Financial ratio analysis: A financial comparison of Michigan K-12 school districts.

Abstract

The State of Michigan completely overhauled its method of financing public schools effective with the 1994-95 school year. As a result of the funding changes, local property tax is no longer the primary funding source for public schools. Such changes demonstrate the dynamic nature of the education industry. This study was conducted in an effort to encourage practicing school business officials to begin using financial ratios as part of their routine analyses and to provide them with a worksheet to facilitate the use of ratios. District officials are encouraged to calculate their district's ratios and compare them to the state average for the purpose of assessing relative fiscal standing. This study examined various contextual classifications of school districts to determine whether or not certain groups of districts may further benefit by extending their analyses to include comparisons with others in the same classification. Only liquidity and equity position ratios were used in this study because they were readily calculated, applicable to schools and important indicators of financial condition. Michigan's 524 K-12 school districts were included in this study. Districts were classified and analyzed on the basis of contextual variables such as geographic location (4 groups), enrollment (2 groups), community type (5 groups) and state equalized value per pupil (4 groups). The five liquidity position ratios were analyzed separately from the five equity position ratios. MANOVA, ANOVA and Fisher LSD tests were used to assess differences in ratio values among the groups within each contextual classification. A separate analysis was conducted for each contextual classification. The results, which were intended to be more descriptive than prescriptive, indicated that some groups of school districts exhibited consistently different liquidity and equity position ratios than all others. Rural districts, tri-county districts, highest quartile of sev/pupil districts and large districts (enrollment above 2,400 students) showed consistently different ratio values than other groups within their respective classifications. These types of districts may benefit from comparisons with other districts in the same classification. A worksheet is presented to assist practitioners in making assessments of relative fiscal standing.