Minnesota Principal Licensure Program – Cost / Benefit Analysis
11/30/2011
Advancing one’s education is correlated to an individual financial lifetime earnings, and increases the number of ways in which an individual can contribute to society. While going back to school is seen by some as a cost, it should more accurately be described as an investment. As this examples shows, were an elementary school teacher having a six of years of work experience and a MA degree to decide to go back to, even if this person were not to obtain the desired job, in this case, that of being a principal, the individual would still increase their earning by now qualifying to a different scale in the Wayzata teacher salary scale. In this example, the teacher in question originally had an MA and 30 additional graduate credit units, if that teacher were to obtain an additional 30 credit units, that individual would then be moves to the MA+60 pay scale. In average, a teacher changing pay scales from MA+30 to MA+60 would benefit from a pay increase of ($40442 – $42116 [before discounting or BD]) $1674 dollars (BD) a year.[1] Since the employee in question was on the 6th year of work when he or she took a paid sabbatical year, being paid at MA+30 ($48,212 [BD]), and coming back on his or her 8th year, being paid at MA+60 ($54,239 [BD]), the individual at first value seems to increase their earnings considerably even if he or she did not started working right away as a principal. If the person came back to work and was immediately transition to working as the acting principal, the difference would be even greater, starting at $106,984 (BD) which is more than twice the salary the person would have received if he or she had simply stayed as a school teacher in the MA+30 bracket (pay for year 8th – $52,565 [BD]). However, when a raise is received is impacted by the discount rate that is used to calculate the depreciation of his or her earnings throughout the years.
Looking more closely at the question, in this study the researcher uses both a 5% discount rate and a 3.5% discount rate to calculate the possible changes in earnings over time. When calculating the discount rate the study uses the present value formula to find the discounted value of a future amount (P= A/(1 + r)n). Both 3.5% and 5% are consider acceptable discount rates by most of the related literature. Taking into account a discount rate, as well as an interest in the individual potential savings, and the cost of obtaining 30 more graduate credits, what are the cost benefits for the elementary school teacher of going back to school? Should the elementary school teacher go back to school and obtain the licensure to become an elementary school principal? What other variables that are usually not analyzed in terms of financial cost should be included as financial costs for this calculation? While a principal generally earns more than a teacher, the teachers also work more days in the year, and have to deal with different types of stress, something that may also have a cost for the individuals, and be one of the variables that the is most influential in their decision. Below are a set of assumptions that were made when developing a response to this problem.
Assumptions:
– Discount Rates – To answer this question, two different discount rates were used. While other values such as 6%, 3%, 10% may be used by some to calculate the changing value of salaries, this evaluator chose 3.5% and 5% as its discount rates. The reason for choosing these two values is that they are both within the values that are considered acceptable and they provided the researcher with the possibility of seeing if the best possible choice for the teacher changes when the discount rate is modified.
– Savings and Interest Rates – While saving rates change depending on an individual’s income and currently most savings and stocks are owned by the wealthier members of the United States society, this solution sets the saving rate at 10% per year. This saving then earns a 7% interest per year. While these values are arbitrary, the interest rate of saving was purposely set higher than the income depreciation rate.
– Credits Per Semester – In this example, to reduce the complications of attending to summer school, the student decided to take 15 credits per semester. To do so, the student took the maximum allowed credits per semester under the basic tuition rate (14) and then paid for the extra hour a semester to then take 15 credits a semester and finish his or her 30 credits after 2 semesters.
– Salary Steps – Every year of work and even during the sabbatical year when the teacher attended school, the instructor advanced a salary steps. Salary steps are there to rewards seniority, but also to help account for depreciation and the inflation of the cost of living. While during a sabbatical, a Wayzata teacher earns only 50% of their salary, and sabbatical years are generally awarded sabbatical for 1 to 2 years, in this case, while the instructor only went to graduate school for a year, after that year, in term of salary steps the teacher was now on the 8th, rather than the second half of the 7th salary step.
– Health Care – Health care choices are regularly based on complex decision that take into account that needs of that individual as well as other direct family members (children, spouse). Because of the different health care options available to both a state employee and a graduate student, such as signing up for one of the student health care coverage or continuing to pay the Wayzata district teacher health care policy, for the purposes of this paper, it is assumed that this represent only a minor loss for the teacher, who would obtain less benefits from their employer during their sabbatical year and will have to pay an extra $800 that year for health care coverage.
– No Stress Related Changes (Illness) – In this study the researcher assumes that as the teacher transitions towards working as a principal, that there will not be any additional work-related health risks, and the level of stress will stay constant, despite there being possible real world changes. Since this individual had seen becoming a principal as a possibility since early in their career, he or she was as mentally prepared for this job as he or she had been as an elementary school teacher. The teacher perhaps felt even less stress as an administrator than he or she had previously as a teacher.
