State of Florida Department of Education

REVIEW OF CURRENT PRICE LEVEL INDEX METHODOLOGY

State of Florida Department of Education

DECEMBER 21, 2018

THE BALMORAL GROUP, LLC 165 Lincoln Avenue | Winter Park, FL 32789

Table of Contents

Executive Summary............................................................................................................................................... 2 Background ........................................................................................................................................................... 4 Literature Review..................................................................................................................................................6

Relative to the FPLI and assumptions ............................................................................................................... 6 Relative to methods used in other states ......................................................................................................... 8 FPLI and The Wyoming HWI.............................................................................................................................. 9 Review of Econometric Theories and Assumptions Employed in the Current FPLI............................................12 Assumption 1: Average wages predict the relative costs of hiring school personnel .................................... 13 Assumption 2: The Average Centrality Index of teachers accurately reflects their distribution....................13 Assumption 3: County characteristics may be used to improve estimated relative wages ........................... 14 Assumption 4: Wages cannot vary widely between adjacent areas .............................................................. 15 Summary and Analysis .................................................................................................................................... 15 Review of Data Choices and Consistency with the Economic Theories and Assumptions Employed in the Current FPLI ........................................................................................................................................................ 18

Statistical Analysis of the wage data used in the FPLI ................................................................................ 19 Findings of the Review of the Current Price Level Index Methodology. ............................................................ 24 Works Cited......................................................................................................................................................... 25 Appendix A: In-Depth Literature Review ............................................................................................................ 30

Relative to the FPLI and assumptions ............................................................................................................. 30 Relative to methods used in other states ....................................................................................................... 32

The case of Maryland:................................................................................................................................. 32 The case of Washington State .................................................................................................................... 32 The case of New Jersey:..............................................................................................................................33 Comparisons between funding allocation approaches .............................................................................. 33 Appendix B: Working Assumptions of the Current FPLI ..................................................................................... 36 Appendix C: Statistics Review ............................................................................................................................. 46 Appendix D: Annotated Bibliography ................................................................................................................. 51 Appendix E: Florida Statute language.................................................................................................................65

List of Figures

Figure 1. FPLI Process Logic .................................................................................................................................. 5 Figure 2. Comparable Wage Index Flowchart.....................................................................................................11 Figure 3. Impact of Centrality in the 2017 FPLI...................................................................................................14 Figure 4. FPLI Index vs. adjustments by County..................................................................................................17 Figure 5. Average Annual Wages and k-means breaks.......................................................................................19

List of Tables

Table 1. Description of State Methodologies ....................................................................................................... 8 Table 2. Strengths and Weaknesses of approaches to wage indices.................................................................. 10 Table 3. Description of FPLI and Wyoming HWI ................................................................................................. 10 Table 4. Hypotheses and Alternative Hypotheses .............................................................................................. 12 Table 5. Summary of FPLI Process Formulas....................................................................................................... 16 Table 6. List of Data Sources ............................................................................................................................... 18 Table 7. Data Sources.......................................................................................................................................... 20

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Executive Summary

At the request of the Florida legislature, the Florida Department of Education (DOE) obtained an independent, third party review of the current index methodology, the methodological basis for which had not been examined since 2003. This report has been prepared by The Balmoral Group under contract to the Department of Education to meet the specifications of the request.

The Commissioner of Education (i.e., the Florida Department of Education) is to annually compute for each school district in Florida the current year's district cost differential, based upon the Florida Price Level Index (FPLI). Florida law specifies how the Index is to be employed to determine the cost differential1, using a three-year running average and specific factors. The index is managed and produced by Florida Polytechnic University (FPU) in collaboration with the University of Florida's Bureau of Economic and Business Research (BEBR).

The FPLI is a wage-base index used to predict differences in the relative levels of costs for hiring comparable personnel across school districts in Florida2. The Index is intended to account for differences that are outside a school district's control, including what economists call "amenities" or "disamenities" - things people generally want to live near, or avoid, respectively.

The current FPLI hinges on several economic theories and assumptions. The following four theories or assumptions broadly capture the FPLI process logic:

1. Average wages in a county are an accurate indicator of the relative costs of hiring school personnel.

2. Average wages for a county can be adjusted to a level accurately representative of teachers'/school personnel, using a measure of occupation-specific employment density and county size.

