Cost Efficiency in Delaware Education: Final Report On Efficiency Opportunities

Cost Efficiency in Delaware Education
Final report on efficiency opportunities
January 10, 2008

Contents
Context
Our approach
Findings, recommendations, and estimated savings

• Summary • Benefits
• Transportation • Construction
• Purchasing • Admin/system
• Energy • Department of Education (DOE)
Appendix: Supporting analysis (separate)
Final report on efficiency opportunities 1

Vision 2015 provided a framework for improving Delaware’s
“return on investment” in public education
The situation...
(% proficient, 2005 NAEP 8th Grade Math and Reading)
The opportunity...
Does not mean we spend too much, but that there are better ways
to ensure we deliver a better return on DE educators’ hard work
Source: Vision 2015, p. 1
However, many V2015 initiatives require new investment
Selected examples of areas warranting investment...if the money were available
Area Investment Annual cost11
Vision Network • Expand Vision Network’s intensive school and district leadership • $4.2M
training and professional development. With the addition of a
second cohort, a total of about 21,000 children, 40 district and
school leaders, and 950 teachers will be part of the effort to
become world-class by 2015
Early Childhood • Expanded access to ECAP (low-income 3- and 4-year olds) • $12.5M
Education • Expansion of DE Stars quality rating system • $1.7M
Professional • Two regional centers focused on sharing high quality • $1M

Development Centers professional development
Teacher Recruitment • Regional recruitment initiative for high-need subjects and schools • $1-2M
Initiative
The promise of Vision 2015, coupled with current spending levels

and fiscal realities, is the driving force of this cost efficiency study
1. Costs are FY 2009 estimates; annual costs could increase after FY 2009 with the further expansion of programs
Contents
Context
Our approach


Study began by delineating scope and driving principles
Study DOES address Study DOES NOT address
• Spending of Federal, state, and local funds in • Spending on higher education, libraries, or
the 19 school districts and 17 charter schools other areas outside of Pre-K - 12 education
• Spending at state level on Pre-K - 12 • Recommended changes to the way funds are
education, by the... generated or allocated, except to identify any
– Department of Education ways in which the current funding system
– Department of Services for Children, Youth, impedes realizing efficiencies
and their Families – LEAD funding study (also included in
– Department of Health & Social Services Executive Order 98) should explore these
– Delaware higher education community topics in more detail
• We should be guided not by whether there is a good reason for the way things
are, but by whether tax dollars could better support student success
Key principles
• No “sacred cows” - all types of spending are considered “in scope”
for the study
• Many inefficiencies are the product of specific policies or practices. If we as a
state preserve them, we should understand the cost of that decision

Study addressed ~$1.65B in spending (current and capital)
Most education revenue comes from the state and is spent at the district level
Funds provided from …and spent primarily to

three sources11 … fund the districts… …on a variety of functions
($M) ($M) ($M)

1,701 1,647 1,647
1,700 1,700 1,700
129 (8%)
Federal 100 (6%) DOE
53 (3%) Charters 251 Non-current exp2
489 40 Food service

1,275 (26%) Local 1,275 1,275 145 Other suppt svcs
86 Transportation
132 Ops/maintenance
90 Administration
850 17 Instr staff support
850 850 64 Student support
1,495 Districts
(91%)
1,089 State
(66%)
425 425 425 822
(50%) Instruction
0 0 0
Source of revenue Area of spend Function
1. Includes revenues and non-revenue receipts 2. Includes facilities construction, debt service, and adult non-public expenditures
Note: Only spending within DOE considered here; revenue does not total expenditures due to DOE surplus in 2005
Source: Delaware DOE Report of Educational Statistics, 2005 Tables 38-47
Current spending grew ~6.5% annually over four year period1
Spending growth has outpaced student population growth
Delaware current expenditures on pre K-12 education2

($M) # of students
1,500 160,000
124,036 125,658
118,509 121,356
120,000
2005
1,000 2002 $/student:
$/student: 11,109
9,740
80,000
1,396
1,288
1,154 1,198
500
40,000
0 0
2002 2003 2004 2005
Fiscal year
Current expenditures
# of students
1. Nominal growth; numbers not adjusted for inflation; real growth rate is 3.7%/yr 2. Only DOE current expenditures are shown on this slide; additional current expenditures on pre K-12
education that were considered include (in 2005) $21M in the Department of Health and Social Services, $7M in Higher Education, and $6M in the Department of Services for Children, Youth,
and their Families; DOE capital expenditures were considered as well
Source: Delaware DOE Report of Educational Statistics, 2002-2005, Table 46
Team evaluated opportunities through various lenses
Considering multiple inputs increases confidence that efficiency potential exists
Prior DE spending
Stakeholder interviews
and efficiency studies
• Met with over 30 people • Reviewed over 24

with experience and/or reports and studies
expertise on education dating from 1987 to
in Delaware Efficiency the present
opportunities
Rigorous analysis of External benchmarks

current spending (education & corporate)
• Examined spending at • Compared Delaware

the most granular to other states as well
level possible using other industries and
DOE financial records corporate functions
Interviews suggested many opportunities have been identified before, but

have not been captured due to implementation challenges and/or political will
Contents
Context
Our approach