– From Teacher to Principal –While it is likely that in real life, the teacher may not be able to find a job as a principal right after graduating, and that he or she may instead go back to teaching, or working as an assistant principal or school administrator for a few years, it is assumed for the purposes of this report, that the teacher will begin to work as an elementary school principal in Wayzata right after graduating. In addition, the teacher has a 100% probability of obtaining this job after graduating.
– Housing and Transportation – During the teacher’s sabbatical year, the teacher moved to live with his or her brother and attend the University of Minnesota. While his or her brother allowed the teacher to stay in his home for free, this individual still has to pay the mortgage to her home in Wayzata and decided not to rent out the place. The driving distance from the teacher’s home in Wayzata to the elementary school where he or she works is the same as from the person’s brother’s house to the University of Minnesota. There are no increases in either transportation or housing costs for the future student. The teacher was planning to take an initial trip to Minneapolis whether or not he or she would attend the UMN to visit his or her brother.
– Demographics – In this example the individual in question is 30 years old, single but planning to marry his or her partner in a couple of years. The teacher does not have any children, and the teacher’s partner is quite busy and travels regularly for work. The teacher’s partner does not feel that the teacher’s return to graduate school will detrimentally affect their relationship. As such, there are limited relationship costs and these costs are not considered in this example.
– Year Zero – There are a few places were year zero could have been set and then used as the basis to calculate the discount rates, and interest rates. If the teacher had been planning for the whole six years that he or she would go back to school, then the cost of school would have to be discounted from year zero (or six years before enrolling in school). Another possible year zero could be after the teacher has worked for six years. In this scenario, the costs of schooling are not discounted by the first six years. However, for this study, the researcher argues that the teacher had been planning for six year in returning to and going back to school, as such year zero is consider to be the first year the teacher worked as an elementary school teacher in Wayzata.
– Cost to Society and Wayzata – to reduce the external impacts of the teacher’s decision, the study assumes that had this teacher not been admitted to the university, that a different student would have taken this student’s place as there are generally more applicants wanting to attend the university than the University of Minnesota can provide access to. Because of the low elasticity of demand, there is not a cost to society, but rather a transfer of cost from one individual to another. In this study, the researcher makes a similar argument for the Wayzata school district. The district knew of an upcoming vacancy for some years as a principal was planning to retire. Another instructor in this school would have been given this opportunity, if this teacher did not receive training to fill the newly established vacancy. As such, because both events, a new student and a new principal would have taken place regardless of whether this teacher filled that position, this analysis focuses on the decision making and choices of the individual instructor, considering the impact of further educating him or herself to primarily impact their personal condition rather than society in general.
– Leisure Time – When calculating the cost of increasing one’s workload, it is difficult to know whether the time that the person was not originally working in had any value, because of this, while there are 7 additional weeks that an elementary school principal has to work in comparison to an elementary school teacher, it is hard to know to what extent is this time valuable. Since it is difficult to measure the contribution of leisure time and its opportunity cost, the researcher decided to exclude the value of leisure time from the calculations by arguing that were it not for these events the teacher would have lost a lot of his or her money gambling instead of being productive. While leisure time costs were not included in the calculation, it can be a very important variable. For more information about the financial impact of leisure time visit TABLE 9.
– Interactive Spreadsheet – Modifying some of these assumptions would substantially impact the results. The attached spreadsheet is interactive; therefore if the reader is interested in finding out the impact of other interest rates, saving rates, and discount rates, they can modify the assumptions as needed to the attached spreadsheet.
Analysis and Results
To calculate the possible incomes, this research used the income tables that can be found at the Wayzata school board website (http://www.wayzata.k12.mn.us/Page/6925), basing the salary differences between the choices available to the teacher on the salaries for principals (from the principals’ contract) and the teacher salary differences from the resources provided by the professor who commissioned this study as well as the (WEA teachers’ contract) also available through the Wayzata school board website. Once a teacher joins he enters into a contract with the school board that details the salary steps and possible income that the teacher could generate were he or she to stay in this job for the remainder of their career. The attachment provided by the professor who commissioned this study provided a salary schedule from 2006-2007. This salary schedule was used to calculate the starting salary of the teacher in question. Since the teacher will have six years of teaching experience by the summer of 2012, it can be estimated that this instructor began to work in Wayzata on the school year 2006-2007. Therefore this scale is appropriate for the teacher in question. Since the teacher will graduate from the University of Minnesota after the 2012-2013 year, for this study the researcher uses the current principal salary as a proxy, but it is likely that the upcoming contract will include a minor modification to the salary base to account for inflation. To calculate the possible salary if the teacher does not obtain a principal position, in this study the researcher analyzed different possibilities, finding the differences between the yearly wage difference between the current MA+30 contract and MA+60 contract and added that difference to the 2006-2007 contract provided by the professor who commission the study, to find out what salary would be obtained if the teacher did not obtain a principal’s position. The tables were the average difference between MA+30 and MA+60 salaries was calculated is TABLE 1. The first seven years of an MA+60 salary were calculated, but they are not included in TABLE 4, and TABLE 5 because regardless of the outcome, the salary is the same for the instructor during the first 7 years (including the year of study) since the instructor has yet to improve his education credentials.
