Real World Economics: Econ 101 explains district budgeting dilemmas

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Edward Lotterman

The St. Paul Public School District’s have to close a projected $100 million deficit for the approaching 12 months, discussed in recent weeks, shouldn’t be unique.

Similar situations prevail for college districts large and small across the state.

Furthermore, the identical underlying problem is hitting many other institutions, including churches, scout troops and American Legion posts.

The phenomenon is greater than nationwide. Other industrialized countries face it as well, especially in Europe. For economics teachers, it illustrates a minimum of two necessary introductory principles, plus several others.

One is “age structure of a population.” This deals with how all of the individuals in specific jurisdictions, from nations to states, cities and faculty districts, are divided by gender and into various age groups.

The “population pyramid,” a graphic device shaped somewhat like a Christmas tree, is a fast method to convey this demographic situation. It mainly is 2 bar charts, female and male by age, placed back to back vertically. A fast look illustrates when there have been large or small birth groups. The broader the bars, the more people there are within the population of that age, the narrower the less. A superb explanation could be found by clicking here.

The second topic, that of “cost curves of the firm,” is foundational to all “production economics” coping with how goods and services are produced, whether for profit or not.

Now, let’s apply these two principles to real-world situations.

On the primary topic, consider that public school districts, congregations, rural clinics, 4H clubs and so forth all struggle with the indisputable fact that our population is aging. Though the populations of our nation and state are higher than ever, the fractions of those populations which are of ages for education or for youth activities are smaller, relative to the final population, than they were a generation ago.

Do the maths: In 1957, we had 4.3 million births in our nation when the population totaled 172 million. In 2022, 3.67 million babies were born to 334 million inhabitants. Births per 1,000 population were at 25 or above for many of the Fifties but are actually under 14. If one excludes births to females who immigrated at any age and their first-generation daughters, that indicator drops significantly more. In order more people age, fewer individuals are born to interchange them.

Secondly, the prices of manufacturing almost anything: cars, corn or educated kids, are complex.

“Fixed costs” have to be paid whatever the variety of “units” produced, whether bushels of corn, Sunday school attendees or highschool graduates. It costs the identical to light and warmth a classroom whether it has five students or 40. Readers could also be more aware of it as “overhead.”

Other costs do vary with output. These “variable costs” increase or decrease based on units served or produced. Textbooks, numbers of teachers, cafeteria groceries, fuel for buses, all vary with the number of scholars, although not necessarily in a smooth linear fashion. Natural gas to heat a faculty constructing only becomes a variable cost when there are so few students that the constructing must be shuttered. Cafeteria food costs, alternatively, will vary greatly when more or fewer students eat lunch in a given school 12 months.

For every of such costs, the district should want to know a per-unit-of-product amount. Say a faculty district must spend $1 million on something no matter number of scholars. If there are 20,000 students, the “average fixed cost” per student is $50. Drop enrollments to 10,000 and the common fixed cost doubles to $100 per student. With 5,000 kids in the colleges, each would represent a $200 share. The identical calculations apply to a rural congregation dividing the insurance cost for his or her constructing or a pastor’s salary by 300 members versus 75.

Similarly, a district should want to know variable costs on a per-student basis. The variety of teachers needed for an 800-student district is lower than for an 8,000-student one, but the quantity per student shouldn’t be the exact same. The per student cost of groceries for a 1,500-student district could also be lower than for a 400-student one due to discounts for larger orders.

The issue for college districts and churches is that a high proportion of costs are fixed. One must heat buildings and periodically renew roofs whether there are 50 worshipers or 500, whether there are 800 students or 200. A classroom floor needs cleansing whether 12 kids use it or 28. Nowadays, you wish a faculty nurse or other person qualified to administer kids’ mediations in a constructing with 200 or 500. Ditto for a custodian, for somebody within the office answering phones, accepting deliveries and handling visitors. And you mostly need someone who can fix glitches with routers, servers and video projector connections.

Some “inputs,” like teachers, are “lumpy.” You may have one biology teacher or three but you can’t have 2.63. Yes, you’ll be able to have half-time positions. You may have one degreed librarian cover five buildings while less-educated and more cost effective aides actually help students. You may teach biology every semester but offer geology or physiology only every other 12 months. But it surely shouldn’t be a smooth operation like gently easing up on a gas pedal. Considering whether the staffing costs are governed by a collective bargaining agreement adds a brand new element to the budgeting process.

One other problem is that folks and residents on the whole demand certain services. Federal and state laws mandate services for special needs students who would have been shut out after I was a child. Even in small districts, AP math  or calculus courses are demanded fairly than simply the algebra-geometry-trig offerings most baby-boomers got.

Yes, staffing and costs at district offices have burgeoned. For some people, including some teachers, “360 Colborne” — the road address of SPPS central administration — has turn into an epithet used to elucidate myriad problems. Bureaucracies burgeon easily but resist downsizing. An enormous a part of St. Paul’s budget problems stem from the very predictable ending of huge sums of federal funds available under the COVID-era American Rescue Plan Act of 2021. Skeptical conservatives are entirely correct once they say that “temporary” programs funded with temporary dollars inevitably turn into everlasting to some extent because no organization desires to reduce. There all the time is someone who advantages from a program and doesn’t want it ended.

Don’t blame “bureaucrats” for all problems though. Every district superintendent and finance chief knows that fixed costs could be cut by closing school buildings. In addition they know that saying closings of faculties which have served neighborhoods for a century all the time touches off political firestorms. Ditto for tax referendums that might increase school funding.

The ultimate econ concept that is beneficial in occupied with these challenges is that of “marginal cost,” the change in total costs with a one-unit change, up or down, in some output or input. If we lose one student, how does that change our total costs? If we added one other service, how would that increase our total costs? How would it not increase total costs so as to add one section of AP physics? How much would it not decrease total costs to chop lacrosse?

Specific situations will change, but demographic changes, especially rapidly dropping birth rates all over the place, will probably be much more salient on this century than within the last. Knowing how economists explain what’s happening might help understand things.

St. Paul economist and author Edward Lotterman could be reached at stpaul@edlotterman.com.






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