Chapter 6 Fiscal Capacity

1
Chapter 6Fiscal Capacity
2
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.

3
Fiscal Capacity

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

4
Fiscal Capacity, cont.

• On the other hand, localities can have moderate
  or low capacity and choose to put more effort
  into funding programs

5
Relative Fiscal Capacity Effort
High
High Effort/ High Capacity
High Capacity/ Low Effort
Capacity
Low Effort/ Low Capacity
High Effort/ Low Capacity
Low
High
Low
Effort
6
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

7
Property as Proxy for Wealth

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

• Ones 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 todays world

8
Fiscal Capacity is Complex

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

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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.

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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.

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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?

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

• The concept
• of capacity seems simple.

• Computing capacity, though, becomes quite
  complex.

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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
  50,000
• Per Capita Commercial
• Property Value 0
  25,000
• Per Capita Industrial
• Property Value 0
  25,000
• Per Capita Income 50,000
  50,000

14
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.

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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

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

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Local Fiscal Capacity

• Traditionally, a locality measured its fiscal
  capacity as a ratio
• The districts property valuation
• The number of pupils in the system
• This calculation method lacks an important
  education component the students needs.

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Students Needs Local Capacity

• 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.

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

19
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.

20
Moreover,

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

21
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.

22
Funding Capacity Equity, cont.

• Most states now include the districts and
  states income and sales tax measurements as a
  way to equalize assessments
• Constitutional exceptions and variations exist
  regarding how each state measures fiscal capacity

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Equalizing Education Funding

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

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• How these funds are equalized today is the
  fodder of State Constitutional challenges and
  Supreme Court cases.

• 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.

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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

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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.

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In Other Words

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

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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)

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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

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School Districts Vary in Size

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

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• 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

32

• Montana and Vermont have the lowest average
  number of pupils per district with
• 335 and 351, respectively

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School District Size Costs

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

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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

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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

36
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

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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?

38
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

39
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

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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

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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)

42
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

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Cost of Living Impacts States Capacity to
Fund Services

• 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.

See Table 6.5 in Text for Entire U.S. Capacity
Indices
44
National Fiscal Capacity

• Nations have difficulty measuring fiscal
  capacity.

• Ways to compute a nations wealth
• Gross National Product
• Gross Domestic Product
• Gross National Income  

45
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)

46
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

47
U.S. in International Wealth Comparisons

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

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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

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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

50
GDP per Capita for the 10 Poorest Countries
1. Sierra Leone 500 2. Somalia 550 3.
Democratic Republic of the
Congo 590 4. Burundi 600
Mayotte 600 5. Tanzania 610
51
GDP per Capita for the 10 Poorest Countries,
cont.
6. Malawi 660 7. Ethiopia 700 8. Comoros
710 9. Eritrea 740 10.
Afghanistan 800
52
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.

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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.