A M A CKIN A C C E N T E R R E P O R T School District Consolidation, Size and Spending: an Evaluation Andrew J. Coulson The Mackinac Center for Public Policy is a nonpartisan research and educational institute devoted to improving the quality of life for all Michigan citizens by promoting sound solutions to state and local policy questions. The Mackinac Center assists policymakers, scholars, business people, the media and the public by providing objective analysis of Michigan issues. The goal of all Center reports, commentaries and educational programs is to equip Michigan citizens and other decision makers to better evaluate policy options. The Mackinac Center for Public Policy is broadening the debate on issues that have for many years been dominated by the belief that government intervention should be the standard solution. Center publications and programs, in contrast, offer an integrated and comprehensive approach that considers: All Institutions. 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For more information on programs and publications of the Mackinac Center for Public Policy, please contact: Mackinac Center for Public Policy 140 West Main Street • P.O. Box 568 • Midland, Michigan 48640 989‑631‑0900 • Fax 989‑631‑0964 • www.mackinac.org • [email protected] © 2007 by the Mackinac Center for Public Policy, Midland, Michigan ISBN: 1‑890624‑62‑4 | S2007‑06 140 West Main Street • P.O. Box 568 • Midland, Michigan 48640 989‑631‑0900 • Fax 989‑631‑0964 • www.mackinac.org • [email protected] The Mackinac Center for Public Policy School District Consolidation, Size and Spending: an Evaluation Andrew J. Coulson Director, Center for Educational Freedom, Cato Institute Adjunct Fellow, Mackinac Center for Public Policy ©2007 by the Mackinac Center for Public Policy Midland, Michigan Guarantee of Quality Scholarship The Mackinac Center for Public Policy is committed to delivering the highest quality and most reliable research on Michigan issues. 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School District Consolidation, Size and Spending: an Evaluation iii Table of Contents Executive Summary .............................................................................................. 1 Introduction .......................................................................................................... 2 District Consolidation: A Brief History and Research Review ........................... 3 Empirical Data and Strategy ................................................................................. 4 Fixed (Categorical) Federal Spending ..........................................................................5 Fixed (Categorical) State Spending ..............................................................................6 Percentage of Special Education Students ....................................................................6 Racial Composition .......................................................................................................6 Potential Effects of Varying Public Demand for Education ..........................................7 Public School Enrollment as a Share of Population ......................................................7 District Officials’ Potential Spending Incentives ..........................................................8 District Labor Costs ....................................................................................................10 Period Effects ...............................................................................................................10 Need We Control for Student Achievement? ..............................................................10 Insignificant Variables ..................................................................................................11 The Model ...........................................................................................................11 Specifying the Control Variables .................................................................................11 Specifying the ƒ(Size) Term ........................................................................................13 The Four Potential Models ..........................................................................................16 Empirical Results and Analysis ..........................................................................16 Investigating ƒ(Size) ....................................................................................................16 Evaluating District Consolidation ..............................................................................18 Evaluating Public Choice Theory ................................................................................19 Conclusion ..........................................................................................................20 Appendix A: Detailed Regression Results..........................................................21 Appendix B: Postestimation Diagnostics ...........................................................23 Appendix C: Michigan School District Head Counts .......................................27 Mackinac Center for Public Policy School District Consolidation, Size and Spending: an Evaluation 1 Executive Summary This study empirically tests the notion that consolidating smaller public school districts will save taxpayers money. Multiple regression analyses are employed to analyze the relationship between district size and per-pupil expenditures in the state of Michigan, focusing on the five most recent school years for which data are available. Based on the model developed for this paper, the most cost-effective size for school districts in Michigan is roughly 2,900 students. Both smaller and larger districts are likely to spend more per pupil, other things being equal. In light of this finding, it is correct to surmise that some Michigan public school districts are probably too small, and others too large, to operate with optimal cost efficiency. But district size has a more nuanced and less important impact on spending that is often assumed, and the current political emphasis on consolidation of small districts is misplaced. The author estimates that the potential savings from consolidating excessively small districts is about 12 times smaller than the potential savings from breaking up excessively large ones. The maximum total annual savings due to district breakups would be approximately $363 million, while consolidations could save state and local governments at most $31 million annually (note that these are only rough, ballpark figures). To realize these maxima, it would be necessary to break up every excessively large district into a multiplicity of optimally sized 2,900-student districts and to consolidate all tiny districts into optimally sized districts as well. Some such mergers and breakups would be impractical or impossible. Truly optimal mergers, for instance, could be achieved only in those cases where two 1,450- student districts were adjacent; three 933-student districts were adjacent; and so on. It would actually be counterproductive to merge two 2,000-student districts, because a 4,000-student district would typically spend more per student, other things being equal, than a 2,000-student district. As a result, the actual savings from pursuing either mergers or breakups is apt to be much smaller than the theoretical maxima given above. It is fair to say, therefore, that neither mergers nor consolidations are likely to bring about dramatic reductions in the roughly $17 billion per year spent on Michigan’s public schools. If legislators and the governor wish to address the spiraling cost of public schooling, this study points to a far more important factor than district size: the incentive structure of the system itself. The model developed here indicates that public school districts generally endeavor to spend — and succeed in spending — as much as they can. Mackinac Center for Public Policy School District Consolidation, Size and Spending: an Evaluation 2 Specifically, this study compared two alternative theories