SD8 - Technical Report: The Cost of Competing in Standards of Quality Funding
Executive Summary: The cost of competing was first proposed as a specific, operational factor in Virginia's education funding formula in the 1988 Joint Legislative Audit and Review Commission (JLARC) report, Funding the Standards of Quality, Part II: SOQ Costs and Distribution. As described in the 1988 JLARC report, the cost of competing refers to the idea that in ways beyond the control of school divisions, the price school divisions must pay for their personnel can be influenced by the need to compete in a regional labor market. The 1988 study proposed that the State recognize a higher cost of competing for school division personnel in Northern Virginia, as the State does for its own classified employees in Northern Virginia. Cost of competing adjustments have been included in Standards of Quality (SOQ) funding since 1988, although approaches for calculating the adjustments have been changing. This study, required by Item 15 of the 1995 Appropriation Act, updates and extends work regarding the cost of competing that was initiated in the 1988 JLARC study. Further, the study mandate also specifies that this study "shall compare professions that are directly competitive with the types of positions that are required to implement the Standards of Quality." Consequently, this study examines the evidence indicating that a cost of competing adjustment is still needed, and the options available for refining the cost of competing adjustment and providing State funding for it. Cost of Competing Adjustment Is Still Needed Four converging sets of indicators demonstrate the current need and appropriateness of a cost of competing adjustment in SOQ funding: • Wage data from the Virginia Employment Commission show that there are different regional wage markets in Virginia, with the biggest difference being between Northern Virginia and the rest of the State. • Regional consumer price index measures show that there are regional cost of living differences in Virginia, again with the biggest difference being between Northern Virginia and the rest of the State. • Regional cost of competing differentials for decades have already been recognized as necessary and provided by State agencies for State classified employees in Northern Virginia. • Other states, as well as Virginia, currently include regional education cost differences as a factor in public education funding. Taken together, these four sets of indicators show that there still is a need for taking the regional cost of competing into account in SOQ funding. Illustrative Options for Refining the Cost of Competing Adjustment Two broad classes of options regarding the cost of competing adjustment are examined in this study: cost calculation options and State funding options. Cost calculation options focus on possible methodological approaches to the cost of competing differential calculation, regardless of the implications for SOQ funding. The State funding options focus on alternatives available to the State regarding how it could pay its share of the cost of competing adjustment, given that the differential has been objectively determined. By considering these two classes of options separately, the likelihood of funding concerns overriding the recognition and consideration of legitimate SOQ costs can be reduced. Cost Calculation Options. Three main alternative approaches for estimating the cost of competing adjustment are examined in this study: • The Linear Weighted Average approach attempts to summarize in a single number current State employee practices across all of its job classes with employees in Northern Virginia. • The Virginia Community College System (VCCS) Policy approach applies the cost of competing differentials used by the VCCS in budgeting for Northern Virginia Community College. • The Stratified Match approach attempts to match categories of school division positions more closely with selected comparable State classified positions that are provided a Northern Virginia cost of competing differential. All three approaches have a key assumption in common: that the State should recognize Northern Virginia school division regional costs of competing in a way that is consistent with its own practices regarding its own employees in Northern Virginia. In other words, if the State already recognizes that in order to be competitive in hiring and retaining its own employees it has to recognize that the Northern Virginia job market requires higher salaries than other regions in the State, then it should also recognize that Northern Virginia school divisions face the same conditions as well. However, these three options provide different ways of implementing this assumption. This report discusses, for each of these three alternative approaches, its rationale and method of calculation, and then its advantages and disadvantages. Illustrative State Funding Options. For any given cost of competing estimate, the State would also have to determine how to fund the cost of competing adjustment. The State has options available to it, other than arbitrarily deflating the cost estimate that would deal more directly with the State funding issue if the estimate is perceived to be too expensive. Two types of illustrative State funding options are examined: • funding the full cost of competing adjustment, and • funding only at the level of the cost of competing that is recognized for teachers (that is, applying the teachers' differential to all other positions as well). The background and rationale behind each State funding option is discussed in the report, along with its estimated SOQ cost impact and its advantages and disadvantages. Details on the cost impacts associated with each funding option on all affected individual school divisions are shown in Appendix E of the report. Taking the three cost calculation options and the two State funding options together, six possible combinations of cost calculation and State funding options are available. Illustrative SOQ cost estimates that would correspond with each combination of cost calculation and State funding options were generated by Department of Education staff, using the current SOQ cost model. The current policy for funding the cost of competing adjustment corresponds to the shaded item in the table: using a "Fund Only at Teachers' Rate" option combined with a "Stratified Match" cost calculation approach. To illustrate, the table indicates the added cost to the State of funding its full share of the Stratified Match cost approach would be approximately $5.9 million in Fiscal Year 1996. Further, to match the additional State funding, Northern Virginia localities minimum baseline SOQ expenditures would be required to increase by an additional $13.4 million. In sum, this study found: (1) a cost of competing adjustment to SOQ funding is still needed and appropriate, especially because the State has to provide cost of competing differentials for its own employees in Northern Virginia; and (2) this adjustment could be refined by more carefully matching all categories of school division positions required to implement the SOQ with comparable State classified positions. While there is room for further refinement in the future, the Stratified Match calculation used in this study, fully funded, is a reasonable step in improving the cost of competing adjustment. This refinement would cost the State an additional $5.9 million, and require a higher minimum baseline expenditure of $13.4 million per year in Northern Virginia. But these additional costs would reflect more accurately the costs of implementing the SOQ in Northern Virginia school divisions. |
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