Summary
Team prioritized seven areas after initial analysis

Group also investigated “cross-cutting” themes/overall system recommendations
1 2 3 4 5 6 7
Transportation Purchasing Energy Salary & Construction Admin & DOE
benefits central support
Cross-cutting themes/overall system
Cross-cutting themes and overall system discussed

in the “Administration and Central Support” section
Note: “De-prioritized areas included Custodial / Maintenance, Technology, Food Service, Non-Core Activities, and Revenue Opportunities
Summary
Significant annual savings opportunity (~$86M+) was
identified across the seven “high-priority” areas
Addressable Opportunity
Opportunity area spend ($M) size11 ($M) Summary of efficiency opportunities
1 Transportation 80 9-12+ • Redesign bus contracting process

• Increase minimum bus retirement age
• Eliminate funding for non-public schools
• Eliminate specific provisions in budget bill
2 Purchasing 178 15-25 • Formalize statewide coordination of the education

purchasing function
3 Energy 28 4-7 • Implement best practices in demand mgmt

• Explore statewide pooling of natural gas
4 Benefits 311 0-29 • Pool local benefits purchasing

• Examine offering a more flexible compensation
package of salary, health benefits, and pension
5 Construction 195 31-48 • Centralize construction purchasing and design

• Exempt schools from prevailing wage requirement
6 Admin and central 85 25-34 • Increase magnitude of scale in funding formula

support / system • Create broad shared services
recommendations • Evaluate impact of shared services and consider
consolidation in year 5 of implementation
7 DOE 50 2-3+ • Enhance purchasing efficiency at DOE
TOTAL 927 86-158+
1. Estimated annual savings after full, successful statewide implementation of recommendations. Construction savings would accrue to capital budget
Summary
Some smaller opportunities exist in “de-prioritized” areas

Addressable
Opportunity area spend ($M) Findings Efficiency opportunities
Custodial / maintenance 82 • Smaller districts lack the scale to hire all • Include maintenance functions in roles
necessary full time maintenance that may be shared among districts
personnel • Ensure that districts receive adequate
• Many districts forego preventive funding to conduct necessary preventive
maintenance due to budget constraints maintenance
Technology 25 • Districts are highly independent in the • Districts should leverage the expertise,
purchasing and utilization of technology resources, and scale of the Department
• In smaller districts, level of service of Technology and Information, and
limited by available resources should seek pooled purchasing
(Eliminate) non-core activities 3+ • DE funds several activities that many do • Examine the cost-benefit tradeoff of
not consider core to public education financing these activities
– eg, private school nurses, drivers ed
Funding model and incentives N/A • In several areas, the current funding • Ensure that any necessary changes to
model acts as a barrier to cost efficiency the funding model are made to support
other cost efficiency recommendations
Food service 40 • No significant cost inefficiencies found • N/A
Revenue opportunities N/A • Some school districts outside of DE have • If new revenue opportunities are
created explicit strategies to pursue non- identified, share best practices across
traditional funding sources, but these districts
strategies produce marginal incremental
revenue relative to the effort required

1 Transportation
Current spend
In FY05, DE spent ~$80M total on student transportation

Contracted services accounted for the majority of spending
Total transportation expenditures per enrolled student, by category1

$ per enrolled student
1,500
Capital outlay
1,168 Supplies
1,073 Contracted services
Benefits
1,000 910 Salaries
889
803
746 729
665
618
583 580 565
537 530 510
476 449
500 410 403
351
0
Indian River
Sussex Tech
Seaford
NCC Voc-Tech
Milford
Delmar
Smyrna
Polytech
Brandywine
Christina
Cape Henlopen
Laurel
Colonial
Capital
Lake Forest
Caesar Rodney
Charters
Red Clay
Appoquinimink
Woodbridge
1. Special schools’ expenditures are consolidated into district totals; Woodbridge capital outlay spent to procure buses / shuttles for transportation to / from alternative programs (Woodbridge is
the fiscal agent for these programs)
Source: DOE 2005 Report of Educational Statistics
1 Transportation
Current state
How student transportation works today

The basics
Roles & responsibilities • The state formula is set up to fund 100% of to- / from-school transportation
• Funding is provided on a per-route basis (base allocation + per-mile allowance
over 30 miles)
• Districts determine routes and manage system
• Districts request additional routes from DOE
Contracting • Funds go to districts, which may operate buses themselves or pass funds
through to contractors
• Bus contractors are paid according to a state formula; no bidding1
• About 2/3 of routes statewide are contracted out
• Almost 200 different contractors used across the state (many with 1 or 2 routes)
Special cases • Charter schools receive funding at the lower amount of:
– 80% of average cost per student for the vo-tech district in which the charter
is located, or
– actual bid costs from a publicly-bid external contract
• State provides $3M in reimbursements to families with students in non-public
schools
• Special rules, which add substantial cost and complexity, apply for low-income
out-of-district choice students, special education students, and homeless
children
1. This applies to districts (charter school transportation funding is described under “Special cases”)
Source: DOE Transportation Director
1 Transportation
Current state
Students become eligible for transportation through
various means
Eligible for school bus transportation Ineligible
Rule Live more than: Live within Rejected or not Special Live within:
2 miles (7-12), mileage, but considered education 2 miles (7-12),
1 mile (K-6) eligible due to unique hazard, students 1 mile (K-6)
from school1 “unique hazard” but specifically attending of school
on route to included by special schools Choice
school legislature students3
Monitor Self-enforced 5-member Legislature Districts Districts

