Download Chapter 6 Fiscal Capacity Issues

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
High Capacity/
Low Effort
High Effort/
High Capacity
Low Effort/
High Effort/
Low Capacity
Low Capacity
Low
Low
Effort
High
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
Computing
capacity,
of capacity
seems
though,
simple.
becomes quite
complex.
Which school district is in a
better position to fund schools?
District A
# Pupils
Per Capita Residential
10,000
Property Value
$50,000
Per Capita Commercial
Property Value
Per Capita Industrial
Property Value
Per Capita Income
$
0
$
0
$50,000
District B
10,000
$50,000
$25,000
$25,000
$50,000
Not All School Districts Have the
Same School Funding Ability
To have each district –
poor & wealthy – fund
education to their Stateprescribed 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 wellfed 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
School District B has
• 1,000 students
• 2,000 students
• 4,000 residents
• 10,000 residents
• per capita income
• per capita income
(PCI) of $35,000
(PCI) of $35,000
Relative Capacity by
Per Capita Income (PCI)
School District A
School District B
4,000 residents X $35,000
1,000 students
10,000 residents X 35,000
$140,000 PCI
per student
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
• Other states calculate
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
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
Cost of Living Impacts States’
Capacity to Fund Services
Virginia
Connecticut
• 14th Highest non-adjusted
• 1st Highest non-adjusted
per capita income =
$31,162.
• Cost of living index: 0.954
• Adjusted Income=
$32,595.
• Adjusted cost of living
rank: 6th.
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
National Fiscal Capacity
Ways to compute a
Nations have
nation’s wealth:
difficulty
measuring fiscal • Gross National
Product
capacity.
• 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
2. United States
3. Bermuda
4. San Marino
5. Norway
$44,000
$36,300
$34,800
$34,600
$31,800
GDP per Capita for the
10 Wealthiest Countries, cont.
6.Switzerland
7.Cayman Islands
8.Canada
9.Belgium
10. Denmark
$31,700
$30,000
$29,400
$29,000
$29,000
GDP per Capita for the
10 Poorest Countries
1. Sierra Leone
2. Somalia
3. Democratic Republic
of the Congo
4. Burundi
Mayotte
5. Tanzania
$500
$550
$590
$600
$600
$610
GDP per Capita for the
10 Poorest Countries, cont.
6. Malawi
7. Ethiopia
8. Comoros
9. Eritrea
10. Afghanistan
$660
$700
$710
$740
$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.