Group Title: relationships between alternative local fiscal capacity measures and selected school finance equity standards
Title: The relationships between alternative local fiscal capacity measures and selected school finance equity standards
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Title: The relationships between alternative local fiscal capacity measures and selected school finance equity standards
Physical Description: viii, 175 leaves : graphs ; 28 cm.
Language: English
Creator: Melcher, Thomas Robert, 1950-
Copyright Date: 1978
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Subject: Public schools -- Finance -- North Carolina   ( lcsh )
Local finance -- North Carolina   ( lcsh )
Educational Administration and Supervision thesis Ph. D   ( lcsh )
Dissertations, Academic -- Educational Administration and Supervision -- UF   ( lcsh )
Genre: bibliography   ( marcgt )
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Statement of Responsibility: by Thomas R. Melcher.
Thesis: Thesis--University of Florida.
Bibliography: Bibliography: leaves 167-174.
General Note: Typescript.
General Note: Vita.
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Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: alephbibnum - 000085348
oclc - 05325546
notis - AAK0697

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TIE RELATIONSHIPS BETWEEN ALTERNATIVE LOCAL
FISCAL CAPACITY MEASURES AND SELECTED
SCHOOL FINANCE EQUITY STANDARDS













By

THOMAS R. MELCIIER


A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR TIE DEGREE OF
DOCTOR OF PHILOSOPHY



UNIVERSITY OF FLORIDA


































































Copyright by
Thomas R. Melcher
1978
















ACKNOWLEDGMENTS


The writer wishes to thank the members of his doctoral committee,

Dr. Kern Alexander, Dr. James Hale, and Dr. Robert Soar. Special

appreciation is expressed to Dr. Alexander, committee chairman, for

his generous encouragement, interest, and support throughout the

doctoral program.

Gratitude is owed to the National Educational Finance Project and

to the Institute for Educational Finance for financial support during

the period of graduate work. Appreciation is extended to Dr. Jerome

Melton and Mr. Alan Hill of the North Carolina Department of Public

Education and to the members of the North Carolina Governor's Commission

on Public School Finance for their support and assistance in this study.

The writer wishes to express special thanks to his wife, Linda,

for her patience, assistance, and understanding.

















TABLE OF CONTENTS


Page

111


ACKNOWLEDGMENTS . . . .

ABSTRACT . . . .

CHAPTER


1 INTRODUCTION ... . . . . ... 1
Statement of the Problem. .. . . .. . .. 4
Procedures. . ... .. ... ... . .... 4
Delimitations . . . . . .. . .. . 9
Limitations . ... .. ...... ... 10
Justification of the Study. .. . . . 11
Definition of Terms .. ... ...... . 13

I] REVIEIV OF RELATED LITERATURE .. . . . . 16
Alternative School Finance Equity Standards 16
Resource Equality .. .. ...... . .. 18
Taxpayer Equity .. .. ...... . . . 25
Fiscal Neutrality .. . . .. . ..... 31
Quantitative Measures of School Finance Equity. 38
Resource Equality .. .. ... ... . 39
Ex Post Fiscal Neutrality . . .... . 46
Ex Ante Fiscal Neutrality . . .... . 49
National School Finance Equity Measures . 50
Alternative Local Fiscal Capacity Measures. .. 53
Development of Local Fiscal Capacity
Measurement . ... . . . 55
Alternative Resource Availability
Measures. ..... . . . . . 65
Alternative Need Units. . .. .. ... 76
Alternative Local Fiscal Capacity
Measures and School Finance
Equity. . . ........ .... 82












TABLE OF CONTENTS (continued)


CHAPTER Page

III METHODOLOGY. .. . . . . . . . . 85
Identification and Selection of School Finance
Equity Standards, Quantitative Measures of
School Finance Equity, and Alternative Local
Fiscal Capacity Measures. . . . . .. 86
Operational Definition of Selected Measures of
School Finance Equity and Local Fiscal
Capacity. . . . . . .. . . 88
Collection of Data. . . . . . . 92
Simulation of Alternative Revenue Distribu-
tions . . . ... . . . . . 94
Computation of School Finance Equity
Statistics. .. . ..... . ... 100

