Chapter 6 Fiscal Capacity. Fiscal Capacity Reveals Community Values Fiscal capacity – or the measurement of wealth - reveals the ability of a locality,

Chapter 6Fiscal Capacity

Fiscal Capacity Reveals Community Values

Fiscal capacity – or the measurement of wealth - reveals the ability of a locality, state, or nation to fund those services it deems important.

Fiscal Capacity• Government

entities can have a great deal of capacity and yet elect not to fund programs commensurate with that capacity

Fiscal Capacity, cont.• On the other hand,

localities can have moderate or low capacity and choose to put more effort into funding programs

Relative Fiscal Capacity & Effort

Capaci

ty

Effort

High

Low

Low High

High Capacity/ Low Effort

High Effort/ High Capacity

Low Effort/ Low Capacity

High Effort/ Low Capacity

Low Capacity Areas

• Low capacity states & localities receive a greater share of funds from federal and state treasuries to operate the schools in order to “level the playing field” for educational opportunity

• The richer help the poorer

Property as Proxy for Wealth

Most localities use property taxes as the primary source of schools’ funding

One’s home value, as measured by the property tax, may not the best measure of capacity to fund schools

Income is probably a better measurement of wealth in today’s world

Fiscal Capacity is Complex

The concept of fiscal capacity is not quite as simple as many would believe.

Consider 2 School Districts with the Same Per Capita Income

District A• Virtually all of its

property wealth in residential property value

District B• Approximately 1/2 of its

property wealth is residential with the other 1/2 evenly divided between commercial & industrial sites.

Do Both Have the Same Capacity to Fund Schools?

District A• Virtually all of its

property wealth in residential property value

District B• Approximately ½ of its

property wealth is residential with the other 1/2 evenly divided between commercial & industrial sites.

Do Both Have the Same Capacity to Fund Schools?, cont.

Commercial & industrial sites have the ability to transfer their tax burden to other users through higher prices

What do the higher prices have to do with local capacity if the tax burden is shifted to the consumer?

Do Both Have the Same Capacity to Fund Schools?, cont.

The concept

of capacity seems simple.

Computing capacity, though, becomes quite complex.

Which school district is in a better position to fund schools? District A District B # Pupils 10,000 10,000

Per Capita Residential

Property Value $50,000 $50,000Per Capita Commercial

Property Value $ 0 $25,000Per Capita Industrial

Property Value $ 0 $25,000Per Capita Income $50,000 $50,000

Not All School Districts Have the Same School Funding

Ability To have each district –

poor & wealthy – fund education to their State-prescribed level would require very little effort for the wealthiest communities & an almost impossible effort level for the poorest.

Not All School Districts Have the Same School Funding Ability,

cont.• This is why states are

required to equalize funding based on the districts’ ability or capacity to fund those services

• Localities have varying levels of capacity, as do states & nations

Using capacity to fund education is not only a moral obligation for the next generation. It is also a significant investment human capital

Local Fiscal Capacity • Traditionally, a locality measured its

fiscal capacity as a ratio:

The district’s property valuation The number of pupils in the system

• This calculation method lacks an important education component– the students’ needs.

Students Needs & Local Capacity

A high-poverty school district will have greater needs than a high-wealth school district.

The students who come to school well-fed and already reading & counting do not have the same needs as those who come to school hungry and without years of reading and counting experiences at home.

Additionally, A school district with 20%

of its students identified as eligible to receive special education services will have a greater need than the district with 10% of its students receiving special education services.

Moreover,

An isolated, rural school system has different needs than an affluent, suburban district close to a great city’s cultural and intellectual advantages.

Funding Capacity & Equity

To have each district fund education independently puts a far greater burden on the poor than on the rich and jeopardizes students’ educational equity.

Funding Capacity & Equity, cont.

• Most states now include the district’s and state’s income and sales tax measurements as a way to equalize assessments

• Constitutional exceptions and variations exist regarding how each state measures fiscal capacity

Equalizing Education Funding

How school districts measure capacity is the hinge pin for determining how each state equalizes education funding.

Scholars have known for years that wide disparities existed in fiscal capacity within states, and that a single measurement of wealth (such as property) only exacerbates the problem.

How these funds

are equalized today is the fodder of State Constitutional challenges and Supreme Court cases.

Ranges in Fiscal Capacity

• When discussing capacity, it is important to consider the size of school districts and the number of school districts within states

• A number of states have indicated a range in fiscal capacity for county units and other large school district states, from less than 10 to 1 to about 20 or 25 to 1 for small district states

Ranges in Fiscal Capacity, cont.

If no state aid were provided in these states, the low fiscal capacity districts would have to make 10 to 25 times the fiscal effort made by their high capacity peers to finance an equitable program of educational opportunity.

In Other Words…

It is easier for states to fund programs with large school districts than to fund them for many small school districts.