by districts Unique Hazard (Budget Bill)
Committee2
Number of
94,922 1,285 2,474 3,476 20,1064
students
Percent of
total student 78 1 2 3 16
population
84%
Delaware, at 84%, has one of the highest rates
of student transportation in the country
1. Includes children eligible for transportation under the McKinney-Vento Act 2. Consists of representatives from the Department of Transportation; the New Castle County Crossing Guard
Division; Delaware Safety Council; Traffic Control Section, the Delaware State Police; and the Department of Education Associate for School Transportation (Chairman) 3. Low-income
students outside of the district in which the school is located are eligible for transportation reimbursements 4. Calculated from 2006-2007 total student enrollment, including charter schools
Source: DE DOE Transportation Office (numbers for 2006-2007 school year)
1 Transportation
Findings
Key findings
Transportation
Contracts and incentives • DE 4th highest among states in per-student transportation spending1
• Full state funding provides no incentive to districts and charters to save money,
and no mechanism for contractors to compete on price
• Review of contractor terms reveals several places where funding exceeds likely
cost to contractors
– eg, interest allowance, salvage value, depreciation schedule
• State gives contractors 11% more to purchase buses than it pays for buses itself
• Almost 200 different contractors used across the state (many with 1 or 2 routes)
Bus replacement • Delaware pays for bus replacement after 7 years and 100,000 miles at the
earliest, or after 10 years (any mileage) or 150,000 miles (any age)
• The national average for school bus replacement is 14 years
Non-public school funding • State gives $3M to families of non-public school students for transportation
• Total amount is set by legislature and divided among eligible families
– no correlation to actual cost of transporting children
– no requirement that funds be used on transportation; can be used for
tuition payments, contributions to private school’s annual fund, etc.
Budget bill exceptions • Over 2,400 otherwise ineligible students are provided transportation through
explicit mention in the annual budget bill
– number of such students has grown in recent years
• This process is independent of the Unique Hazards Committee, which was
1. US Department of Education, 2004-2005
created to determine eligibility for bus service due to safety concerns
Source: US Department of Education; School Transportation News
1 Transportation
Opportunities
Opportunities and estimated annual impact
Efficiency opportunities Impact
Redesign bus contracting process to provide incentives for districts to save $1.6-4.6M+
money (several potential options):
• Change current funding formula1,2, OR $1.6-4.5M
• Eliminate funding formula and competitively bid routes and route management; $4.6M+
consider multi-district contracts3
Increase minimum bus retirement age to 10 years (or 150,000 miles or a $4.1M
nationally certified mileage standard for bus safety) to close gap with
national average retirement age of 14 years4
Eliminate funding of transportation for non-public school students $3M
Empower Unique Hazards Committee to make final decisions on safety- $0.6-1.4M

based exceptions, and eliminate provisions in the budget bill that allow
otherwise ineligible students to ride the bus5
Total $9.0-12.0M+
1. Figures are an annual average of the total savings over 13 years 2. Three potential options valuated: a) decrease cost premium and increase salvage value estimate: cost premium = 5%,
salvage value estimate = 12%; b) state buys buses at state bid rate and gives to contractor: no cost premium or salvage estimate, state finances bus over 7 years; c) replace capital allowance
in formula with capital allowance payments for buses bought in year 1 plus annual profit payment equal to 55% of capital allowance provided under current funding formula
3. Figure is an annual average of the total savings over 5 years 4. Includes changes to cost premium (5%) and salvage value estimate (12%); figure is an annual average of the total savings
over 13 years 5. This does not apply to homeless children who are provided transportation under the McKinney-Vento Act
1 Transportation
Opportunities
There are additional sources of value to consider
Improve efficiency of routes by relaxing current route structure constraints

• Design routes without regard to district lines
• Adjust bell times to allow for double or triple runs
• Consider sharing the same buses and/or bus routes among district schools, charter schools, and/or
vocational schools
• Provide common management of system across districts / state
Consolidate special school transportation and run the system at the county or state level
• Currently, the district in which a special school is located coordinates the transportation for students
attending that school1
• No collaboration exists between special schools to optimize transportation of students residing in
overlapping geographic areas
Standardize eligibility and ridership data reporting process across the state, using best practice
methodologies from other states as a guide
1. Most special schools draw students from an entire county, so the school’s home district provides transportation across multiple districts
2 Purchasing
Current spend
Purchasing analysis focused on $178M portion
of total purchased goods and services
Excluded from analysis:

• Capital spending
$M (2006) $M (2006)
595 417 • Transportation
600 • Services to clients & 200
agencies 178 75
• Maintenance and repairs
• Utilities
150
400
103
100
200 178
50
Includes all district and
charter spending on:
• Supplies and materials,
0 some equipment 0
Purchased Excluded Purchasing • Professional services Purchasing Goods Services
goods and areas focus focus
1
services
Other purchased categories (eg, energy, transportation)

included in other sections of our analysis
1. Does not include salaries and benefits of instruction, instructional support services, and student support services, nor salaries and benefits of general administration and school
administration
Source: Delaware DOE 2005 Report of Educational Statistics; BCG analysis
2 Purchasing
Current state
How Purchasing works today
Districts and charters may purchase

off of state contracts, or on their own Overview of the state contract list
1) State Contract List • Created and maintained by Government

OMB – Government Support Services Division of OMB
Nr. Contract Description
Support Services Division – contracts cover needs of all state
01B No. 2 Fuel Oil
002 Gasoline agencies – not specific to Education
004 Tires and Tubes
005 Bread Products – currently ~120 contracts available online
007 Auto Parts and Batteries
009 Motor Oil
... ...
• School districts (and charters) not
1
~35 – 45% mandated to buy on these contracts
Supplier market
Input (demand /
specifications)
• No exhaustive tracking of contract usage
2) Local Contracts – suppliers report back on purchased
Local contracts
volumes; information consolidated twice a
Nr. Description year to identify active contracts
01 Product
– no comparison of state contract conditions
State School
agencies districts ~55 – 65%1 vs. school districts’ locally-negotiated
contracts
Conditions
...
– contracts renewed annually almost
automatically
1. Estimate
Source: Interviews; BCG analysis
2 Purchasing
Findings
Key findings
Purchasing organization and processes
Districts and charter schools purchase as highly independent entities

