Planning Decisions, Inc.

THE BOTTOM LINE FROM CHUCK LAWTON

Treating Public Spending as an Investment

Published Sunday April 27, 2008

So what, exactly, does it mean to treat public spending as an investment? Rob Grunewald and Art Rolnick, two economists from the Federal Reserve Bank of Minneapolis, give us an example by describing the results of a study of 123 children from low-income families in Ypsilanti, Michigan. Back in the 1960’s, the children were randomly divided into two groups. One attended a special preschool program involving daily sessions with trained teachers and weekly home visits. The second, or control, group. had no pre-school program. Both groups were tracked through age 40. The results were remarkable.

Only 15 percent of the group that participated in the pre-school program required special education, compared to 34 percent for the control group. Conversely, by age 14, 49 percent of the pre-school group was in the top 10 percent of their class compared to only 15 percent of the control group. And the positive benefits of the early attention continued. Sixty-six percent of the pre-school group graduated from high school on time compared to only 45 percent of the control group. By age 27, only 7 percent of the control group had monthly incomes of at least $2,000 (compared to 29 percent for the pre-school group), only 13 percent owned their own homes (compared to 36 percent for the pre-school group) and only 14 percent had never received welfare payments (compared to 29 percent for the pre-school group). At age 40, the average number of arrests per person in the control group was 10. In the pre-school group it was less than 6.

All very nice, but how does this translate into an investment program? Let’s consider just the cost of special education in Maine. Between fiscal year 1996 and 2006, the cost of special education in Maine rose from $149 million to $283 million. In FY1996 15 percent of Maine’s total K-12 enrollment received special education services, about 32,000 individuals. That figure rose to 18 percent of total enrollment in FY 2002 and has held steady at that share since then. The annual cost per student has increased from approximately $4,700 in 1996 to approximately $8,200 in 2006, an average annual increase of nearly 6 percent. Maintaining both the 18 percent share of total enrollment and the 5.8 percent annual rate of cost increase and applying these figures to Maine’s projected school enrollment indicates that in 2017 Maine will be spending $463 million for special education services.

The first step in applying the investment perspective to this issue is to ask, “What can we do to cut that expense, not by reducing services but by reducing the need for them?”

In the Ypsilanti experience, the need for special education was cut nearly 60 percent in the group benefiting from an intensive preschool program. Let’s be more modest for Maine. Let’s say we could cut the need for special education by 1 percent per year down to 10 percent of total enrollment and then hold it at that level. This, in effect, would return Maine to its 1996 level over the next three years and then reduce the demand by an additional 1 percent per year to 2015 and hold it at that level going forward. Given our decline in overall enrollment, such a program would mean that Maine would have approximately 18,000 special education students in 2017 instead of the 32,000 the current “business as usual” trends indicate we will have.

From this perspective, the question becomes, “What savings would such a reduction in demand produce and what sort of pre-school program might we be able to finance with those savings?”

Reducing the share of students needing special education services from 18 percent to 17 percent—about 1,100 students at a cost of $8,700 per student—produces first year savings of about $9.5 million. Carrying the program forward as described, the savings would rise to over $215 million in 2017. Discounting the eleven-year stream of annual savings (2007 to 2017) at a rate of 5 percent yields a net present value of $870 million.

In short, we could borrow $870 million today and—presuming we used it to finance a pre-school program aimed at our most at-risk children and that the program succeeded in reducing the demand for special education services throughout their school careers to 10 percent of projected enrollment—we could pay back the loan plus interest in eleven years with the savings from what we are now projected to spend anyway.

Those, of course, are big if’s. But then that’s what enthusiastic, determined entrepreneurs are forever saying to potential investors—“Just imagine if we succeed!”

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