Friday, December 06, 2002
LET’S DO SCHOOLS THE WARREN BUFFETT WAY
The whole world knows the story: Omaha boy makes good, turns $140,000 into tens of billions of dollars with good, old-fashioned horse sense and mastery of the principles of capitalism.
He’s Warren Buffett, the Oracle of Omaha, everybody’s role model for smart, successful investment strategies.
So why on earth don’t we run our schools the Warren Buffett way?
He only sinks his money into companies whose business methods and purposes he understands, that have higher intrinsic value than the price on paper, are overperforming compared to expenditures, and meet his basic criteria for good investments.
We taxpayers are going to be asked to sink our money back into our public schools, so it’s a form of investment, too. Shouldn’t we be going by some sort of criteria, too, instead of just holding our noses and paying through them without any idea of what our money is doing and why?
Isn’t it time to do some good, old-fashioned valuation analysis for what our tax dollars are, and are not, doing in public schools?
Before we go through the bloodbath that is sure to ensue next Legislative session over state aid to education in this era of Old Mother Hubbard state finances, why don’t we first do a little Buffett-style analysis on how we’re investing in our children’s educations?
My guess is that, if we did, the result will be a whole new direction for education finance that will be smart, successful, world-class . . . and a tip ‘o the hat to Nebraska’s best-known billionaire.
Buffett’s criteria, amended to fit school finance terminology:
1. Has the company consistently performed well?
Have Nebraska’s public schools done better in the last year than they did 5, 10, 20 and 30 years ago? Have they done better than the private schools and the home schools? Do they cost more per pupil, adjusted for inflation, and if so, can they demonstrate added value as a sort of “return on equity”?
2. Has the company avoided excess debt?
What is the ratio of public-school debt to annual operating expenditures and how has that changed compared to 5, 10, 20 and 30 years ago?
3. Are profit margins high? Are they increasing?
If graduation rates, post-secondary continuing education rates, test scores and percentage of students who don’t need any remediation in college all are satisfactory and increasing, then management is efficient in the use of its resources. If not, not.
4. How long has the company been public?
Have schools stood the test of time? If they are considered good, enrollment should be rising. How does enrollment compare to 5, 10, 20 and 30 years ago (excluding pre-kindergarten, nongraded and other enrollment categories that didn’t exist in the past so that the numbers can be compared apples to apples)?
5. Do the company’s products rely on a commodity?
Do the schools provide a product that is basically indistinguishable from those of competitors? If so, they’re a bad investment. Is the product the school provides based on a uniform, standard, foundational resource that changes very little from one place to the next – for instance, oil and gas in the business world? Since Nebraska has been installing learning standards that are basically boilerplate of what every other state in the nation (except Iowa) is putting in, then the standards could be said to be an educational “commodity” that do not set Nebraska’s public schools apart in an attractive way, and therefore they’re a bad investment.
6. Is the stock selling at a 25 percent discount to real value?
This is the clincher. There’s no stock in public schools, but we can still place a value on them. Just as it is difficult to measure a company’s intrinsic value, which may be very different from its book value, it is difficult to measure the intrinsic value of public schools. This is why we really, really need those performance audits of state aid to education, to expose the wasteful and educationally questionable spending that might be reducing the real value of a year of public schooling in Nebraska. Surely a school’s total value will be higher than its liquidation value, so perhaps that lower number could be established by factors such as the book value of the buildings and contents, payroll, pension funds, annual revenues, income on investments and so forth. The question is, if public school is costing around $6,000 per pupil per year in Nebraska for operating expenses alone, is that undervalued, overvalued or about right? Are we getting our money’s worth . . . or more than our money’s worth . . . or less?
So what do you think? Using the Warren Buffett criteria, should we be reinvesting in Nebraska’s public schools the way we always have?
Or is it time for a change?
Weigh in this week with Go Big Ed at firstname.lastname@example.org and I’ll report back.
And Mr. Buffett: would you consider giving one of your celebrated talks to the Unicameral along these lines, come January? Your insights have helped the business world and now it’s time for K-12 education to sit at the feet of the sage. We’d all turn out for it . . . and even bring our senators a whole lot of goodies from one of those Buffett babies, Dairy Queen.
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