Overview of the Cost-of-Education Index

The Cost-of-Education Index (CEI) began on December 20, 1990, when the

Foundation School Fund Budget Committee adopted the recommendations of the

Advisory Committee on the Cost-of-Education Index. The primary goal of the Advisory

Committee was to formulate an index that complied with the statutory requirement of

Section 16.102 of the Education Code: “The basic allotment for each district is adjusted

by multiplying the amount of the basic allotment by an index factor that reflects the

geographic variation in known resource costs and costs of education due to factors

beyond the control of the school district.” Since the statute requires examination of cost

variations “beyond the control of the school district,” the Advisory Committee uses

regression analysis to account for these factors, rather than constructing a market basket

of prices.

The CEI consists of two components: a price effects index to account for regional

price variations, and a scale effects index to account for diseconomies of scale. The goal

of the price index is to adjust for geographic variations in costs, beyond the control of

districts. Since teacher salaries are the most costly expense for districts, monthly average

salary for individual teachers is the dependent variable in the regression (i.e., the

predicted variable). The five uncontrollable factors that affect these teacher salaries are

the following: beginning average teacher salaries in contiguous counties; county

population less than 40,000; percentage of low-income students; average daily

attendance; and type of district, such as suburban, rural, and independent town. The

controllable factors, and remaining independent variables, for the regression for the price
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effects index are the following: property wealth per teacher; total effective tax rate;

teacher benefit level per pupil; graduation rate; number of secondary teachers; percentage

of minority teachers; non-salary expenditures; an indicator for the teacher with an

advanced degree; an indicator for the teacher without a degree; and the total years of

teaching experience. After running the regression, the Advisory Committee constructed a

table for the various “break points” for the index. Higher index values in the table lead to

a higher overall index. Thus, the CEI rewards districts for uncontrollable factors.

Although the Advisory Committee proposed another component for the CEI (i.e., the

scale effects index), the Texas Legislature never adopted this portion.

Add to Competing County Pop. < District % Low Avg. Daily

1.0 Salaries 40,000 Type Income Attend.
-0.01 Indep. Town
0.00 < $17,300 No < 50% 200 - 499
0.01 $17,300 - $17,750 Yes Rural 50% - 67.9% 500 - 999, < 200
0.02 $17,751 - $18,250 68% - 76.9% 1000 - 1599
0.03 $18,251 - $18,700 77% - 85.9% 1600 - 2399
0.04 $18,701 - $19,100 86% - 92.9% 2400 - 3599
0.05 $19,101 - $19,500 >= 93% 3600 - 5399
0.06 $19,501 - $20,000 5400 - 8499
0.07 $20,001 - $20,450 >= 8500
0.08 $20,451 - $20,850
0.09 >= $20,851

A series of formulae determine the scale effects index, while a table based on

regression results determines the price effects index. The original intent of the Advisory

Committee was to multiply the two separately calculated indices together:

Price Index * Scale Index = CEI

However, since the Texas Legislature never adopted the scale effects index, the

final CEI is simply the following equation:

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Price Index = CEI

For this index, the Advisory Committee applied a weight of 0.71 to the Basic

Allotment (BA). This weight represents the percentage of statewide total operating

expenditures accounted for by professional salaries and the proportionate benefits. The

result is the formula for the Adjusted Basic Allotment (ABA):

(0.71 * BA * CEI) + (0.29 * BA) = ABA

Other Studies

Other states have conducted studies of their own. In 1990 only a few other states

made adjustments for price effects. Alaska’s index was similar to Texas’s, whereas

Florida and Ohio had a cost-of-living index. Also, during this time period, roughly 30

states made adjustments for scale effects.

On November 1, 2000, the Charles A. Dana Center released their summary report,

“A Study of Uncontrollable Variations in the Cost of Texas Public Education.” This

study finds that not all of the five uncontrollable factors in the CEI are still statistically

significant, and that there are some omitted variables in the price index regression. In

response to these findings, this research group presents three alternative models of a new

Texas cost-of-education index: wage index, salary index, and cost-function index.