• Very little sharing of information, resources, or best practices
– monthly business managers’ meetings provide very loose, informal network
• Very limited “piggybacking” on other districts’ contracts
• Very limited bundling/pooling of demand
• Neither DOE nor OMB has much authority with regard to school district purchasing decisions
District purchasing organizations vary widely, but tend to lack dedicated resources and expertise
• Having a small purchasing organization in each district and charter school means high total purchasing
spending relative to the sophistication of the overall purchasing organization
• Limitations acknowledged in survey of district purchasing managers
Use of statewide contracts varies widely

• Some business managers claim to use statewide contracts 80-90% of the time, others use the list for a
limited set of specific categories, and others use it whenever they don’t have resources to bid themselves
Statewide contracts do not always provide the best terms

• Contracts are general, updated infrequently, and have broad terms (eg, no guaranteed volumes)
• Districts sometimes able to negotiate better terms through supplier relationships, more specific terms (eg,
volume guarantees, shorter contract durations)
Considering size of system, there is room for improvement

in the purchasing organization, processes, and expertise

2 Purchasing
Opportunities

Formalize statewide coordination of the education purchasing function,

balancing local ownership with optimized purchasing
• Establish a statewide education Purchasing Council, with representation from the state
(OMB Gov’t Support Services Division), districts, and charter schools
• For “commodities” (~80% of all purchasing categories, less instruction-related; eg,
office supplies) establish state-level education-specific Central Category Managers1
with oversight of the Purchasing Council. Require districts and charter schools to
purchase on statewide contracts in these categories.
• For a few categories (local, instruction-related; eg, textbooks) create a Lead Buyer1
Network at the district / charter level with oversight of the Purchasing Council. Require
districts / charters to participate in the Lead Buyer Network.
$15-25M
(9-14% of
Professionalize the education purchasing function
• Define procurement processes, including supplier selection and negotiation
total spend)
• Develop system of metrics and incentives, and track performance
• Improve communication of strategies and best practices
• Develop state-of-the-art procurement tools
– Establish a state-wide purchasing-related database for education (eg, suppliers,
contracts, negotiation schedules, SME contacts, etc.)
– Increase and improve the use of electronic interfaces (eg, eProcurement)
• Incorporate systems to ensure quality control and the highest service quality by building
in a clear and transparent customer satisfaction process and the option to purchase
outside of statewide contracts if a charter school, district, or DOE can document equal
or better cost, service, and quality from a competing provider
1. Central Category Managers and Lead Buyers perform several roles with oversight from the Purchasing Council: ensure communication across districts; bid, negotiate and own contracts;
track compliance; ‘one-face’ to the supplier market
3 Energy
Current spend
Delaware spends $28M annually on Energy
Energy is third largest component of all …and Electricity accounts for

Operations and Maintenance expenditures… over 60% of this spend
($M) ($M)
200
30
28 17
158 64
20
100 45
7
10
28
21 2
2
0 <1
0
Operations Repair And Custodial/ Energy Other
Energy Electricity Heat By Heat By Oil Water And All Other
and Maintenance Maint
Natural Sewer
Maintenance Employees
Gas
Source: 2006 DOE object code level expenditures; Delaware DOE 2005 Report of Educational Statistics; BCG analysis
3 Energy
Findings
Key findings
Energy
A wide disparity exists among districts in total energy costs per square foot
• Highest-spending district is 98% higher than the lowest-spending district
Many districts do not completely implement best practices in demand management and
energy efficient investments that are in use by other districts, for example:
• Establish an energy policy with specific goals and objectives
• Conduct energy audits in all buildings to identify energy-inefficient units
• Make proactive minor investments that have rapid payback (eg, motion detectors,
modulating boiler controls)
• Understand the payback economics of larger investments (eg, energy efficient window
replacement) and make positive NPV investments whenever possible
Districts in general view their minor capital budget as inadequate for energy investments
Many districts are not comfortable dealing with an energy service company (ESCO) to
finance investments as they are unaware or skeptical of the ESCO’s abilities
While electricity is being purchased by most districts in a pooled partnership (negotiated

by the state), natural gas is still being purchased separately by each district

3 Energy
Current state
Energy costs per square foot vary widely among districts

Total annual energy costs1 per sq ft, by district ($/sq ft)
Energy cost ($/sq ft)
Total sq ft
$/sq ft sq ft
2.5 4,000,000
2.0
3,000,000
1.5
2,000,000
1.0 2.10 1.98

