Perverse incentives and school budgets

A Journal Sentinel article describes one of the perverse incentives in the Wisconsin spending caps. A bit of explanation is in order. Wisconsin puts a limit on the amount of money a school district can spend, based on the district's enrollment and the district's spending in the previous year. The latter creates a perverse incentive: to spend at the limit. If a district spends less than the limit it will be able to spend less in the future. So even if the district wants to spend less in one year, it does not wish to tie its hands in the future.

Technical detail: 75% of the unspent money is recoverable, but that means 25% is permanently lost. This creates another catch: if the district does decide to recover the 75% the following year, taxes may take a sudden jump since state aid is based on the previous year's spending.

Apparently, according to this article, several districts decided not to spend at the limit, in the expectation that the law would be changed. It was not, and now they are discovering that their future budgets will be lower because of their one-year decision.

Caps like these, although designed to set a ceiling on spending, in practice become a floor. As local taxpayers realize tax rates are set at the state rather than the local level their interest in local government declines. As a result, in my experience, local politics increasingly becomes an insider's game--dominated by employees and those pursuing a particular agenda. I was struck by the lack of interest in those appearing before our board in finding ways the money could be spent more effectively; practically everyone simply demanded more money. The irony, of course, is that spending more was the one thing the board could not do.