word can. Contrary to the common experience of most educators, economic cycles do not have required or mandated effects on school districts. There are no if this then that laws of consequence. Though readers, through years of observation, might have developed strongly held opinions about the seemingly automatic cause and effect nature of economic cycles on school districts, this article suggests an alternative. School district resources can be managed to assure the sustainability of educational programs.

One of the more fundamental concepts in economics, as in life, is the movement toward balance or equilibrium. This equilibrium is constantly evolving as the economy is in constant motion. Thus, equilibrium is rarely achieved; for the most part, it remains a dynamic target or goal. The most fundamental example of this movement toward equilibrium is the ever-changing balance (or imbalance) between supply and demand. The two are rarely in perfect balance; one or the other is usually larger or smaller. As the larger of the two elements decreases to meet the smaller and the smaller increases to meet the larger, they inevitably pass each other and switch positions. The two rarely balance perfectly. Of course, many factors affect the balance between supply and demand, which is why balance is so hard to achieve.

Superintendents should understand the complex movement toward balance or equilibrium as the relationship of the overall economy’s performance to some standard or baseline. In other words, is the overall economy better or worse than normal and in which direction is it moving? Think of normal as the mean, which may be expressed as a trend, and understand that the performance of the economy is often greater or less than the mean. The extremes are often referred to as boom and bust, with boom referring to periods when economic performance is much higher than the mean and bust referring to periods when economic performance is much lower.

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In general, superintendents will be most interested in the state of the economy as reflected by real personal income and employment. These two aspects fuel taxpayer capacity and willingness to fund public education. Personal income and employment combine to create our sense of disposable wealth, which strongly influences our willingness to spend on personal and public consumption and investment.

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Figures 1 and 2 depict personal income. The figures were created using the most recent official data from the U.S. Department of Labor, the U.S. Department of Commerce, and the U.S. Census. Figure 3 depicts unemployment. It was created using official data from the U.S. Department of Labor. A trend line was added to each line graph in Figures 1, 2 and 3. This simple linear regression trend line is the mean toward which each of the line graphs regress.

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Keep in mind that these data, although interesting, have their flaws. For example, the government offices that collect and publish them take too long to do so. Consequently, they are often too outdated to use as a basis for decision making. In addition, the data are collected, analyzed, and published by the U.S. government, which has a vested interest in their levels. The methodologies used for collecting and analyzing these data have not remained consistent and are sufficiently complex to raise doubt as to what these data are really measuring. Finally, the scope of these data might be too broad to be useful; superintendents might be more interested in data for their own state, region, or locality.

Although it is possible to address some of the problems with U. S. government data, superintendents might be better served by collecting their own anecdotal data through regular discourse with their community members and colleagues. Simply asking their community members, “How’s business?” is likely to garner more useful information than studying untimely, overly broad, questionable economic data published by government sources. When speaking with community members, superintendents should remember to ask follow-up questions, if necessary, to gain a sense of where that individual’s personal economy lies relative to the mean. Superintendents might ask, “Are things better than average, average, or worse than average?” and “Are things getting better or worse?”

Superintendents, armed with this information, can then make informed strategic decisions regarding the development and management of their school district budgets. It does not matter where within the economic cycle superintendents find themselves. It only matters that superintendents have a good idea about their current position relative to the mean, or trend, and a good idea about the direction in which the economic cycle is moving.

Now we get to the leadership question. First, we will deal with the easy part – developing a school district finance philosophy – and then with the more difficult task of implementing that philosophy.

Developing the School District Finance Philosophy

Reduced to its essence, the mission of every school district in the nation may be expressed as follows:

The mission of the Sample School District, in partnership with its community, is to provide a cost-effective educational opportunity to all resident school-age persons that satisfies all federal, state, and local requirements and that is aligned with community values.

The community values may then be expressed in a series of belief statements and the school district’s culture may be expressed in a series of operational parameter statements. It is these belief statements and operational parameter statements that superintendents must understand and influence.

Among the many beliefs included in a community’s value system is likely to be that children should be provided with the best educational opportunity the community is willing to afford. Further, the quality of the educational opportunity should be essentially equal for all students and should not rise and fall from year to year with the vagaries of short-term economic cycles.

To comply with this value, a school district must be able to sustain its programs, undiminished, in good times and in bad. To do so, the school district must establish its programs so they may be adequately funded at or below the mean, or trend, of the local economy. The school district must exercise discipline to resist expanding its programs during good times so it will not have to suffer the emotional, organizational, and instructional pain involved with reducing programs during bad times. The sustainability of programs is a school district goal and operating within its financial means is the key to achieving that goal.

