Running Head: CHARTER SCHOOL SPENDING AND SAVING IN CALIFORNIA. Charter School Spending and Saving in California WORKING DRAFT.

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1 Running Head: CHARTER SCHOOL SPENDING AND SAVING IN CALIFORNIA Charter School Spending and Saving in California WORKING DRAFT February 2, 2015 Sherrie Reed PhD Candidate, University of California, Davis Director of Research, New Tech Network Heather Rose, PhD Associate Professor, University of California, Davis

2 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 2 Abstract Examining resource allocation practices, including savings, of charter schools is critical to understanding their financial viability and sustainability. Using nine years of finance data from California, we find charter schools spend less on instruction and pupil support services than traditional public schools. The lower spending on instruction and pupil support is offset, not by administrative costs, but by higher spending on operations, consultant services and a greater rate of saving. Spending on consultant services by charters may suggest efficiency in the early years of operation. Further, the greater saving rate of charter schools implies preparation for economic uncertainty, vital for financial viability.

3 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 3 1. Introduction to Charter School Spending and Saving Charter schools represent the primary vehicle for school choice in the U.S. Yet, the long-term viability of charter schools is unknown. While nearly 6,000 charter schools are currently operating across the nation (National Alliance for Public Charter Schools, 2013a), the Center for Education Reform reports that over 1,000 charter schools have closed since 1992 (Consoletti, 2011). The closure of charter schools is natural part of the market in which charter schools operate, where charter schools not meeting consumer demands are driven out of business (Huerta & Zuckerman, 2009). The Center for Education Reform describes five primary reasons for charter school closure including financial deficiencies, mismanagement, poor academic performance, insufficient facilities and the absence of a good working relationship with the charter authorizing agency. The most prominent reason--contributing to 42% of charter school closures--is financial deficiencies (Allen, Consoletti, & Kerwin, 2009; Consoletti, 2011), which may stem from inadequate revenue or ineffective resource allocation. The fiscal challenges of charter schools are a concern for multiple reasons. The charter school movement has long suggested that school choice provides quality schooling opportunities for students who might not otherwise have access (Resmovits, 2014). If quality charter schools are closing merely due to financial problems, it is critical to understand the funding and spending patterns that may contribute to the financial viability of schools. In addition, advocates of charter schools often suggest charter schools are cost effective, delivering higher performance at a lower cost (Resmovits, 2014; Winters, 2012). If this is the case, understanding how charter schools achieve this cost efficiency has important implications for education finance policy more broadly. Finally, the federal government, many state governments and numerous philanthropic organizations invest substantial sums of money to promote the successful implementation of charter schools. This investment of taxpayer and philanthropic money is wasteful if charter schools are unable to remain fiscally solvent and operational. Current research on charter school finance is inconclusive and often conflicting. Much of the research in the field of charter school finance focuses on the adequacy and equity of charter school funding, concluding that charter schools receive less public funding than traditional public schools

4 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 4 (Batdorff, Maloney, May, Speakman, Wolf & Cheng, 2014; Consoletti, 2011; Nelson, Muir & Drown, 2003; Speakman & Hassel, 2005). In contrast, other research indicates that charter schools receive greater funding than traditional public schools (TPS) when philanthropic funding is included (Baker, Libby & Wiley, 2012). However, researchers Gary Miron and Luis Huerta argue that the study of revenues alone is misleading because it does not account for the types of students enrolled and services delivered (in Resmovits, 2014). Examining charter school spending, then, provides a more complete picture of the fiscal practices that lead to efficient and sustainable operations by illuminating how limited funds are apportioned rather than simply looking at the total amount available for spending. The research about charter school resource allocation to-date provides some insight as to how charter school resource allocation differs from that of traditional public schools. On average, charter schools receive less revenue, spend less overall (Arsen & Ni, 2012; Miron & Urschel, 2010, Perez et al., 2006; Zimmer et al., 2003) and save more than traditional public schools (Arsen & Ni, 2012), providing evidence of efficiency and financial viability. However, this lower overall spending manifests in lower spending on instruction and student support services (Arsen & Ni, 2012; Miron & Urschel, 2010, Perez et al., 2006; Zimmer et al., 2003), and higher spending on administration (Arsen & Ni, 2012; Miron & Urschel, 2010, Perez et al., 2006; Zimmer et al., 2003), practices which may undermine consumer demand for charter schools if families believe fewer funds are directed towards the classroom. The existing research of charter spending, however, contains numerous limitations. Todate one national study of charter school spending exists (Miron & Urschel, 2010), but differences in funding mechanisms, reporting requirements and policy contexts across states limit the conclusions that can be drawn. This national study includes only eight of the nearly 1,000 charter schools in California, the state with the largest share of the nation s charter schools, and lacks any data for charter schools in Florida, the state with the second largest share of the nation s charter schools. Two studies which examine charter school resource allocation practices in California (Perez, et al., 2006; Zimmer et al., 2003) use only personnel staffing data and survey data about the perception of fiscal flexibility and

