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

4. On the other hand, localities can have moderate or low capacity and choose to put more effort into funding programs Fiscal Capacity, cont.

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. 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 Property as Proxy for Wealth

8. The concept of fiscal capacity is not quite as simple as many would believe. Fiscal Capacity is Complex

9. 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. Consider 2 School Districts with the Same Per Capita Income

10. 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?

11. 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.

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

13. Which school district is in a better position to fund schools? District ADistrict B # Pupils10,00010,000 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. 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

15. 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 Not All School Districts Have the Same School Funding Ability, cont.

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

17. 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.

18. 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. Students Needs & Local Capacity

19. 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. Additionally,

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

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 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

23. How school districts measure capacityis the hinge pin for determining how each state equalizes education funding. Equalizing Education Funding

24. 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.

25. 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

26. 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. Ranges in Fiscal Capacity, cont.

27. In Other Words… It is easier for states to fund programs with large school districts than to fund them for many small school districts.

28. 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)

29. 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 Larger School Divisions Are More Efficient

30. The United States educates more than 47 million public school students in almost 15 thousand school districts. School Districts Vary in Size

31. 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

33. Consider the building costs, the administrative overhead, the State Department of Education costs amortized over the small school districts School District Size & Costs

34. 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 A Local Comparison

35. 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 Relative Capacity by Per Capita Income (PCI)

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

37. 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. 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 Variance in Measuring Fiscal Capacity

40. 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 State Population Demographics Vary

41. 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 livein 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

43. 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

44. Nations have difficulty measuring fiscal capacity. Ways to compute a nation’s wealth: Gross National Product Gross Domestic Product Gross National Income   National Fiscal Capacity

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. The U.S. is not the wealthiest country on a per capita basis. U.S. in International Wealth Comparisons

48. 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

49. 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