3. County characteristics may be used to improve estimates of relative wages and/or to adjust the Index where accurate wage data is sparse.

4. Wages cannot vary widely between adjacent areas.

The report progresses in four stages:

1. A summary of literature relevant to the FPLI. A condensed literature review is contained in the body of the report, with additional detail and more in-depth analysis in Appendix A.

2. A summary of how wage or cost of living indices are calculated in other states with respect to teacher remuneration. The review finds that several other states have

1 See complete language of the relevant Florida Statute in Appendix E. 2 The index is intended to represent the cost of hiring comparable school personnel, although commonly referred to as teachers' salaries. In Florida, teachers' salaries constitute about 52% of total school personnel spending.

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adjusted their approach in the last few years due to emerging methodologies and better available data. 3. An assessment of how the assumptions made in the construction of the FPLI are consistent with economic theory and literature. There are a number of working hypotheses embedded in the FPLI process; some of the econometric approaches used are not the norm across other states that use similar index approaches. 4. An assessment of how the data choices made in the construction of the FPLI are consistent with economic theory and fitness-for-purpose. The data sources are generally industry standard (e.g. Census); the use and manipulation of the data has changed from year to year. A table summarizing the changes over time is included in the data review section. The report concludes with several recommendations that may improve the FPLI from the perspective of transparency, accuracy, and fitness-for-purpose. The most significant of these are: 1. Thoroughly document process steps and data sources to promote understanding and validate process and calculations, and to ensure that the FPLI represents the legislative intent. 2. Taking advantage of new County level data OES forthcoming from Census, and other data sources to consider a Comparable Wage Index based on school personnelcredentialed comparable occupations (generally, but not for all positions, collegeeducated workers). 3. The creation of an advisory group that is conversant in relevant terminology and familiar with Florida's education financing may help to address FPLI concerns.

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Background

Florida is a high-growth state with a highly competitive marketplace for labor, and the allocation of funding to the education sector is one element of the State's ability to attract and retain teachers. Schools compete for teachers (and other school personnel) not just with other schools but with other workplaces that offer opportunities for a teacher-qualified worker. Therefore, teacher salary is an important component of the workplace choices teachers make, including whether to seek employment in comparable positions that are not in the education sector. However local amenities such as school district quality, neighborhood crime or other factors that economists may not be able to readily measure also need to be considered. Prior to 2004 the FPLI used a "market basket" approach to assess cost of living variation between counties, but this was perceived to be biased toward counties with high land costs. It also failed to take into account the effects of positive amenities that compensate to some degree for high rents. This approach was subsequently replaced with a wage-based index to account for these issues. Over the intervening period, the data used in the construction of the FPLI and certain aspects of the methodology have changed, with varying degrees of transparency. The current wage-based FPLI is constructed in a series of steps as shown in Figure 1 on the following page. It is difficult to ascertain whether the formula and procedures currently in place meet the original legislative intent of the Index. Over the past decade, approaches to education funding across the U.S. have evolved with the availability of better data than was accessible in the past. For example, data that distinguishes rent gradients between counties and estimates of the responses of actual Florida wages to various commute costs are now readily available. The wage-based index is one of several approaches currently used across the United States. The Comparable Wage Index (CWI) is an alternative wage-based index that has been adopted in several other states. It is based on average wages in a state for jobs that require comparable education and qualifications. The FPLI in comparison uses the average of all non-education wages. The reason for the difference is that the FPLI looks to wage data for non-education workers to characterize differences in county level costs to hire school workers, as opposed to directly comparing school worker compensation levels. Historically, the data to construct a CWI was not available at the County level, and would be difficult to replicate meaningfully for Florida. Recent work for the U.S. Department of Education has resulted in countylevel data that is intended to be updated annually. In discussion with practitioners in other states that utilize this approach, the CWI is reasonably straightforward to implement and explain. In contrast, it is difficult for practitioners to understand and replicate the current FPLI. The Index managers themselves have reported that less than half of teacher salary valuation is explained by the FPLI, whereas applications of the CWI has been found to be able to explain around 92%[1].

[1]Denslow (2015) Taylor (2011) Updating the Wyoming Hedonic Wage Index. Teacher Fixed Effects Model.

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