TABLE 2 provides the reader with an explanation of what cost were included when the student decided to stop working in Wayzata for a year and attend a licensure program at the University of Minnesota. As explained within the assumptions, healthcare was set at an increase of $800 a year, there were no changes to the transportation costs, and according to the Wayzata teacher terms of contracts, teachers are allowed to ask for a professionally related sabbatical to improve their education as long as other teachers are staying at the school and have not also requested taking an educational sabbatical. Since the school had planned to allow one of its current instructors to become a principal, the societal cost and district cost of training this principal are not the result of the teacher’s decision but would have happened regardless; therefore this study focuses on the personal cost of a teacher in making an investment and continuing their education. The costs of tuition were based on the current tuition cost for the University of Minnesota graduate school (http://onestop.umn.edu/pdf/tuition_grad_2011-12.pdf).
Since the teacher will be taking 14 credits each semester, the teacher decided to pay for an additional credit and take 15 each semester to avoid going to summer school and finishing the program as quickly as possible. TABLE 3 includes very similar information to TABLE 2 with the difference that the values are discounted by 3.5% (TABLE 3) instead of 5% (TABLE 2). Since the person is attending the university in what would be their 7th year of work and the first year the salary was not discounted, the discount rate was 1.05^6 and 1.035^6 respectively. The costs of attending the university for a year are very different if the values are discounted by *1.34 or *1.23. Taking into account that the teacher will be taking 15 semester credits as well as working volunteering for 320 hours which at the cost of $17.5 an hour is equivalent to $5600 (BD) a year, the cost of going to school for a year $56,960.33 (BD) or $42,507.71 (5% Disc) or $46,309.21 (3.5% Disc). It is expected for the values discounted by 3.5% to be larger than the values discounted by 5% since the values discounted by 5% lose their relative value quicker. An important assumption made by the researcher in this study which is included within TABLE 2 and TABLE 3 is that the person did not lose income despite now working 47 instead of 40 weeks since the person used to spend their additional time gambling and losing a value comparable to what he or she would have earned otherwise (additional details in TABLE 9). The total number of weeks a principal works and an elementary school teacher works are based on current Wayzata contract details. During the year the teacher goes back to school, he or she loses half of their income; this was included within the total costs of obtaining the degree.
The next tables that were generated were TABLE 4 and TABLE 5, these two tables account for the devaluation of salaries (5% or 3.5%) and the different possible salaries (MA+30, MA+60, Principal No-PhD, Principal with a PhD). There is a possibility that the teacher does not obtain the principal position and earn only the salary for a teacher with an MA+60 credits, or perhaps the teacher when completing those 60 credits was able to finish a PhD after transferring credits from the MA and having some courses exempted. The other important variables that are calculated in this table are the annual savings and the interest rate of these savings. While the first year the 10% yearly savings did not gain any interest since the money was added to the saving account at the end of the year, after the first year, the money the teacher added to the savings and the money that was already there gains a 7% interest rate per year (*1.07^n). The money added at the end of the year, does not gain an interest that year. The 7% interest rate was set to be higher than both discount rates (3.5% and 5%) [dividing by 1.03^n and 1.05^n respectively) yet this may not necessarily be the case.
TABLE 6 includes what the savings and earnings would have been without a discount rate. This table is only added for reference purposes, since it is important to discount all values on a yearly basis. TABLE 4 and 5 include a very detailed illustration of the different earnings per year. At the end of the table values for a 35 year career are calculated. All of these values are then taken for the calculation of the net benefit analysis (total benefit – total cost), and the benefit-cost analysis (total benefit/total cost). Earnings (without taking into account the cost) are also compared using the option of no going back to school as having a value of “1”. According to this comparison, both taking into account savings and not taking into account savings, the earnings comparisons result in (for 5% discount) – MA+30 1 (BD) or 1 (5%) or 1 (3.5%), MA+60 as 1.01 (BD) or 1 (5%) and 1 (3.5%), principal no PhD as 1.76 (BD) or 1.66 (5%) or 1.69 (3.5%), and principal with a PhD as 1.76 (BD) or 1.66 (5%), or 1.70 (3.5%). This is to say that someone who became a principal will earn 1.76 times what someone that did not go back to school over the course of a 35 year career.