5 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 5 autonomy, possibly missing important findings for spending on equipment, materials, and facilities. Also, all of the existing research uses a single year of data, where shifts in the number of charter start-ups or a charter policy may potentially skew findings. Further, little research accounts for the length of operating history of charter schools, despite evidence that it matters (Zimmer et al., 2003), as charter schools are often plagued with heavy start-up costs in the first few years (Hayes & Keller, 2009). Finally, only limited research examines charter school savings patterns, important to paying off short-term debts and surviving revenue deficits, common in times of economic uncertainty (Wohlstetter, Smith & Farrell, 2013). This study adds to the existing body of research on the resource allocation practices of charter schools by capitalizing on publicly available data for California charter schools. California represents an important segment of national charter school community, as California is often cited as a model for charter school legislation and equitable funding (NAPCS, 2013b). California charter schools account for over 18% of all charter schools and 21% of all charter school students in the U.S. (NAPCS, 2013a). California also leads the nation in the number of charter schools in a single state. California s 1,000 charter schools make up ten percent of public schools in the state and enroll seven percent of the state s K-12 students. 1 Since , California charter schools have reported financial data, providing nine years of data to analyze. We use these multiple years of detailed charter school financial records, combined with relevant information on the duration and location of charter school operation, as well as the characteristics of enrolled students, to address the gaps in the literature and answer each of the following research questions: 1. How do charter schools in California allocate resources (i.e. instruction, administration, pupil support, operations and savings)? 2. How does resource allocation differ between charter schools and traditional public schools? 1 1 Numbers representing California charter schools and student enrollment are calculated based on administrative data from California Department of Education.

6 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 6 3. How does resource allocation differ between newly founded charter schools and charter schools with a long operating history? 4. How do school characteristics (i.e. total enrollment, percent of students eligible for free and reduced lunch and geographic location) explain noted differences in resource allocation between charter schools and traditional public schools? 2. Policy Context Since their advent in Minnesota 1991, charter schools continue to grow, both in numbers of charter schools operating and numbers of students served. In , over 5,500 charter schools operated in 39 states and two territories, accounting for nearly six percent of the nation s public schools and four percent of K-12 public school students (NAPCS, 2013a). Recent legislative action to expand charter school operations in several states indicates the number of charter schools in the U.S. will continue to grow. In 2012, two additional states, Washington and Mississippi, approved charter school laws (NAPCS, 2013). Other states, such as Hawaii, Idaho and Missouri, lifted the caps on the numbers of charter schools allowed to operate within the state (NAPCS, 2013). Further, the federal government provides financial incentives for states to improve charter laws and increase the number of charter schools through Race to the Top grants and the National Charter School Grant Program. Noteworthy philanthropists like Reed Hastings and Walton Family Foundation, and advocacy foundations such as Thomas B. Fordham Institute and National Alliance of Public Charter Schools, also lend their influential support to ensure the growth of charter schools. The growth in the number of charter schools provides educational options for an increasing number of students. In , charter schools in the United States enrolled nearly two million students (NAPCS, 2013a). The National Alliance for Public Charter Schools estimates that another one million students across the nation are on charter school wait lists, providing evidence of the demand for more charter schools (Kern & Gebru, 2014). 2.1 California Charter Schools