1.86
1.56 1.56 1.54 1.47 1.46 1.37 1.36 1.35 1.32 1.32 1.31 1.29 1.28 1,000,000
1.20 1.15
0.5 1.06
0.0 0
Lake Forest
Colonial
Caesar Rodney
Laurel
Brandywine
Christina
Delmar
Sussex Votech
Seaford
Milford
Indian River
Red Clay
Cape Henlopen
Polytech
Woodbridge
Smyrna
NCC Votech
Capital
Appoquinimink
Bringing all districts’ costs down to the average of the

lowest three would result in $4.7M annual savings
1. Includes electricity, natural gas, and heating oil
Note: Costs may vary due to renovations, district office sizes, existence of air conditioning, and use of schools for other than educational purposes; square footage of some buildings estimated
Source: 2006 DOE object code level expenditures; Delaware DOE 2005 Report of Educational Statistics; DOE capital improvement documents; BCG analysis
3 Energy
Opportunities
Implement best practices in demand management, such as those implemented $3-5M

in Seaford and Colonial, through the following means:
• Formalize the sharing of best practices among districts to develop a statewide
standard of energy management, and require districts to adopt this standard
• Create a statewide role similar to the newly filled Building Support Systems
Engineer at OMB (or determine whether possible to share the resources in place
there) in order to:
– study energy usage across districts and maintain / update energy standards
– advise districts on energy demand management and other areas of energy
efficiency
– negotiate on behalf of the districts with an energy service company (ESCO) as
appropriate to provide funding to districts for necessary capital investments
Continue to explore the statewide pooled purchasing of natural gas in a similar $1-2M
manner to that currently used for electricity
Total estimated reallocation opportunity $4-7M

4 Benefits
Current spend
Delaware spends ~$311M on education employee benefits

Majority of spending is tied to State employee plans; only ~$18M is for additional local benefits
Total benefits costs, including state provided and additional local benefits
$M
350
311 118
State provided
300 Addl local
About 65% goes to fund the

250 pension plan and the
remainder covers current
200 107 retiree health care costs
150
100 45
50 13
11
11
7
0
Total Benefits Health Insurance Pensions Social Security Workmen’s Comp Medicare Dental1 All other2
1. Local benefit (not required by state) 2. Includes life, disability, and unemployment insurance; prescription plans; and other unclassified costs
Source: 2006 DOE object level expenditure data; BCG analysis
4 Benefits
Current state
How Benefits work today
The state of Delaware provides a certain level of benefits for all state employees,
including educators
State funding is given to districts for 100% of the “employer portion” of health care
benefits and a pro-rated (~70%) portion of the following rate-driven benefits, based on
salary costs:
• FICA
• Medicare
• Unemployment
• Pension
Districts must cover the remaining ~30% of the rate-driven benefits using local funds1
Just as they may pay a higher salary than required by the state, districts also have the
option to offer additional benefits...
• ...of which they must cover 100% of the cost
1. Certain federal and state funds, such as the Academic Excellence block grant, may also be used to cover this remaining 30%, though the majority is local funds
Source: Conversations with experts at DOE and OMB
4 Benefits
Findings
Key findings
Benefits
Delaware spends about 40% of educators’ salaries on benefits, compared to the national
average of 31%
• This equates to an additional $66 million in annual expenditures
On top of the generous statewide package, many local school districts provide additional
benefits to attract employees
• Represents 2% of salaries on average, but varies widely across districts
State has contracted with vendors to offer additional benefits (eg, vision, dental) for
employees, with employees paying 100% of the cost
• Some districts provide additional benefits by paying the employee portion of the state-
negotiated benefits
• Several districts use benefits consultants and report the ability to achieve better rates than
the state with the same or better coverage
Delaware’s defined benefit pension plan has ~$6B of assets to cover its ~$6B liabilities
(fully funded), but estimated retiree health care liabilities are ~$3B, with no corresponding
assets

4 Benefits
Current spend
Delaware’s spend on benefits is highest in the region
Delaware’s total compensation package …and Delaware’s benefits portion of the salary
is very competitive regionally… is the highest of any of its neighbors
Average total teacher compensation1 ($) Instructional benefits as percent of salaries (%)
80,000 40
60,000 30
40,000 20 40.0
75,659 74,083 70,421 70,253 34.3 33.6 32.2
58,491 28.9
20,000 10
0 0
New Jersey Delaware Pennsylvania Maryland Virginia2 Delaware Maryland New Jersey Pennsylvania Virginia
State State
Delaware’s average total compensation is more than 5%

higher than Pennsylvania, Maryland
1. Includes 2005 average salary plus 2005 benefits percentages 2. Includes extra-duty pay
Source: American Federation of Teachers 2005 Survey and Analysis of Teacher Salary Trends; US DOE Revenues and Expenditures for Public Elementary and Secondary School Districts,
2005; BCG analysis
4 Benefits
Opportunities
Given that Delaware’s educator salaries must be competitive regionally

and with other professions, the Public Education Compensation
Committee should incorporate into their work a full study of compensation
options to both enhance educator recruitment and retention and help to
secure the long-term viability of the educator compensation system
Topics addressed should include, but not be limited to:

1. Exploring more flexible compensation options that will allow
employees, for example, to accept a higher salary for a reduction in
$0-29M3,4,5
benefits that offsets the expense1,2
2. Exploring offering a defined contribution plan as an option to the
current defined benefit plan
3. Conducting an in-depth analysis of local benefits with the potential
of pooling the demand to negotiate better rates
The committee should request an extension of their current timeline in

order to complete this work, but should complete a preliminary report by
no later than May 1, 2008
1. With the caveat that employees will be required to have some form of health insurance (either through the State or someone else) 2. Could be some negative second order effects,
including: increased insurance costs per plan participant due to lower number of participants, increased administrative costs to manage a flexible plan, and the possibility that a higher
proportion of younger workers may accept a reduction in benefits, causing an increase in costs for the remaining population 3. Assumes that Delaware is able to overcome up to 68% of the
difference between its benefits costs and Maryland’s (the next highest paying regional competitor) through savings in health care and pension benefits; $6M savings (or 15% of the Delaware-
Maryland gap) is equivalent to 10% of employees accepting additional compensation whose total costs are equal to 66% of their foregone benefits cost; $28M savings (68% of the Delaware-
Maryland gap) is equivalent to 30% of employees accepting additional compensation whose total costs are equal to 50% of their foregone benefits cost 4. Pooling of local benefits represents
up to a $1M opportunity 5. Dollar impact does not include potential positive impact on future solvency of retiree health care system
5 Construction
Current spend
DE had nearly $200M of capital outlay for education in 2006