IV PRESENTATION AND ANALYSIS OF FINDINGS .... . 106
Resource Equality . .. .. .. ..... 106
Ex Post Fiscal Neutrality . ... .. . 113
Ex Ante Fiscal Neutrality . . . . ... 126

V SUMMARY, IMPLICATIONS, AND RECOMMENDATIONS. ... 135
Summary . . ..... ... . ... 135
Implications ... .... . . . .. . 141
Recommendations .. . ... . . .. 146

APPENDIX. . . . ..... .. .. .... .. . 149

BIBLIOGRAPHY. . . . ... . . . . . . . 167

BIOGRAPHICAL SKETCH .... ....... . . ..... 175










Abstract of Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the Requirements
for the Degree of Doctor of Philosophy


THE RELATIONSHIPS BETWEEN ALTERNATIVE LOCAL
FISCAL CAPACITY MEASURES AND SELECTED
SCHOOL FINANCE EQUITY STANDARDS

By

Thomas R. Melcher

December 1978

Chairman: S. Kern Alexander
Major Department: Educational Administration

The problem of this study was to analyze the relationships between

alternative local fiscal capacity measures and selected school finance

equity standards. The specific aspects of the problem were:

(1) To identify alternative local fiscal capacity concepts, school

finance equity standards, fiscal capacity measurement approaches,

and school finance equity evaluation procedures.

(2) To analyze the relationships between alternative local fiscal

capacity measures and selected school finance equity standards

within the state of North Carolina.

Eight alternative approaches for measuring local fiscal capacity

were operationalized by combining tax base accessibility, personal in-

come, tax base accessibility plus personal income, and personal income-

modified tax base accessibility as alternative measures of local economic

resources with educational need units and population units as alternative

measures of public needs to be financed from these resources. Alterna-

tive 1976-77 revenue distributions among North Carolina school districts










were simulated based on systematic variation of local fiscal capacity

measurement holding other state school finance variables constant.

The alternative local fiscal capacity measures were evaluated by

assessing the consistency of the different revenue distributions with

three selected school finance equity standards: (1) resource equality,

(2) ex post fiscal neutrality, and (3) ex ante fiscal neutrality.

Resource equality requires that equal revenue per unit of educational

need be provided throughout a state. Ex post fiscal neutrality exists

when variations in revenue per educational need unit are not related

to variations in local fiscal capacity. Ex ante fiscal neutrality

requires that equal local tax effort result in equal revenue per edu-

cational need unit.

Statistical procedures employed for evaluating the consistency of

alternative revenue distributions with the resource equality standard were

(1) the 95th to 5th percentile range ratio, (2) the relative mean devia-

tion, (3) the coefficient of variation, and (4) the univariate Gini

coefficient. Evaluations with respect to ex post fiscal neutrality were

completed utilizing (1) Pearson product-moment correlations, (2) re-

gression slopes based on simple linear and quadratic specifications of

local fiscal capacity, (3) elasticity coefficients, and (4) bivariate

Gini coefficients. The consistency of alternative revenue distributions

with the ex ante fiscal neutrality standard was assessed using (1) the

95th to 5th percentile range ratio, (2) the relative mean deviation,

(3) the coefficient of variation, and (4) Pearson product-moment

correlations.









Major statistical findings of the research were:

1. The selection of a local fiscal capacity measure, holding other

state school finance variables constant, may substantially af-

fect school finance equity.

2. Simulated revenue distributions based on local fiscal capacity

measures utilizing educational need units were more consistent

with the selected school finance equity standards than those

based on measures using population units.

3. The personal income-modified tax base accessibility per educa-

tional need unit capacity measure was the most effective of the

simulated alternatives in facilitating the attainment of the

selected school finance equity standards within the specific

context of North Carolina.

4. Rankings of the simulated revenue distributions were generally

consistent among statistical procedures using all points in a

revenue distribution; rankingsbased on procedures using

selected points differed slightly.

Appropriate determination of local fiscal capacity is one of

several essential elements of an equitable state school finance program.

The methodology utilized in this study may be applied in other states

to determine the relationships between alternative local fiscal capacity

measures and school finance equity in different settings.















CHAPTER I

INTRODUCTION



The definition and measurement of local fiscal capacity is one of

the older and more elusive problems in the field of public school finance.