Large Schools District Advantages

• Per capita tax base is larger • More resources available • Schools have an efficiency of size• Administrative costs are controlled (less redundancy)

Larger School Divisions Are More Efficient

• One 400 student school & a 500 student school may have the same number administrators, secretaries, librarians, and nurses

• The larger school may have four or five more teachers PLUS additional building operations expenses

• If the cost of operating the school on a per student basis is spread out over those students, it is more cost effective to run the school with 500 students than with 400 students

School Districts Vary in Size

The United States educates more than 47 million public school students in almost 15 thousand school districts.

• Hawaii and the District of Columbia have only one school district

• Florida and Maryland have large average school district sizes with

37,321 and 35,860,

respectively

• Montana and Vermont have the lowest average number of pupils per district with

335 and 351, respectively

School District Size & Costs

• Consider the building costs, the administrative overhead, the State Department of Education costs amortized over the small school districts

A Local Comparison

School District A has

• 1,000 students • 4,000 residents• per capita income

(PCI) of $35,000

School District B has

• 2,000 students • 10,000 residents • per capita income

(PCI) of $35,000

Relative Capacity by Per Capita Income (PCI)

School District A

4,000 residents X $35,000

1,000 students

$140,000 PCI

per student

School District B

10,000 residents X 35,000

2,000 students

$175,000 PCI

per student

More Residents, More Fiscal Capacity

• School District A has $140,000 of per capita income per student

• School District B has $175,000 of per capita income per student

• On this basis, School District B has a greater capacity to fund services

• Clearly, where there is a greater ratio of residents to students, there exists greater capacity

Questions

• Does your state have the fiscal capacity to fund the programs needed to truly leave no child behind?

• Does your locality have the fiscal capacity?

State Fiscal Capacity

• Just as localities have differences in their ability to raise funds for services, states also vary in their capacity

• We can calculate per capita income, and we can also adjust for cost of living standards across states

• Each of these pieces of information provides one part of the puzzle in determining fiscal capacity

Variance in Measuring Fiscal Capacity

• Some states measure capacity on a capita or total population basis

• They argue that government services must be provided for all the population – not just public school students

• Other states calculate capacity on a per student enrolled in public school basis

• They reason that for education purposes, the number of students enrolled in public schools should measure capacity

State Population Demographics Vary

• Florida, as a retirement Mecca, for example, has a relatively lower ratio of students to the overall population

• Generally, the preferred method for computing capacity uses the number of public school students as the denominator

Caution Using Income Indicators

• Per capita income is more rapidly affected by the economy than is property

• If a statewide downturn occurs and a many state residents are unemployed, income will decrease quickly and not accurately reflect the published income data (from prior years)

Cost of Living & Capacity

• Another way to examine the capacity of per capita income is to adjust it for a cost of living index

• It is more expensive to live in New York City than it is to live in upstate New York and more expensive to live in San Francisco than it is to live

in Bakersfield, California

Virginia

• 14th Highest non-adjusted per capita income = $31,162.

• Cost of living index: 0.954 • Adjusted Income=

$32,595. • Adjusted cost of living

rank: 6th.

Connecticut• 1st Highest non-adjusted

per capita income = $40,640.

• Cost of living index: 1.122• Adjusted Income =

$35,682.• Adjusted cost of living

rank: 2nd.

Cost of Living Impacts States’ Capacity to Fund Services

See Table 6.5 in Text for Entire U.S. Capacity & Indices

National Fiscal Capacity

Nations have difficulty measuring fiscal capacity.

Ways to compute a nation’s wealth:

• Gross National Product

• Gross Domestic Product

• Gross National Income  

Gross National Product (GNP)

• Defined as the total economic value of all the goods & services produced by a country during a given year

• Gross Domestic Product (GDP) is now a more favored indicator than Gross Domestic Product (GNP)

Gross Domestic Product (GDP)

• Gross Domestic Product (GDP) can be defined as the total output a country produces, including either public or private factors, regardless of where production occurs, within a given year

U.S. in International Wealth Comparisons

The U.S. is not the wealthiest country on a per capita basis.

GDP per Capita for the 10 Wealthiest Countries

1. Luxembourg $44,000

2. United States $36,300

3. Bermuda $34,800

4. San Marino $34,600

5. Norway $31,800

GDP per Capita for the 10 Wealthiest Countries, cont.

6.Switzerland $31,700

7.Cayman Islands $30,000

8.Canada $29,400

9.Belgium $29,000

10. Denmark $29,000

GDP per Capita for the 10 Poorest Countries

1. Sierra Leone $5002. Somalia $5503. Democratic Republic of the Congo $5904. Burundi $600 Mayotte $6005. Tanzania $610

GDP per Capita for the 10 Poorest Countries, cont.

6. Malawi $6607. Ethiopia $7008. Comoros $7109. Eritrea $74010. Afghanistan $800

A Large Disparity in Nations’ Wealth

One must wonder what will happen to the world economy as the countries that develop their human capital advance while other countries go without the resources even to bury the dead.

Essential for U.S. to Fund Public Education

Unless the United States uses the capacity it has to promote public education, other countries will surpass us in many wealth measures on a per capita basis.