7 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 7 Since the passage of the Charter School Act of 1992, California has been a leader in the charter school movement. California was the second state to enact charter school legislation and its present-day charter school legislation is a model for other states. The National Alliance for Public Charter Schools (NAPCS, 2013b) points to California as a leader in the areas of equitable operational funding, equal access to categorical funding, and equitable access to capital funding and facilities. Additionally, the Charter Schools Development Center and the California Charter Schools Association, California s charter school advocacy organizations both headquartered in Sacramento, are important leaders in shaping both state and national policy for charter schools. In order to operate as a public school in California, a charter school must be authorized by a public school district governing board, a county office of education governing board or the State Board of Education. Charter schools are initially authorized on the merits of a charter application outlining operating principles and measurable outcomes for which the school will be accountable. Typically, authorizers grant operating permission for five years, with a renewal application and review process necessary to continue operation for a subsequent five years. During the initial five year term, newly founded charter schools often experience non-recurring costs associated with initial planning and getting the school up and running (Hayes & Keller, 2009). The charter renewal process varies by charter authorizing agency, but the authorizer is responsible for oversight of the charter school for adherence to local, state and federal education regulations, including financial regulations. It is presumed therefore that, charter schools demonstrate financial stability and document success on measurable outcomes in order to earn the renewal for continued operation. Charter schools operating for six to ten years are often in their second term and those operating for more than 10 years have typically passed two renewal processes. 2.2 Charter School Funding California Education Code (1999) defines the sources and means for funding charter schools. Like all public schools in California, general purpose funding for charter schools is based

8 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 8 on the average daily attendance (ADA) rate of enrolled students. 2 Charter schools receive a weighted per- ADA rate that varies by grade levels and needs of enrolled students. Charter schools receive an amount equal to the statewide per pupil funding average for elementary districts for each student in grades kindergarten through five, an amount equal to the average for unified (K-12) districts for students in grades six through eight, and a rate equal to the average for high school districts for students in grades nine through 12. Charter schools also receive Economic Impact Aid, which provides additional per-ada funding for low-income and English language learners. During the time period examined in this study, charter schools in California also received categorical funding. In lieu of nearly 50 categorical programs available to traditional public schools, charter schools receive per pupil funding through the Charter School Block Grant. In addition, charter schools receive a share of state special education funds and are eligible to receive funds from a few large state categorical programs such as class size reduction and transportation. If eligible, charter schools also receive federal categorical funding provided through the No Child Left Behind Act (2001) for educational programs for low-income students or English language learners, professional development for teachers, and the drug-free and safe schools initiatives (CDE, Charter School Categorical Block Grant Programs, nd). Public funding for charter schools is distributed in one of two ways in California. In direct funded charter schools, the state disburses charter school funding directly to charter schools. Direct funded charter schools manage their own fiscal activities independently of their charter authorizing agency (CDE, Charter School Direct Funding Option, nd.); all spending decisions are made in accordance with charter school governing board by-laws and operating procedures. Direct funded charter schools usually have financial personnel on staff or contract with private accounting firms to manage accounts receivable, 2 Charter school funding in California is straightforward compared to the funding of traditional public schools. Until funding for traditional public schools varied throughout the state based on a complex formula of local and state sources. For more information on California s public school funding formula see Weston, Sonstelie and Rose (2009).

9 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 9 payable and personnel payroll. The percent of charter schools that are direct funded has steadily increased from 61% in to 72% in On the other hand, between 28% and 39% percent of charter schools in California operate as dependent charter schools, where funding and operations are closely tied with the authorizing district. In dependent charter schools, also known as locally funded charter schools, funding flows from the state to the local education agency that authorized the charter, most typically a public school district. In the case of locally funded charter schools, the charter authorizing agency often manages part or all of the fiscal activities of the charter school and retains fees for these services as agreed upon between authorizer and charter school operator. Remaining funds are then disbursed from the charter authorizing agency to the charter school. The local funding of dependent charter schools makes it difficult to disentangle charter school fiscal information from that of the charter authorizing agency, a common data limitation noted in prior literature (Miron & Urschel, 2010; Zimmer et al., 2003). 2.3 Charter School Financial Reporting In California, fiscal reporting was first required for charter schools in , though traditional public schools reported fiscal data for decades. Currently, all public schools, including charter and traditional public schools, report financial information to the California Department of Education (CDE) as required annually. Traditional public school districts report financial data using the Standardized Account Code Structure (SACS). Charter schools may be included with the charter authorizing district s financial reporting in SACS or charter schools may report finance data independently of their authorizer using either SACS or the Charter School Alternative Reporting Form (also known as the Alternative Form ), depending on agreements with the authorizing agency. Almost all locally funded charter schools and one-third of the directly funded charter schools report financial data with their authorizing agency in SACS each year. Consequently, the charter schools that report separately from their authorizer, on either the SACS or Alternative Form, are the remaining two-thirds of direct funded charter schools and include almost no locally funded charter schools.

