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A Tale of Two Teacher Salaries

More than 30 districts throughout the U.S. use [student-based budgeting](http://reason.org/news/show/apr-2015-education), (SBB) as a means of providing schools with more equitable, transparent, and flexible funding. Districts that employ this system are tasked with making strategic decisions that involve significant tradeoffs. Among the most critical choices is whether to charge school budgets using the district’s average teacher salary or actual teacher salaries. Both methodologies have important implications that ultimately impact the effectiveness of SBB.

Average v. Actual Teacher Salaries Explained

Most districts recognize teacher expenditures by charging school budgets for the districtwide average teacher salary. To illustrate how this works, let’s examine a simplified example. Assume that a district has two teachers whose salaries are determined by its pay scale as follows:

Example 1

Teacher A Teacher B
Years of Experience 2 12
Educational Attainment Bachelor’s Degree Bachelor’s Degree
Actual Salary $45,000 $65,000
District Avg. Salary $55,000

In this example, Teacher A earns $20,000 less than Teacher B and the district’s average salary is $55,000. Now assume that Teacher A works at School #1 and Teacher B works at School #2. If the district were to charge its schools using actual teacher salaries they would be charged $45,000 and $65,000, respectively. Conversely, if the average teacher salary is used then both schools would be charged $55,000.

Example 1

School 1 School 2
Actual Teacher Salary $45,000 $65,000
District Avg. Teacher Salary $55,000 $55,000

Evaluating the Methodologies

Using average salaries results in unintended consequences that aren’t readily apparent in most financial reports. Returning to our example, it is clear that School #1—which employs the less expensive teacher—is essentially providing School #2 with a $10,000 subsidy as shown in the chart below.

School 1 School 2
Actual Teacher Salary $45,000 $65,000
District Avg. Teacher Salary $55,000 $55,000
Net ($10,000) $10,000

In practice, this type of subsidy causes significant inequities since teachers aren’t distributed uniformly within districts. Schools in affluent areas tend to have more experienced and thus more expensive teachers than schools in low-income neighborhoods. Research by Marguerite Roza of Center on Reinventing Public Education examined numerous districts and concluded that teacher salaries are an average of $1,000 to $5,000 higher in schools with fewer low-income students compared to the highest-poverty schools within the same district. Scaled over an entire school a mere $1,000 gap in average salary can easily result in a six-figure funding deficit.

As a result, districts that use average salaries spend a smaller portion of unrestricted funds on low-income students. Using actual salaries instead would allow these principals to apply their savings toward investments that benefit their students, such as additional staff members, teacher development, and technology. According to Roza, “In a game where budgets are based on the districtwide average salary, affluent schools get a bargain on their pricey veteran teachers, while high-poverty schools pay a premium for their low-cost novice teachers.”

Average v. Actual Salaries in Practice

So why do many SBB districts continue to use average salaries in budgeting? The most common argument in favor of this practice is that principals should always hire the best teachers possible without regard to cost. A primary concern is that using actual salaries would allow principals to make tradeoffs between teacher quality and cost. For example, a principal might elect to hire less experienced and thus cheaper teachers in order to spend these savings elsewhere.

Additionally, districts are also concerned about the impact on schools with more senior staff members. Because principals lack short-term flexibility in staffing costs, transitioning to actual salaries might force them to cut expenditures in other areas. Such changes would likely be accompanied by political challenges that district leaders wish to avoid. Finally, some districts prefer the predictability of using average salaries, especially as it relates to to filling mid-year vacancies. In districts that use actual salaries, a principal might have to shift funds from other areas of operations if the cost of a replacement teacher exceeds the cost of a departing teacher. Using average salaries simplifies this process as staffing positions are largely interchangeable.

Accountability Focused on Results

Although these concerns have merit, districts can address them proactively. First, SBB should be accompanied by strong accountability policies that focus on results instead of inputs. Additionally, districts can ease the transition to a new budgetary environment by implementing temporary stop-gap measures. For example, the New York City Department of Education gradually transitioned its schools by holding principals harmless for teachers hired before the policy was implemented. Lastly, districts can also consider adopting a hybrid model in which budgets are charged for a school’s average teacher salary for the prior year, thus affording principals greater predictability and more time to adjust to changes.

Regardless of which methodology is selected, SBB is still superior to full-time equivalent budgeting and will ultimately increase equity, transparency and school-level autonomy. However, to maximize the effectiveness of SBB, districts should use actual salaries and address the challenges associated with this practice proactively.

About the Author

Image of Aaron Smith

Aaron Garth Smith is an education policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets. Prior to joining Reason, Aaron was senior director of analytics at YES Prep Public Charter Schools, a nationally renowned charter management organization serving over 10,000 students in Houston. His writing has appeared in various publications including Orange County Register and Los Angeles Business Journal.