The wage index measures the variation in overall labor costs in various markets in

Texas, and is similar to some indexing strategies used in other states. The salary index

examines the salaries that teachers would be willing to accept, rather than including

factors that affect the salaries that school districts are willing and able to pay. The cost-

function index is the most comprehensive index of the three since it accounts for all of
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the following features: the prices of inputs, e.g., teachers and other personnel;

environmental factors, e.g., district size and student characteristics; and educational

outcomes.

In April 2005, Lori Taylor, who worked both on the Advisory Committee and the

Dana Center study, released an additional study, “Adjusting for Geographic Variations in

Teacher Compensation: Updating the Texas Cost-of-Education Index.” Like the CEI,

average monthly teacher salary is the dependent variable. Taylor’s plan to improve upon

the CEI is to use a fixed effects regression.

Current Data, Original Methodology

The Texas Education Agency (TEA) has outlined a new version of the price

effects index. This version follows the same methodology the Advisory Committee

constructed in 1990, but updates the CEI by using more recent data. The data is from the

2007-2008 school year. Since no one has updated the CEI since 1990, this study offers

the state of Texas a clearer picture of regional price variations almost two decades later.

This study also upholds the original intent of the CEI because it adheres to the same

methodology as the 1990 study.

Recommendations

The salary of an individual teacher is the dependent variable. However, most of

the independent variables pertain to the district level, instead of the individual level. This

lack of uniformity in the regression can lead to some problems. For example, the

percentage of minority teachers is an independent variable in the regression. Since the

dependent variable is individual teacher salary, then that same individual’s race likely
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would be a more valid independent variable than the racial breakdown of that

individual’s district. If, for some reason, some of these individual level variables were

nonexistent, providing a fixed effect for the individual’s district likely would be a more

fundamental econometric approach. The fixed effect for the district hopefully would

capture a similar outcome as the observable data would.

Two members of the Advisory Committee recommended that the Texas

Legislature needed to better define what they meant by “uncontrollable costs.” As a

result, researchers must interpret this component of the statute. As the Dana Center later

observed, distinguishing between controllable and uncontrollable costs is difficult, and

these distinctions are subject to criticism. One researcher’s controllable cost is another

researcher’s uncontrollable cost, and vice versa.

For the Legislative Budget Board (LBB) researchers, some controllable variables

in the CEI actually may not be controllable. Graduation rate for a district certainly is not

controllable for an individual teacher (i.e., the dependent variable), and it may not be

controllable for a district. While a district can implement some policies to influence the

graduation rate, the student ultimately decides whether to graduate high school. Teaching

experience may be a controllable variable when the dependent variable is teacher salary

(an exception would be a first-year teacher who is 22), but it is not controllable for a

school district. These two examples are merely a partial representation of the problem

described in the previous paragraph.

Beginning teacher average salary in contiguous counties may not be a valid

uncontrollable factor. This variable is likely endogenous, meaning that the decision to
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offer a salary to a teacher in one county depends on teacher salaries in contiguous

counties, and vice versa. Due to labor market search processes, if one county increases

its salaries, the contiguous counties may need to raise salaries to remain competitive. For

example, if District A increases beginning teacher salaries by $2000, neighboring

districts, Districts B and C, may feel the need to take a similar measure and increase their

salaries by $1500. If Districts B and C later discover that despite a significant increase in

salaries, they are still losing teachers to District A, they may increase salaries by an

additional $1000. Thus, District A likely would need to increase salaries by $500 to

remain competitive. Therefore, in this example, and assuming a competitive market, a

district has some control over the teacher salaries in contiguous counties.

This report has some additional econometric concerns. Calculating the CEI begins

with a linear regression, which is a continuous equation. The next step is to form discrete

“break points” for the index values. Automatically going from a continuous equation to

discrete values is not statistically sound because the process loses some information and

leads to rounding issues. Another concern is that both the original CEI and the Dana

Center study are very focused on the R-squared in the regression. This concentration can

be a problem if it caused them to make some methodological decisions based on attaining

a high R-squared.

Finally, some independent variables in the regression may be spurious, meaning

that they have no direct relationship with the dependent variable. For example, does a

district’s graduation rate affect individual teacher salaries, and if so, positively or

negatively? An education regression needs to make the distinction whether the

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independent variables affect the dependent variable, such as teacher salaries, or if they

affect something outside the regression, such as the actual cost of education.