Allocation ratios as predictors of financial condition in Michigan K-12 school districts.

Abstract

The objective of this study was to determine if a model could be developed which utilized allocation ratios to predict financial condition in Michigan public school districts. Financial ratios have long been used by private sector analysts to judge the financial condition of firms. Allocation ratio analysis, a derivative of standard ratio analysis which uses only expenditure data from the organization's income statement, was used in the analysis of financial condition. The relative potency of General Fund allocation ratios in predicting financial condition was examined. Seventeen allocation ratios were derived from each of the functional expenditure categories designated in the Michigan Department of Education's Annual Financial Report, Form B. Financial Condition was measured by the percentage of General Fund balance a school district maintained. Data were obtained from each of twelve fiscal years from 1982 to 1994. A multiple regression model was developed using the population data from 1982 to 1992; the model was confirmed with sample data from 1992-1994. The major finding in this study is that financial condition in school districts is related to three allocation ratios. These ratios are: High School Instruction, Capital Outlay and Fiscal Services. Both High School Instruction and Capital Outlay are positively related to healthy financial condition. Fiscal Services are negatively related to healthy financial condition. Improved financial condition prevails when, simultaneously, general fund allocations in high school instruction and capital outlay are maintained and prudent spending in fiscal services is observed. Initial benchmarks for allocation ratios on these three expenditure categories are offered as a guide for healthy and/or unhealthy financial condition. Practicing business officials are encouraged to analyze their allocation ratios as means of self-assessment and to provide an early warning system of potential decline in fiscal health. School business administrators and boards of education are urged to build school district budgets with the strategy of benchmarking allocation ratios.