Represented ~50% increase over 2005, largely due to building alterations
Total capital outlay for new buildings, building alterations, and building/grounds repair
$M
200 195
14 Building/grounds repair
150
138
15
120
19 144 Building alterations1
100
71
49
50
52 52
37 New buildings
0
2004 2005 2006
Fiscal year
1. Includes renovations and additions

Source: Delaware DOE object code data, 2004, 2005, and 2006
5 Construction
Current state
How Construction works today
For a major construction project, district develops a concept (eg, new building,
renovation) and approaches DOE for approval
• If DOE approves, state gives district a certificate of necessity (CN) authorizing the project
and committing to pay for 60-80%1 of the state-approved costs
District then holds a referendum asking voters to fund remaining 20-40% of the DOE-
approved cost of the project and 100% of any cost above this
• If voters approve the measure, DOE works with OMB to get money in the budget and then
gives it to the district staged over a period of several years
District then bids out the project to a contractor, who is required to pay state-mandated
“prevailing wage rates” to workers for any construction project greater than $100,0002
1. Amount varies based on district wealth 2. Prevailing wage rates also required for maintenance or renovation projects greater than $100,000
5 Construction
Findings
Key findings
Construction
There is little standardization at the state level for major capital projects, in either school
building planning / design or equipment / component specification
• As a result, projects likely incur additional unnecessary design and purchasing costs
• One district completed a six-year capital project at ~37% below budgeted costs by adopting
some standardization and leveraging the district’s buying power for equipment purchases
for multiple school buildings at the same time
Requiring state-mandated prevailing wage rates results in districts paying 20-40% more1
for certain projects
• Ohio saved an average of ~11% on total school capital projects by exempting schools from
the state prevailing wage rate requirement (represented almost $500M over 5 years)
1. District facilities managers’ estimates, depends on type of project

Source: Interviews; BCG analysis
5 Construction
Findings
Estimated capital savings of $21-34M annually if
schools exempted from prevailing wage rate requirement
Expected savings
Total annual
expenditures33 DE facility mgr If same savings
($M) estimates44 ($M) % as Ohio55 ($M)
New school 37 2 1
construction
School building 48 10 9
addition1
School renovation 96 19 10
Building/grounds 14 3 1
repair2
TOTAL 195 34 21
1. Assumes school additions are 33% of school renovation expenditure 2. Assumes 50% of minor cap budget used for projects greater than $15,000; Ohio number conservatively assumes
same rate as for school renovation 3. From 2006 4. Estimates of savings in new construction, addition, renovation, and repair were 5%, 20%, 20% and 40%, respectively 5. Savings seen in
new construction, addition, and renovation were 1.2%, 19.9%, and 10.7%, respectively; repair is conservatively assumed to be the same as renovation (11%)
Source: SB 102 Report: The Effects of the Exemption of School Construction Projects from Ohio’s Prevailing Wage Law; Discussions with DE facilities managers; BCG analysis
5 Construction
Opportunities
Leverage purchasing power of the state to reduce both design and materials $10-14M
costs of major construction and renovation projects by creating a state level
construction board with the ability to:
• Work with districts to determine major construction and renovation needs over
a period of about 5 years
• Negotiate with contractors / architects for long-term statewide projects
• Work with districts to set statewide standards on design and construction
materials and components
• Create and maintain detailed modular design specifications (a “kit of parts”)
that can be used by each district in constructing unique schools but with some
standardization at the modular level in both design and materials
• Contract to conduct large scale purchasing of commodities (eg, steel) and
other materials (eg, boilers) for delivery when needed to the appropriate district
Evaluate an exemption of public schools from prevailing wage rate $21-34M

requirements for construction, renovation, and maintenance
• Conduct a trial of the exemption
• After the trial has concluded, study and adjust the program based on realized
impact, including cost savings, building quality, and overall impact on
construction wage rates in Delaware
Total estimated reallocation opportunity $31-48M

5 Construction
Opportunities
There are additional sources of value to consider
Evaluate the number of approvals and inspections required for school building construction by
multiple state and local agencies and eliminate any that are unnecessary or redundant
Evaluate the method by which capital projects are or should be funded for districts and charter
schools, including the timing of cash flows, assumed interest rates, financing, and whether certain
expenditures are more appropriately handled in the operating budget