10 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A Data and Methods This study draws on the financial data reported annually by all traditional public school districts and charter schools in California, which is publicly available from CDE. We include nine years of finance data, beginning with , the first year in which charter schools were mandated to report financial data, through , the most recently available data at the start of this analysis. The use of nine years of data addresses the limitation of cross-sectional data and single year studies present in the existing literature and allows me to examine whether or not patterns persist over time as individual charter schools mature and additional charter schools enter the market. 3.1 Sample The sample of charter schools for this study includes those charter schools reporting both schoollevel financial data separate from their authorizing agency, just under half of all charter schools. Table 1 provides detailed information about the number of the charter schools operating in the state, the charter schools excluded, and the percent of charter students served, for each of the nine years included in this analysis. We do not have school-level finance data for the 48% to 57% of charter schools that report their financial data with their authorizer in any given year. For example, in , 487 of the 991 charter schools reported with their authorizing agency. By necessity, these charter schools are excluded from the charter school sample. We also exclude the 3% of charter schools that fail to report any finance data. 3 Lastly, a handful of charters are excluded because they are missing student enrollment data; in , only one school met this criteria, but in , eight schools are excluded for this reason. 4 After exclusions, between 38% and 48% of operating charter schools in any given year are included in the sample. These charter schools are almost exclusively direct funded charter schools and serve nearly half of the charter school students in the state. Though slightly less than half of California charter schools are 3 The reasons that charter schools fail to report finance data is unknown. According to CDE, these schools are expected to report finance data at the school level, but no data appears in either the SACS or Alternative Form data files. It is possible that these charter schools actually report with their charter authorizing agency instead. Review of the list of schools that fail to report in each year demonstrates that the problem is limited to few schools who fail to report in multiple years, of which between 50% and 80% are direct funded. 4 The reason charter schools fail to report enrollment data is also unknown. However, review of the schools who fail to report shows the problem is again limited to a few schools who fail to report in multiple years.

11 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 11 included, the final sample is more robust than other studies of charter school spending. Unlike previous studies, the final sample includes multiple years of finance data. Further, the sample includes substantially more charter schools than other single state studies, with Arsen and Ni (2012) examining just over 250 charter schools in Michigan and our study including over 450 in alone. The comparison group in this paper includes all traditional public schools in California, 5 whose financial data are reported at the school district level. 6 Because of district-level reporting, these data necessarily include the locally funded and direct funded charter schools electing to report with their authorizing district. The inclusion of these charter schools in the comparison sample is unlikely to substantially affect the aggregate values computed for traditional public schools, because the charter schools represent only three to five percent of California s public schools and two and four percent of California s total K-12 enrollment. 5 We exclude schools operated by County Offices of Education (COEs). COES administer professional support to local education agencies within their boundaries and operate special programs for students with special needs or adjudicated youth. While spending on programs serving students are included in COE finance data, so are expenses unique to the administrative and professional development services offered. As such, the finance data does not accurately represent average per pupil spending and is therefore excluded from analysis. This exclusion follows the methods of Rose et al. (2003). 6 Common Administrative Districts serve the district administrative needs of multiple school districts and report financial data in aggregate. In Common Administrative Districts, school districts pool resources and share costs for services such as human resources, federal and state reporting and financial services. For the purpose of analysis, we treat them as a single unified school district. In , there were six Common Administrative Districts.

