Enacted in 2013, the Local Control Funding Formula (LCFF) represents the most comprehensive reform to California school finance in over 40 years. With additional funding from a state tax initiative, Proposition 30 (2012), districts across California are beginning to restore their budgets after four straight years of state funding cuts. Administrators in the Los Angeles Unified School District (LAUSD) have estimated that the district will receive at least $100 million of additional funding per year through LCFF and Proposition 30, beginning in the 2014-15 school year. A key provision of LCFF provides greater autonomy in local spending, while holding districts accountable to demonstrate how new funds impact student performance. It is thus imperative that districts identify cost-effective resource allocation strategies for investing new state tax revenues. The purpose of this study is to provide guidance to LAUSD and other school districts as they determine which budget choices are likely to have the greatest impact on students.

LAUSD is considering multiple policy options for allocating the new funding. While there is still disagreement among the school board, the superintendent, the teachers’ union, and the local community, reducing class sizes and increasing teachers’ salaries are the two broad proposals that have gained the most traction with local stakeholders. In this study, I draw on a five-year panel of LAUSD administrative data to estimate the costs and effects of various permutations of these two proposals. I also compare the cost-effectiveness of policies that combine both class size reduction and teachers’ salary increases. In general, I find that rehiring teachers and reducing class size is more cost-effective than raising teachers’ salaries. However, these results are sensitive to the projected impact of salary increases on student achievement. If I assume salaries will have the magnitude of effects found in Clotfelter, Glennie, Ladd, and Vigdor (2008), then salary increases are generally more cost-effective than class size reduction policies. Regardless of which parameters are used, I consistently find that targeting funding at specific students or schools yields higher student achievement gains per dollar spent, compared to across-the-board spending policies. For instance, class size reduction strategies have a larger effect per dollar when targeted at lower grades in lower-performing schools and when the district uses selective teacher rehiring mechanisms. Similarly, I find that compensation policies are more cost-effective when targeted at novice teachers in lower-performing schools.

The study makes three contributions to current knowledge of school resource use. First, the analysis begins to unpack the conditions under which class size reduction is more cost-effective than salary increases. When classroom space is available and underutilized, which is often the case after several years of teacher layoffs, reducing class size becomes more affordable and potentially more cost-effective than alternate policy options. Second, the findings demonstrate that targeting resources at lower-performing students and schools may represent both an equitable and cost-effective use of funding. Finally, I show the how methods of cost-effectiveness can be used in a local setting to assess the best use of limited school resources.