If a school district is not legally authorized to save funds from one year to another through mechanisms such as reserves, unreserved fund balance, and higher structural budget surpluses, the school district’s sustainable financial means is the level of funding available during bad times. If, however, a school district may save funds from year to year, its sustainable financial means may be higher than the funding available during bad times; it may approach the average funding available during all times: the mean or trend. Thus, the school district should include in its parameter statements a statement about its use of legal savings mechanisms. The school district’s financial philosophy might then be stated as follows:

To assure the long-term sustainability of our programs, we will develop annual budgets that add to the legal savings accounts during good economic times and conversely, we will develop annual budgets that reduce the legal savings accounts during bad economic times.

Now that the easier task is complete, new superintendents may move on to the more difficult task of implementing the new philosophy.

Implementing the School District Finance Philosophy

As noted above, making the changes necessary to implement the new philosophy is not easy. For most people, change is difficult and they are likely to resist any attempt to force it on them. Lasting, effective change usually requires the consent of those who will be affected: the stakeholders. In this case, the stakeholders might include members of the general community, parents, students, and staff members. Before most stakeholders will consent to change, they must believe that

  • Things are bad and are unlikely to get better on their own.
  • Change will make things significantly better and the process of change will not be too difficult or painful for them personally.
  • The person or group that will determine what change is made and who will lead the process of change has their best interest at heart and will not betray them.
  • After the change is made, there will be no need for additional change in the near term.
  • They will be better off when all is said and done and the final calculations are made.

To implement the new finance philosophy, the superintendent must understand how to lead change.

Although it would be easier to implement the school district finance philosophy of long-term sustainability of educational programs achieved through operating within its financial means when economic times are bad, it may be accomplished at any time.

During good economic times, the superintendent should keep the annual budget increases higher than in bad economic times, as is normally the case. However, rather than directing the extra funding to additional or expanded programs, the additional funding should be directed to savings, if it is legally permitted, and to investments in infrastructure and opportunistic purchases of equipment. In good economic times, the funding available in excess of that available during average economic times, or below average economic times, must be considered unsustainable. Unsustainable revenue should be saved for future bad economic times, invested in facilities and infrastructure, and used to purchase big-ticket items. Unsustainable revenue should never be used for recurring or sustained expenses.

The superintendent will need to exercise strong leadership and professional discipline to resist the urge and political pressure to use the unsustainable revenues to expand educational opportunities for students. The superintendent will need to keep the phenomenon of regression to the mean firmly in mind at all times, good or bad. The superintendent must have faith that such a finance plan will protect the district’s educational programs in all but the longest and worst economic downturns.

During bad economic times, the superintendent will need to keep the annual budget increases lower than in good times. If no surplus funds are available to save for the future, there will be no funds available for investing in infrastructure or purchasing big-ticket items, and all the funds must be directed toward maintaining the educational programs. As the bad economic times continue, the superintendent may need to begin using savings, if it is legal, to maintain the educational programs without increasing the budget by an unsupportable amount. The more savings that are available, and the larger and more recent the investments in infrastructure and purchases of big-ticket items were made, the longer the school district can maintain its educational programs in bad economic times.

The superintendent will need to exercise strong leadership and professional discipline to resist fear of the economic situation and any political pressure to cut programs in order to mirror what surrounding school districts might be doing. As in good times, the superintendent will need to keep the phenomenon of regression to the mean firmly in mind at all times, good or bad. The superintendent must have faith that such a finance plan will protect the district’s educational programs from all but the longest and worst economic downturns.

Superintendents should make certain to utilize their school business administrators, auditors, outside accountants, and other financial consultants to determine the specific mechanisms they will use to implement their finance philosophy.

In a Nutshell

The statistical phenomenon of regression to the mean helps us remember that economic booms never last—nor do economic busts—despite how we may feel while we are experiencing them. Contrary to common observation, it does not have to follow that school districts will expand educational programs during good economic times only to be forced to contract those programs during bad economic times. School districts may choose to manage their finances using the sustainability of educational programs as their primary financial goal and operating within their sustainable financial means as their primary methodology. Doing so will essentially decouple the district’s educational programs from the vagaries of economic cycles.

Implementing this philosophy requires the superintendent to be a skillful leader of change and to resist any reaction to the economic situation or political pressure to expand or cut programs in order to mirror what surrounding school districts might be doing. The superintendent must remember the phenomenon of regression to the mean and have faith that the finance plan will protect the district’s educational programs from all but the longest and worst economic downturns.

Finally, superintendents should not operate alone. They should include their school business administrators, auditors, outside accountants, and other financial consultants as they determine the specific strategies they will use to implement their finance philosophy. Further, superintendents must have the endorsement and support of the board of education in this endeavor.

About the Author

Dr. Shane Higuera is a former school business administrator. He serves as an adjunct assistant professor at Dowling College on Long Island in New York helping to prepare future school business administrators. In addition to serving AASA as a member of our Publications Review Board, Dr. Higuera consults with school districts on matters of school finance and business management as well as owns and operates the SBA Website, a site devoted to the informational needs of school business administrators working within New York State. Contact him at shane@sbawebsite.net.