12 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 12 Table 1 Charter School Finance Data Sample Total Charter Schools Total Charter Students 8 166, , , , , , , , ,856 Exclusions Charters Reporting with District/COE/SBE Charters Not Reporting Finance Data Charters Not Reporting Student Enrollment Sample Charter Schools in Sample Charter Students in Sample 69,387 76,951 93, , , , , , ,470 % of CA Charter Schools % of CA charter students In this table, the number of charter schools includes those charters which are listed in CDE finance data for whom operating status was verified using the Public Schools Database also from CDE. In financial datasets, more charter schools are counted, but often prior to opening or after closing. For example in the financial data files included 512 charter schools with more than 50 not reporting finance data. However, only 460 were actually operating during the school years, bringing the number of charters failing to report data to 14. By , all 991 charter schools included in the financial data were legally operating. 8 In this table, the number of students enrolled in charter schools is calculated from CBEDS student enrollment files downloaded from California Department of Education.

13 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A Categorizing Expenses We use SACS and Alternative Form data to compare spending patterns of charter schools and traditional public school districts in California. The financial data from both formats align considerably well and include detailed accounts, using over 100 object codes. Object codes describe and categorize the source of revenue (e.g., general revenue, property tax income and grants) the items purchased (e.g., instructional materials and computer equipment), services purchased (e.g., legal, professional development and consulting), and staff hired (e.g. teachers and administrators). 9 We adopt methods previously designed by Rose, Sonstelie, Reinhard, and Heng (2003) for the study of resource allocation in traditional public schools in California. In their study, Rose et al. (2003) created eleven expense categories based on the purpose of expenditures: teachers, instructional aides, administrative personnel, pupil service personnel, other personnel, instructional materials, maintenance and operations, other services, capital equipment, food service, and tuition and transfers. In the analysis, we collapse the 11 categories identified by Rose et al. (2003) into four larger groups--instruction, student support, administration, and operations--to align with the existing literature about charter school spending. Instruction includes teacher and instructional aide salaries and benefits, as well as instructional materials. Pupil support services include guidance, psychological, and health services and special education related services. Administration is limited to the salaries and benefits for certified administrators serving at the school and district level. The operations category includes salaries and benefits for clerical and janitorial personnel, the acquisition, rental and/or maintenance of facilities, and the acquisition and maintenance of capital equipment such as computers. We also isolate two additional categories: consulting services and savings. Hypothesizing that charter schools may be purchasing administrative and pupil support services from consultants, separate out the consultant expenses from other services. Finally, we generate annual savings, which is simply total revenue minus total expenses in 9 Both the SACS and Alternative Form utilize the same accounting object codes despite different reporting formats. The consistency in codes in both reporting formats allows for accurate comparisons and valid analysis when categorizing expenses. A detailed crosswalk of the codes from both the SACS and Alternative Form as used in this analysis is available from the author.

14 Percent of total enrollment Per pupil dollars C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 14 the other five categories. Annual savings is essential to understanding charters ability to save for economic uncertainty and long-term financial viability. In total, we include six main expense categories. 3.3 Method of Analysis In order to examine differences in resource allocation between charter schools and traditional public schools, we begin by comparing mean per-pupil spending in each expense category. These descriptive statistics show notable and statistically significant differences between charter schools and traditional public schools in a variety of spending categories. We also compare mean per-pupil spending between charter schools of various lengths of operating history, with few noteworthy differences. Recognizing the numerous possible explanations for the observed mean differences between charter schools and traditional public school districts, we also estimate a series of regressions to better understand the extent to which various factors may explain the difference in resource allocation. For each of our six expense categories (total expenditures, instruction, pupil support, administration, operations, consulting and savings), we estimate a regression in which the dependent variable is per pupil spending in that category. We use the same set of independent variables in each of the models. Table 2 provides descriptive statistics for each of the dependent and independent variables. Table 2 Descriptive Statistics for Regression Variables Charter Traditional Public Schools 25 th p Mean 75 th p 25 th p Mean 75 th p Dependent Variables (weighted by total enrollment) Instruction 3,506 4,140 4,607 5,029 5,438 5,743 Pupil Support ,120 1,214 Administration , ,124 1,243 Consulting 462 1,015 1, Operations 709 1,269 1, Savings Control Variables Middle school students High school students Eligible for free/reduced price meals Total enrollment ,294 6,257 Per pupil revenue (weighted) 7,071 8,171 8,773 8,065 9,044 9,795