6 Admin/system
Current spend
Admin and Central Support ~$86M in addressable spend

Focused on areas that might benefit from shared services and/or district consolidation
1,106 117
26 DOE Operations and
Annual 7
117 District offices maintenance workers Have little scale
spend
Bus drivers, cafeteria potential and/or
on salaries 17
workers, custodians addressed in
and benefits another area
in $M 7 Instruction
7 Student support
14 Instructional support
964 Schools
Focus of the
Admin & Central $86M
Support analysis
65 Administration
Location District
offices
Administration and oversight functions present an

opportunity for savings through economies of scale
Note: District admin spend also includes 4 supervisor positions employed at the school level. Benefits for each employee are calculated using the average benefit/salary ratio for a given district
Source: Personnel information retrieved by Director of Financial Management (Sept 2007); BCG analysis
6 Admin/system
Findings
Key findings
Admin and central support / overall system
Current funding does not encourage larger districts to capture scale benefits within administration
• The unit formula funds district administration largely on a flat per-student basis
• Although the unit formula assumes very little scale in school district administration (96%), in practice
districts are able to achieve greater scale (90%)
• Administrative functional areas within private industry operate at even greater efficiency (65-85% scale)
Scale of the entire Delaware public education system can be better leveraged with increased district
cooperation and/or reorganization
• Districts of increasing size can allocate proportionally fewer personnel to areas such as HR and Finance,
and thus can spend more on instruction-related activities
• Shared services can reduce spend by pooling administrative functions across multiple districts
• District consolidation can enable even greater savings but would require significant changes in school
district governance
Increased cooperation among districts will not only lower administrative spend, but also enable
increased efficiency across many other functional areas
• Cross-district standards and support should systematize processes, thus producing an environment
equipped to implement other cost efficiency recommendations (in transportation, purchasing, energy,
and construction) and realize the full value of the savings
• In addition, a more coordinated system will facilitate more rapid implementation and easier tracking of all
future best practices

6 Admin/system
Current state
District office spend analysis points to two means
for capturing savings
Meeting best practice efficiency Capturing scale efficiency

Administration spend ($/student) Administration spend ($/student)
1,000 1,000
Difference in spend Observed and expected
among districts indicates scale indicates
800 opportunity for some 800 opportunity for savings
districts to adopt the from consolidation (all
administrative best functions) or service
600 practices of others 600 centers (select functions)
400 400
200 200
0 0
0 5,000 10,000 15,000 20,000 0 10,000 20,000 30,000 40,000 50,000
District enrollment District enrollment
Note: Scale curves are fit to Indian River School District with an 85% scale
Source: Personnel information retrieved by Director of Financial Management (Sept 2007), BCG analysis
6 Admin/system
Current state
DE must act to capture scale and enhance coordination

Three key options are available
Option Description Considerations
• Put mechanisms / incentives in place that • Least “disruption”

encourage the districts to more actively • Must figure out what to do differently to
Cooperation collaborate in target areas produce more cooperation than occurs
today
• Extract “high scale” functions into one or • Preserves district “autonomy”

more shared services centers and • Difficult to mandate use of centers
Shared Services aggressively promote / mandate district • Need robust service level agreements
reliance on them between centers and districts
• Pursue consolidation, ranging from: • Greatest disruption in implementation

1. consolidation of smallest districts • Simplest resulting structure, with ability to
Consolidation 2. county-based districts scale in all functions (not just some)
3. a single statewide district • May have some savings offset (level-up)
• Must address bureaucracy concerns
Current level of cooperation is insufficient; shared services

and consolidation must be considered to realize savings

6 Admin/system
Current state
Limited cooperation thus far and lack of readiness to
consolidate dictate a move first towards shared services
Option Evaluation
Districts currently cooperate on a limited basis and are free to cooperate more, but
Cooperation a new strategy is required to realize significant savings
Delaware is prepared to act on shared services, but savings will only be obtained
Shared Services if the State and districts are dedicated to transformational change
While consolidation results in a simpler organization structure than shared

Consolidation services (ie, fewer districts and no new service entities), there are potential
drawbacks such as diminished savings due to leveling up salaries and reduced
community ownership

6 Admin/system
Opportunities
Increase magnitude of scale in the funding formula by providing more incentive for larger $0.4-2M
districts to drive scale efficiencies
Create broad shared services $25-34M1

• Shared services should start around a few key scalable functions (eg Purchasing, HR, Finance,
Transportation)
• To realize the full potential savings, these services must be expanded across all other scalable
district operations (eg Facilities & Operations, Instructional Support)
• Ensure full consideration of regional and/or statewide shared services among districts and
charter schools by requesting DOE to convene a committee not later than March 1, 2008 to fully
research shared service models and to develop a business plan for implementation. This
business plan should be completed by September 1, 2008
Measure impact of shared services in year 5 of implementation, and consider district $39-42M2,3
consolidation at that time ($21-22M
w/ level up4)
Total estimated reallocation opportunity $25-34M5
Note: All savings are based upon an 85% scale curve for administration spend that was fitted to match Indian River current spend/student. In addition, an 85% scale curve for instructional
support spend was determined by fitting the curve to the lowest half of districts in spend/student. Savings are expected in student support, but because of the low correlation between district
size and spend/student, no scale was applied and these savings were not estimated
1. $25M assumes one service center serving each county; $34M assumes a single service center 2. Potential impact of consolidation assuming no prior savings from implementation of shared
services and not accounting for any cost of leveling up of salaries 3. $42M assumes New Castle, Kent, Sussex, and vocational districts; $39M assumes two districts in New Castle County
4. Estimated net savings when leveling up total teacher compensation 5. Includes the impact of full shared services implementation, which is inclusive of the impact of increasing the
magnitude of scale in the funding formula. Does not include the impact of potential district consolidation
7 DOE
Current spend
DOE spend has tripled in the past 15 years, but has
remained at ~6% of total education expenditure
2006 DOE spend:

$103M1
Total spend ($M)
2,000
1,778
1991 DPI spend: 103 DPI/DOE
1,595 56
$33M Charters
1,470
1,500
1,397
1,324
1,243
1,094
1,010
1,000 918 952
846
793
741 1,619 Districts
685
615 637
500
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Year
1. Exclusion of federal food programs, grants/tuition, and transportation results in an addressable spend of $50M
Source: Annual financial reports from 1991-2006
7 DOE
Current state
DOE expenditures can be grouped by expense code