However, when taking into account the cost of going back to school, following the assumptions that are made by the researcher in this study, it can be concluded that unless the teacher obtain a job as a principal, it would not be worth it to go back to school. The benefit-cost ratios indicate this situation. When calculating the benefit-cost of programs, the researcher divided the benefits by the cost. These results can be found in TABLE 7 and TABLE 8. As indicated in these tables, this resulted in the following values: MA+60 – 0.38 (BD) or .00 (5%) or .08 (3.5%), principal with no PhD – 28.84 (BD), 15.24 (5%), 18.14 (3.5%), principal with PhD – 29.08 (BD) or 15.37 (5%) or 18.51 (3.5%). These calculations show that for every dollar invested on obtaining the licensure and the 30 graduate credits needed, if the person does not obtain a job as a principal, then for every dollar invested in obtaining the licensure the person obtained a return of less than half a dollar (.38) or .00 (5%) or .08 (3.5%) per dollar when discounting. However, if the person obtained a job as a principal, whether or not he or she also obtained a PhD, the teacher obtained either $28.84 (BD) to $29.08 (BD) per dollar invested or $15.24 (5%) or $15.37 (5%) or $18.14 (3.5%) or 18.51 (3.5%). The return on the investment seems to be marginally bigger if the person obtains a PhD or not, and the differences between not becoming a principal become larger as the discount rate decreases (from 5% to 3.5%).
Conclusion
As indicated in these results since the researched assumed that the instructor would obtain a job as a principal when he or she returns to Wayzata, it can be concluded that it would be beneficial for the teacher to make the investment to obtain a University of Minnesota principal licensure. While not calculated here, the person may also save money as he or she may would stop gambling. Since the cost of the additional seven weeks of work the person would have to work were not calculated because of this personal problem of this individual, a sensitivity analysis would benefit from calculating how the additional weeks of work negatively impact the gains of going back to school. Due to the subjective nature of how much these weeks affect their additional opportunities; the researcher chose to not take them into account. To illustrate how these values could have impacted the final benefit-cost values please refer to TABLE 9. While it was not calculated for this project, it is likely that the opportunity cost will substantially impact the benefit-cost ratio of becoming a principal. Once again, however, this is only relevant if the person working as a principal does feel that he or she has less time for other endeavors rather than wasting this additional time procrastinating, or pursuing hobbies that may be detrimental to the teacher’s health. It is difficult to quantify leisure time as an opportunity cost because of the disparity between what individuals do with their leisure time.
Sensitivity Analysis
Within the sensitivity analysis, it is important to also consider the impact of savings and interest gain on a person’s savings and investments. To illustrate how saving an interest rates affect this ratios, additional calculations were made using a 10% a year savings rate and a 7% yearly interest rate. This calculations can be found in tables 4,5, 6, and 7. In TABLE 4 and 5 the reader can observe how every year, 10 percent of the income generated was saved and it would later provide a return of 7%. The total values after a 35 work career for savings vary greatly by income. These are the amounts that could have been saved and were earned as a result of a 7% interest rate over the years: MA+30 – $769,868.61 (BD), or $462,405.84 (5%) or $528,377.07 (3.5%), MA+60 – $766,626.32 (BD), or $456,373.00 (5%), or $522,652.96 (3.5%), Principal with no PhD – $1,237,819.13 (BD), or $682,122.49 (5%) or $799,985.71 (3.5%), Principal with PhD – $1,241,848.21 (BD), or $684,050.19 (5%), or $802,353.74 (3.5%). These values, depending on the scenario can account for close to a third of the benefits obtained by the teacher. When analyzing TABLE 7 and TABLE 8 the reader can find the net benefits, and the benefit cost ratio, and the earning comparison of all 4 groups that were compared in this study.
To anyone using this study as the foundation for their decision as to whether or not to take the courses to become a principal, they must take into full considerations the assumptions made by the researching in this study and consider which ones should be modified. Assumptions vary depending on the time and place, therefore by editing the attached spreadsheet, a local community or a region can independently decide what is most important to them and modify the variables or their weights accordingly.
Bibliography
Levin, H. M., & McEwan, P. J. (2001). Cost-Effectiveness Analysis: Methods and Applications. Thousand Oaks: Sage Publications.
University of Minnesota. (2011, September 20). CEHD – Administrative Licensure. Retrieved November 5, 2011, from University of Minnesota : http://www.cehd.umn.edu/olpd/grad-programs/Adm-Licensure/default.html
University of Minnesota. (2011, August 15). Tuition Rates. Retrieved October 30, 2011, from One Stop Student Services: http://onestop.umn.edu/finances/costs_and_tuition/tuition_and_fees/index.html
Wayzata Public Schools. (2011, September 12). Employee Contracts. Retrieved November 15, 2011, from Wayzata Public Schools: http://www.wayzata.k12.mn.us/Page/6925
