Creative accounting: measuring the true cost of K-12 education.

Public Education as a Business: Real Costs and Accountability

By Myron Lieberman & Charlene Haar

Rowman & Littlefield, 2003, $32.95; 248 pgs.

The focus of Public Education as a Business comes after the colon: the real costs of K-12 public schooling. In this slim volume, the authors propose to improve the way "cost" is traditionally measured in public K-12 education. They point out that most evaluations of school performance focus solely on outcomes, such as students' test scores or high-school graduation rates. Rarely do studies of school reforms consider the costs or compare alternative approaches in order to determine which is the most cost-efficient. However, the accurate measuring of costs is a crucial aspect of policy analysis.

Myron Lieberman and Charlene Haar, chairman and president, respectively, of the Washington, D.C.-based Education Policy Institute, embrace the economist's concept of cost--the opportunity cost of all the resources forgone. For instance, if a city grants the school system use of a vacant government building, the cost of inhabiting the building is frequently not charged to the schools. But a proper measure of costs would account for the opportunity cost of the city government's allowing use of a building for free when it could have rented it out, earning significant revenue for the space. Such social costs are routinely omitted from the data on school spending that are reported by various levels of government.

By contrast, when a business like Wal-Mart computes its costs, it must properly account for the cost of the capital tied up in the business--the land, buildings, and inventories. Costs also include the depreciation of this capital over the course of its useful life. If a building has a 20-year life, then some measure of that depreciation must be included in an annual measure of costs. The authors make clear that our measures of the cost of public education--even the "total cost" measures reported by the U.S. Department of Education--understate the true costs due to inadequate measures of the total capital stock of public schools (land, buildings, information technology) and of depreciation.

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Lieberman and Haar also examine K-12 education costs that are absorbed by other agencies of government (including higher education) as well as the costs of revenue collection and the disincentive effects associated with levying taxes to pay for the schools (what economists term "deadweight loss").

The true cost of teachers' pensions is also seldom reflected in government data on school spending. Generous early retirement schemes passed by legislatures in the 1990s, combined with a surge in teacher hiring and the bear market in stocks, have produced massive unfunded liabilities in these pension funds. Jon Fullerton (see "Mounting Debt," Forum, Winter 2004) notes that the unfunded pension liability of the Los Angeles Unified School District alone is $4.8 billion. Lieberman and Haar describe other urban school district and state plans that are awash in red ink.

For this reason, several states have moved to so-called "defined contribution" pension plans, for which employers have no liabilities beyond their current contributions. Since virtually the entire private business sector and most public and private institutions of higher education have moved to defined contribution systems (such as private-sector 401k plans) for their professional employees, the defined benefit plans offered by public school districts seem like a very expensive anachronism.

Fortunately, some significant public accounting changes are in the works. A private body, the Government Accounting Standards Board (GASB), is implementing guidelines to make accounting in government agencies more accurate, consistent, and transparent.

The net effect of these changes will be to make expenditure data from public schools more consistent with the economic concept of cost. These GASB reforms are motivated in part by pressures from the financial community, specifically bond-rating companies, which seek better data on school district finances as a basis for assessing the quality of the debt they issue.

Given the lively policy debates and litigation surrounding school finance, it is surprising that scholars have not done a better job of measuring the social cost of public elementary and secondary education. One can only hope that Lieberman and Haar's careful scholarship will stimulate further research in this area.

Reviewed by Michael Podgursky

--Michael Podgursky is a professor of economics at the University of Missouri-Columbia.