THE DEVELOPMENT AND TESTING OF AN EFFECTIVENESS RATIO FOR INVESTMENT OF PENNSYLVANIA SCHOOL DISTRICT FUNDS

The need to acquire adequate revenues to administer public education in the Commonwealth of Pennsylvania presents a multitude of problems that are far from resolved. The ability to invest idle money for maximum efficiency can improve revenues without adding to the tax burden. The years 1980 and 1981 have seen unprecedented fluctuations in interest rates. In any investment climate, assessment methods for investing are important, but in the current money market their importance is greatly amplified. This research study develops and tests an efficiency ratio that can be used to measure effectiveness of investment practices by Pennsylvania school districts. Although there has been research concerning investment efficiency, these studies have not resulted in any consistent body of knowledge that has practical application. The purpose of the research is to determine the relationship between balances available for investment, and interest earned on investment and to develop and test a ratio. Financial data from formal school district reports and a questionnaire were used to answer the following questions: (1) What is the relationship between the amount of principal invested and effectiveness as measured by the ratio? (2) What is the relationship between interest on selected investments and effectiveness as measured by the ratio? (3) What is the relationship between the length of time an investment is held and effectiveness as measured by the ratio? Simple regression was performed on the three independent variables of principal, rate and time with the dependent variable (the effectiveness ratio). The calculated effectiveness ratios had no significant differences by class, which implies use as a comparative tool among all districts. The ratio was sensitive to fluctuations in interest rates which is important for values as an assessment tool. There was no significant statistical relationship found between the ratio and the variables of rate and time.