Fiscal capacity is a quantitative measure of the economic resources within

a governmental jurisdiction per unit of need for public services. Numer-

ous studies since the beginning of the twentieth century have documented

the existence of wide variations among local school districts in fiscal

capacity to support public education (Cubberley, 1906; R.L. Johns, 1952;

Rossmiller, Hale, & Frohreich, 1970; Strayer & Haig, 1923). Recognizing

the inequities inherent in school finance methods based largely on

unevenly distributed local resources and citing the responsibility of

the states for ensuring equality of educational opportunity and taxpayer

equity, early public school finance theorists,including Updegraff (1922),

Strayer and llaig (1923), and Mort (1926), recommended that state school

finance programs based on the concept of fiscal equalization be developed

and implemented.

Since the introduction of the foundation program approach in the

1920s,most states have adopted and maintained public school finance sys-

tems designed to provide varying degrees of fiscal equalization among

school districts. Under the fiscal equalization concept, state dollars









are apportioned among school districts in direct relation to educa-

tional need and in inverse relation to local fiscal capacity. In 1975-76,

46 states employed some type of equalization formula and 68% of all state

school funds were distributed on a fiscally equalized basis (Tron, 1976,

pp. 14-15). The basic rationale underlying the fiscal equalization

approach, whether implemented through a foundation program, power equaliz-

ing formula, or other method, is that the state is responsible for facili-

tating the attainment of school finance equity for public school pupils

and taxpayers through a system of shared state and local financing.

Despite the focus of state school finance programs on equity and the

central role of local fiscal capacity measurement in the implementation

of fiscal equalization programs, no consensus has been reached concerning

the definition and measurement of either school finance equity or local

fiscal capacity. The concept of equity for pupils and taxpayers is

partially a matter of personal philosophy and values; however, two

measurable standards of school finance equity were widely employed by

school finance researchers in the United States during the 1970s:

(1) resource equality, that all children within a state should have

equal access to the resources necessary for the provision of educational

programs suited to their individual needs, and (2) fiscal neutrality,

that the quality of a child's education should not be a function of

wealth, other than the wealth of the state as a whole.

The fiscal neutrality standard, articulated by Coons, Clune, and

Sugarman (1970, p. 1) and established as a legal precedent in Serrano v.

Priest (487 P.2d 1241, 1971), has received varying interpretations in

the school finance literature. As Barro (1974) noted:










The ex post interpretation is that the actual level of educa-
tional support must not correlate with wealth. On that basis,
a system that resulted in both higher spending and higher
effort in wealthy districts would not be acceptable. The ex
ante formulation is that the ability of a district to support
schools should not depend on wealth. This means only that a
unit of effort must produce the same support everywhere. (p. 32)

The measurement of local fiscal capacity has similarly been the

issue of much controversy during the 1970s. Property valuation per pupil,

the traditional measure of local fiscal capacity, has been criticized on

three major grounds. First, it has been observed that local nonproperty

taxes and other revenue sources are accessible to local school districts

in many states and that a more broadly defined measure of resource ac-

cessibility would more accurately reflect local revenue potential (Garms,

Guthrie, & Pierce, 1978, p. 235; R.L. Johns, 1972b; p. 365; Moore, 1971,

p. 209). Second, the use of income or related economic indicators re-

gardless of their accessibility to local school districts has been

advocated on the grounds that economic indicators reflect ability to

pay and are related to patterns of school district fiscal behavior

(Benson, 1972, p. 22; Hickrod & Hlubbard, 1978, pp. 272-278; Odden,

Augenblick, & Vincent, 1976, pp. 17-20). Finally, it has been suggested

that the use of pupils as a unit of need discriminates among communities

on the basis of the mix of services to be provided and that the use of

a per capital measure would alleviate this problem (Callahan, Wilken,

& Sillerman, 1973, pp. 18-19; Odden, 1977, pp. 360-363).

As alternative measures of local fiscal capacity are considered for

use in state school finance programs, information concerning the rela-

tionships between these measures and widely recognized school finance










equity standards will facilitate the development of sound public policy.

Accordingly, there is a need for analysis of the relationships between

alternative local fiscal capacity measures and selected school finance

equity standards.


