“This (recently published) report was commissioned in 2010, and its content may not reflect current DfE policy.”
Executive Summary of the Report (pub 2012):
“Understanding School Financial Decisions“
With over £30bn of public money spent every year, English schools face complex financial decisions that relate almost exclusively to their spending. In this Report, we analyse the degree of variation in expenditure items between schools, and examine how much of that variation is due to their circumstances, and how much reflects specific decisions made by the school. Lastly, we consider the potential for improvements in resource utilisation. Although these issues have been addressed before, most of the existing literature focuses on overall school expenditure. Thus we contribute in a number of ways:
1. By exploiting a new dataset, we can examine schools at a very disaggregated level and isolate some of the real operational decisions that they make on how to allocate their budgets. The new School Workforce Census covers all employees in all schools in the country, and includes information such as age, pay and tenure;
2. We control in considerable detail for the schools’ circumstances to ensure that we are focusing on schools that are facing the same operational environment;
3. To better understand discretion over expenditure, we analyse what schools do with their “residual” income. That is, income which is not accounted for by their circumstances;
4. We use data over two years to examine how schools adjust their spending in response to changes in their income.
Results – Commentary
Our results show that there is huge variation in the allocation of expenditure by schools. Even controlling in great detail for the specific individual circumstances of each school, much of that variation remains. For some components of expenditure, the decisions appear to be largely unexplained by any observable features of the school. The results show that even many of the important operational financial decisions of schools are largely idiosyncratic. The degree of difference in expenditure is such that it seems very hard to interpret this as optimal responses to the different perceived local rates of return to particular factors in the education production function. Of course many of our conclusions are reliant on the School Workforce Census, and our analysis emphasises the great importance of maintaining this new longitudinal database.
Why don’t schools take a more strategic approach to their spending? There will be a number of answers to this question. One important factor is constraints that reduce freedom over what to spend income on. In the past, governments have earmarked money for specific initiatives, thereby allowing no opportunity for long‐term planning on the part of schools. The interactive whiteboard funding and Excellence in Cities were examples of this. Implicit in the introduction of these schemes is that schools are not to be trusted in making choices about spending, and that policymakers know how best to spend the school’s budget. It would indeed be interesting to compare the financial decisions of those schools, such as academies, that are now outside local authority control.
Another important set of restrictions comes from the institutional setting around teacher pay and conditions, negotiated between trade unions and government. While some of these restrictions have been relaxed in recent years for some schools, there has been little change to date in practice.
But perhaps more important than the constraints is the lack of incentive for school leaders to get spending decisions right. A careful and considered allocation of spending that approximates an optimal allocation makes little difference to a headteacher and her/his leadership team, who tend to be focused on overall pupil achievement – an outcome that we know reflects little on input decisions. Severe financial mismanagement is obviously a serious issue, but spending (say) three times as much as comparator schools on support staff is not.
The simplest answer to the question “How can we improve schools’ financial decisions?” is “Make them matter”. By using insights from economics, psychology and behavioural economics, we attempt to shed light on this question
Results – Summary
The results show that there is a very substantial amount of variation in some expenditure decisions taken by schools facing a similar operating environment. This appears to be the case in both primary and secondary phases. The results also show that the amount of variation and the degree to which these reflect real decisions differs across a wide range of operational decisions.
In the items that account for a large share of the budget there is rather less disparity, but it is still non-trivial. Taking teaching expenditure per pupil (which accounts for close to 60% of total) as an example, variation in this expenditure item translates into a gap of about £1000 per pupil between a school at the bottom quartile (25th percentile) and a school at the top quartile (75th percentile). 60% of this variation can be explained by the structural and demographic characteristics of the school, rising to 70% of variation if we include variation in total income. Nevertheless, this leaves some 30% of the variation in teaching expenditure unexplained or idiosyncratic.
We also analyse measures of detailed operational decisions that reveal the schools’ decision-making. These are generally less budget-constrained giving the schools more scope for discretion. For example, we find that, controlling for the school context, three quarters of the variation in the number of senior managers is idiosyncratic. Essentially equivalent schools are making very different decisions on how many senior positions to have, also on the numbers of support staff, and so on. The more disaggregated the factor is, the more idiosyncratic the expenditure levels are. Accounting in great detail for the schools’ circumstances, we can explain very little of the variations in expenditure on senior school leaders, support staff, Headteacher pay, teacher turnover, and the deployment of teachers by subject (that is, how many hours of a subject are taught by specialists).
This coincides with our analysis of ‘unexplained’ or ‘residual’ income, which suggests that discretion is principally associated with expenditure on teachers, educational support, the Headteacher’s salary and the school‐level pay premium.
Using data from 2008 – 2010, we find that schools react very differently to changes in income. Only 42% of secondary schools increase expenditure on teachers above any other item. The remaining 58% of schools choose to increase the majority of their expenditure on other items, or allow their budget balance to change the most.
Read the full report here.