UC Davis

This dissertation consists of three papers on public economics and school finance. Each focuses on school districts in California, exploring how they manage their finances. Given the structure of the California’s school funding system, districts in the state uniquely situated compared to school districts elsewhere and other types of local governments more broadly. The results of the analyses, however, are instructive and could be relevant in other contexts.

In the first chapter, I explore categorical funding programs—additional funds available to applying districts that are targeted to specific purposes or student groups. These are the most significant of the limited options for California school districts to raise revenues. The use of these funds is restricted, however, and districts often face a choice between altering their educational program and forgoing the new revenues. This paper analyzes the impacts of the availability of categorical funds on school district decision-making. Using detailed school district financial data and focusing on results for four major programs, I use a difference-in-difference research design by exploiting the timing of each program’s introduction or elimination and find that district spending decisions are significantly influenced by these categorical programs, as participating districts react by shifting their spending patterns to accord with program goals. The influence of categorical funding on district spending patterns is accompanied by mixed results for student outcomes. Suggestive evidence shows that some programs have benefits for students in participating districts while other programs have minimal impacts on student achievement.

The second chapter examines school district savings. In any given year, California school districts hold a significant portion of their revenues in reserves. While some amount of saving is fiscally prudent, such high savings raise a question of whether this reserve behavior is appropriate. Revenues held in reserve are not spent on services for the students that generated them and research in other contexts has raised concerns about agency issues—the self-interested use of savings on the part of managers potentially at the expense of the broader organization. In this paper, we explore the determinants of reserves in California school districts. With estimates of these determinants, we then identify districts that hold significant excess reserves and examine whether these districts exhibit agency issues. We find that revenue volatility, total enrollments, and declines in enrollment are key determinants of district reserves. District that hold substantial excess reserves also spend more on administrative expenses relative to other districts, indicating some potential for agency issues. However, further analysis finds that these high-saving districts also have higher average student achievement, suggesting that their reserves behavior and the associated administrative spending may actually reflect a premium paid for higher quality management.

The third chapter is on the volatility of revenues. California school districts have little control over their revenues—most rely heavily on state aid for the bulk of funding. This funding fluctuates from year to year, and in the case of recessions, can be subject to substantial reductions. Typically, income or revenue volatility suggests a need to smooth consumption in order to avoid disruptions when shortfalls occur. Using nearly 30 years of detailed financial data, we explore how districts manage this variation and the associated uncertainty. We find that, on average, California districts spend nearly all new revenues, responding myopically to annual changes. There is, however, substantial variation between districts in the management of revenue volatility. These differences in management are related to district characteristics like region or grades served, as well as student demographics and the level of available resources. We continue our examination and find that differences in management are related to student achievement and class sizes.