15 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 15 The first independent variable is a dichotomous variable indicating whether the entity is a charter school or traditional public school district. The coefficient on this variable indicates the difference in spending between charter schools and traditional public school districts. 10 The second set of variables account for the characteristics of students a school serves. Prior literature suggests that charter schools are more likely to serve elementary students, who are presumably less costly to serve than secondary students (Arsen, Plank & Sykes, 1999; Miron & Urschel, 2010). In fact, the funding mechanism in California provides charter schools with less revenue for elementary students than those in higher grades. Furthermore, differences in grade levels served may also dictate differences in spending needs across categories; for example high schools may need more sophisticated science labs and more guidance counselors than elementary schools. Therefore, the regression models include control variables that account for the percent of students enrolled in elementary, middle and secondary grades, data collected annually by California Department of Education and later made publicly available. 11 Prior research also suggests that charter schools are less likely to serve high needs students (Miron & Urschel, 2010; Perez et al., 2006; Resmovits, 2014; Zimmer et al., 2003), such as those who are eligible for free and reduced price meals, who are presumably more costly to serve. This difference may explain overall differences in total revenue, as schools receive additional funding through federal and state categorical programs for students who are eligible for free and reduced lunch or special education, as well as spending in specific categories such as pupil support staff. To account for these factors, our regression models include the percent of students eligible for free and reduced lunch. These data are also publicly available from California Department of Education. 12 The total enrollment in a school may also influence spending. Prior research points out the difference in per pupil spending may be related to economies of scale, where the cost to educate each 10 With no additional controls in the model, the coefficient on the charter variable simply captures the mean difference in per-pupil spending

16 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 16 student decreases as the number of students increases (Andrews, Duncombe & Yinger, 2002; Duncombe, Miner, & Ruggiero, 1995; Monk & Hussain, 2000; Pandolfo, 2012). As fixed costs are spread across more students, the per-pupil cost of resources actually declines. Guided by this theory, charter schools which are typically smaller in size than traditional public schools are expected to spend more per pupil than traditional public schools in areas such as administration, which have noticeable fixed costs. Therefore, the regressions include a control for a school s total enrollment. This control enters the regression in log form to account for potential nonlinear relationship between size and spending. Although student characteristics and enrollment are important factors in determining spending patterns, ultimately the total revenue per pupil determines the funds available for spending in the various categories, therefore the regressions also account for total revenue per pupil. Another consideration when noting the spending differences between charter schools and traditional public schools is geographic location. Charter schools are often concentrated in urban areas (Ritter, Jensen, Kisida & McGee, 2010), where both salaries and property costs are higher. In California, 214 charter schools, or nearly one-quarter of California s charter schools, are located in Los Angeles (CCSA, California Charter Schools by the Numbers, nd). These Los Angeles charters enroll the largest number of students in any single school district in the country (NAPCS, 2013). Similarly, there are 55 charter schools operating in San Diego, 38 in Oakland, and 36 in San Jose (CCSA, California Charter Schools by the Numbers, nd). Furthermore, previous literature provides evidence of regional wage differences, where salaries are notably higher in urban areas such as Los Angeles, San Diego and San Jose (Rose, Sengupta, Sonstelie & Reinhard, 2008; Rose & Sengupta, 2007). Therefore, if charter schools are disproportionately located in these areas, we may observe higher spending in categories that are wage intensive. We use county level fixed effects to control for regional differences, ensuring that any notable differences between charter schools and traditional public schools are not attributable solely to the concentration of charter schools in certain geographic locations. To account for the fact that multiple districts are located within a county and thus may have correlated error terms, we assume that the

17 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 17 error term in our model has a county-specific component and compute standard errors clustered at the county level. Finally, when we estimate the regressions, we include nine years of finance data. To ensure that time trends are not driving our results, we also include fixed effects for the year. The regression analysis substantiates the findings presented in the descriptive tables and also allows us to show what portion of the charter schools spending differences are attributable to these additional factors. 4. Findings and Discussion After briefly reviewing overall spending and revenue trends, this section will evaluate spending by category. We outline the similarities and differences in the spending patterns of traditional public schools and charter schools. We also explain differences between charter schools operating for varying lengths of time, where findings are notable. Throughout the section, we suggest possible explanations for our findings and consider how our findings align with or diverge from those in previous studies of charter school resource allocation. Summarizing nine years of data, Table 3 displays overall trends in revenue and expenses for charter schools and traditional public schools in California. Columns A and B show the spending in each category as a share of total expenditures for charter schools and traditional public schools. Columns C and D provide the average per-pupil revenue and the average per-pupil spending in each spending category for both charter schools and traditional public schools. Column C shows the differences in spending between charter schools and traditional public schools over this near decade, and column D shows the regression-adjusted differences. Although Table 3 gives the nine-year averages, the discussion below includes figures depicting the annual data and trends overtime. We convert the data for individual years to dollars using the all-urban consumers Consumer Price Index (CPI). Furthermore, Appendix Tables A.1 and A.2 provide spending by category for each of the nine years and Appendix Table A.3 shows the detailed regression results used to determine the regression-adjusted differences.

