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Chapter 6 Fiscal Capacity


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

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Title: Chapter 6 Fiscal Capacity

Chapter 6 Fiscal 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
High Effort/ High Capacity
High Capacity/ Low Effort
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
  • The richer help the poorer

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
  • Income is probably a better measurement of wealth
    in todays 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?,
  • 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

Do Both Have the Same Capacity to Fund Schools?,
  • The concept
  • of capacity seems simple.
  • Computing capacity, though, becomes quite

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
  • Per Capita Commercial
  • Property Value 0
  • Per Capita Industrial
  • Property Value 0
  • Per Capita Income 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 districts property valuation
  • The number of pupils in the system
  • This calculation method lacks an important
    education component the students needs.

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.

  • 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.

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

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 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

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

  • 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.

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
  • 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

  • Does your state have the fiscal capacity to fund
    the programs needed to truly leave no child
  • 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
  • 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
  • in Bakersfield, California


Cost of Living Impacts States Capacity to
Fund Services
  • Virginia
  • 14th Highest non-adjusted per capita income
  • Cost of living index 0.954
  • Adjusted Income 32,595.
  • Adjusted cost of living
  • rank 6th.
  • Connecticut
  • 1st Highest non-adjusted per capita income
  • 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
National Fiscal Capacity
  • Nations have difficulty measuring fiscal
  • Ways to compute a nations 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

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,
  • 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 500 2. Somalia 550 3.
Democratic Republic of the
Congo 590 4. Burundi 600
Mayotte 600 5. Tanzania 610
GDP per Capita for the 10 Poorest Countries,
6. Malawi 660 7. Ethiopia 700 8. Comoros
710 9. Eritrea 740 10.
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.