Classifying each expense type by funding appropriation gives another level of detail
103 Other1
Total 105 <1
15
3 Supplies & materials (incl tech) 14
spend 5 Transportation
($M) 4 Other contractual services
90 7 Other professional services 3 All other
14 Educational consulting & UofD contracts

75 1 Individuals with Disabilities Education Act
10
1 Education accountability
60 22 Salaries & benefits
2 Educator recruiting
45
17 Grants, tuition, & scholarships
5
$49M in direct 30
pass through 7 DSTP & state assessment activity
expenditures
15 32 Federal food programs
0 0
DOE core expenditures Ed consulting & UofD contracts
expenditures grouped by appropriation2
1. Includes $255K in travel expenses 2. These expenses are educational consulting / UofD contracts only; there are other expenditures for each of these appropriation categories
Source: 2006 DOE expenses by appropriation by object code, provided by Director of Financial Management
7 DOE
Findings
Key findings
DOE
Growth of the DOE has kept pace with the total education budget
• DOE spend is currently 6% of the education budget and has been the same percent for the last 15 years
DOE spends $103 million on core programs

• $48M was funded with federal money, $55M with state money
• Approximately half of the recorded expenditures were in the form of pass-through money
($32M in federal money for food service; $17M in grants, tuition, and scholarships)
Core DOE programs are primarily supported by expenditures of:

• $22M in salaries and benefits
• $14M in educational consulting fees and UD contracts
• $7M in other professional services fees (eg, computer consulting services)
• $4M in non-professional service contracts (eg, office space leases, telecommunications, printing)
• $3M in supplies and materials (includes computers and software)
Procurement strategies applied to districts could generate savings if implemented for purchasing of
goods and services within DOE
Source: 2006 DOE expenses by appropriation by object code, provided by the Director of Financial Management
7 DOE
Opportunities
Explore efficiency opportunities in DOE travel spending $25-40K

• Demand management (including greater use of teleconferencing), systematic (10-15%)
supplier review, establish a rigorous compliance process
Implement purchasing recommendations for all other goods and services $1.6-2.8M1
obtained for DOE core programs (7-12%)
• May require changes or exceptions to regulations governing state agency
purchasing in order to achieve full efficiency
If service centers are created, ensure alignment with DOE TBD

• Ensure personnel and services are allocated efficiently among central DOE,
service center, and district locations; avoid duplication and ensure alignment of
efforts
Study and monitor the cost (to districts and DOE) of state and federal laws TBD
and regulations
• Legislature and DOE should strive to eliminate rules that have greater costs
than educational benefit
Total estimated reallocation opportunity $1.6-2.8M+
1. Same analysis on purchasing in districts was applied to procurement of DOE goods and services with the exclusion of food service. Impact includes federal funds. Savings in state funds is
estimated to be $1.3-2.2M

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Cost Efficiency in Delaware Education

Final report on efficiency opportunities

January 10, 2008

Findings, recommendations, and estimated savings

Appendix: Supporting analysis (separate)

Final report on efficiency opportunities 1

Area Investment Annual cost11

Professional • Two regional centers focused on sharing high quality • $1M

The promise of Vision 2015, coupled with current spending levels

Findings, recommendations, and estimated savings

Appendix: Supporting analysis (separate)

Final report on efficiency opportunities 4

Study DOES address Study DOES NOT address

Final report on efficiency opportunities 5

Funds provided from …and spent primarily to

($M) ($M) ($M)

489 40 Food service

Delaware current expenditures on pre K-12 education2

• Met with over 30 people • Reviewed over 24

Rigorous analysis of External benchmarks

• Examined spending at • Compared Delaware

Interviews suggested many opportunities have been identified before, but

Findings, recommendations, and estimated savings

Appendix: Supporting analysis (separate)

Final report on efficiency opportunities 9

Team prioritized seven areas after initial analysis

Cross-cutting themes/overall system

Cross-cutting themes and overall system discussed

1 Transportation 80 9-12+ • Redesign bus contracting process

2 Purchasing 178 15-25 • Formalize statewide coordination of the education

3 Energy 28 4-7 • Implement best practices in demand mgmt

4 Benefits 311 0-29 • Pool local benefits purchasing

5 Construction 195 31-48 • Centralize construction purchasing and design

6 Admin and central 85 25-34 • Increase magnitude of scale in funding formula

7 DOE 50 2-3+ • Enhance purchasing efficiency at DOE

TOTAL 927 86-158+

Some smaller opportunities exist in “de-prioritized” areas

Food service 40 • No significant cost inefficiencies found • N/A

Final report on efficiency opportunities 12

In FY05, DE spent ~$80M total on student transportation

Total transportation expenditures per enrolled student, by category1

How student transportation works today

Eligible for school bus transportation Ineligible

Monitor Self-enforced 5-member Legislature Districts Districts

Opportunities and estimated annual impact

Efficiency opportunities Impact

Eliminate funding of transportation for non-public school students $3M

Empower Unique Hazards Committee to make final decisions on safety- $0.6-1.4M

There are additional sources of value to consider

Improve efficiency of routes by relaxing current route structure constraints

Excluded from analysis:

Other purchased categories (eg, energy, transportation)

How Purchasing works today

Districts and charters may purchase

1) State Contract List • Created and maintained by Government

Districts and charter schools purchase as highly independent entities

Use of statewide contracts varies widely

Statewide contracts do not always provide the best terms