18 Operations Pupil Support Instruction C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 18 Table 3 Differences in Revenue and Spending between Charter Schools and Traditional Public Schools ( dollars) A B C D E F Mean Percent of Total Current Expenses Mean Per Pupil Spending Mean Difference Regression Coefficient with Controls Charter TPS Charter TPS Charter TPS Charter TPS Total Revenue NA NA 8,171 9, * NA Total Expenditures NA NA 7,840 8,885-1,045* -129* Instruction ,140 5,438-1,298* -618* Teachers ,205 4,639-1,434* -928* Instructional aides * -43 Instructional materials * 353* Pupil Support , * -626* Pupil service personnel * -481* Tuition and transfers Administrative personnel , * -166* Consulting services , * 613* Operations , * 669* Maintenance and operations * 453* Other personnel * 28 Other services * 106* Capital equipment * 83* Annual Savings * 129* *p<.05

19 C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A Total Expenditures and Revenue Researchers agree that charter schools spend less than traditional public schools (Arsen & Ni, 2012; Miron & Urschel, 2010; Perez et al., 2006). Our analysis also supports this conclusion. In California, charter schools spend less than traditional public schools in every year since charters began reporting financial information in On average, charter schools across the U.S. spend 19% less than traditional public schools (Miron & Urschel, 2010), while in California the magnitude of the difference is not as great. Across the nine years examined, charter schools spent an average of $7,840 per pupil, about $1,000 per pupil less than traditional public schools. Figure 1 displays the average total per pupil spending for charter schools and traditional public schools across the nine years. The difference is largest in , when charters spend $1,352 less than traditional public schools, and smallest in , when charters spend only $774 less. While the differences vary slightly from year to year, the trend of lower spending is consistent, with charter schools spending an average of 12% less than traditional public schools. The lower spending by charter schools may in part be due to the fact that they receive less revenue, though the entire 12% gap in spending is not explained by lower revenue. In California, charter schools receive an average of 10% less per pupil in state and federal revenue than traditional public school districts, with the gap as small as 6% in and as great as 14.5% in In addition per pupil total spending, Figure 1 depicts the trends for annual per pupil revenue for both charter schools and public school districts from until

20 Per Pupil Dollars C H A R T E R S C H O O L S P E N D I N G A N D S A V I N G I N C A L I F O R N I A 20 Figure 1 Revenue and Expenditures for Charter Schools and Traditional Public Schools ( dollars) $10,000 $8,000 $6, Revenue--TPS Expenditures--TPS Revenue--Charter Expenditures--Charter While some might hypothesize that long-term charter schools are more likely to mirror traditional public schools in spending patterns than new charter schools (Arsen & Ni, 2012), the greatest difference in overall spending is between long-term charter schools, rather than newly-founded charters, and traditional public schools. Newly founded charter schools actually spend more per pupil on all expenses combined than long-term charter schools. On average, long-term charter schools spend 16% less than traditional public schools, or about $1,400 per pupil less. In contrast, newly founded charter schools spend only 7%, or $600 per pupil, less than traditional public schools. In other words, newly founded charter schools spend an average of $800 more per pupil than long-term charters. Though this gap is notable, the magnitude of the difference fluctuates markedly over the decade as seen in Figure 2. In , newly founded charter schools spent only $276 per pupil more than long-term charters, but in the difference peaked at over $1,200 per pupil. Despite the fluctuations, the higher spending by newly founded charter schools compared to those operating for a much greater length of time persists in every year in the past decade.

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