Statement of the Problem


The problem of this study was to analyze the relationships between

alternative measures of local fiscal capacity to support public education

and selected standards of school finance equity. The specific aspects

of the problem were as follows:

1. To identify alternative local fiscal capacity concepts, school

finance equity standards, and approaches for measuring local

fiscal capacity and school finance equity.

2. To analyze the relationships between operational measures

reflecting alternative local fiscal capacity measurement

approaches and selected school finance equity standards within

the context of a selected state.


Procedures


The study was conducted in the following five phases:

I Identification of alternative local fiscal capacity concepts,

school finance equity standards, and approaches for measuring

local fiscal capacity and school finance equity.

II Development of operational definitions for quantitative

measures reflecting identified local fiscal capacity measurement

approaches and school finance equity standards.





5



III Collection of data concerning local fiscal capacity

measures and the school finance context of a selected state.

IV Simulation of alternative revenue distributions among school

districts for the 1976-77 school year based on alternative

local fiscal capacity measures.

V Computation and analysis of selected school finance equity

measures based on alternative 1976-77 revenue distributions.

Phase I. The concepts and measurement approaches providing the

foundation for the study were identified in Phase I through a review of

the public school finance literature. The focus of the review was on

identification and analysis of (1) alternative school finance equity

standards, (2) quantitative measures of school finance equity, and

(3) alternative approaches for measuring local fiscal capacity to

support public education.

Based on the review of related literature reported in Chapter II

of this study, the following school finance equity standards were selected

for analysis: (1) resource equality, (2) ex post fiscal neutrality, and

(3) ex ante fiscal neutrality. Alternative local fiscal capacity con-

cepts identified in the literature review consist of four alternative

methods of determining resource availability and two alternative

methods of measuring the need for public services. The alternative

resource availability measurement approaches are (1) tax base ac-

cessibility, (2) economic indicators, (3) the additive combination

of resource availability and economic indicators, and (4) the

multiplicative combination of resource availability and economic









indicators. The alternative need measures are (1) educational need

units and (2) population units.

Quantitative measures of each selected school finance equity

standard were identified in the review of related literature. Statistics

selected for the measurement of resource equality were (1) the 95th

to 5th percentile range ratio in revenue per educational need unit,

(2) the relative mean deviation in revenue per educational need unit,

(3) the coefficient of variation in revenue per educational need unit,

and (4) the Gini coefficient based on variation in revenue per educa-

tional need unit.

Statistics selected for the measurement of ex post fiscal neutrality

were (1) Pearson product-moment correlations between revenue per educa-

tional need unit and (a) tax base accessibility per educational need

unit, and (b) personal income per educational need unit, (2) regression

coefficients obtained from the regression of revenue per educational need

unit on (a) tax base accessibility per educational need unit, and

(b) personal income per educational need unit, and (3) bivariate Gini

coefficients obtained by ordering school districts based on (a) tax base

accessibility per educational need unit, and (b) personal income per

educational need unit.

For the measurement of ex ante fiscal neutrality the following

statistics were selected: (1) the 95th to 5th percentile range ratio

in local operating tax rate necessary to attain the state mean revenue

per educational need unit, (2) the relative mean deviation in local

operating tax rate necessary to attain state mean revenue per educa-

tional need unit, (3) the coefficient of variation in local operating tax









required to attain the state mean revenue per educational need unit,

and (4) the Pearson product-moment correlation between local operating

tax rate and revenue per educational need unit.

Phase II. In Phase II operational definitions were developed for

each quantitative measure of local fiscal capacity and school finance

equity based on the concepts and measurement approaches identified in

Phase I and on an examination of the school finance context of a

selected state. The state selected for the study wasNorth Carolina.

Examination of the North Carolina school finance context involved

collection and analysis of information concerning (1) the state school

finance program, (2) the state-local tax structure, (3) the school

district organization pattern, and (4) general demographic and economic

characteristics of local school districts. First, the specific parameter

used in the state school finance program for the measurement of educa-

tional need was identified to enable the development of the operational

measures of local fiscal capacity and school finance equity incorporating

educational need units. Second, the specific tax bases accessible to

local school districts and the relative yield of each accessible tax

base were identified as a prerequisite to the development of the opera-

tional measures of local fiscal capacity and school finance equity in-

volving tax base accessibility. Third, the school district organization

pattern was examined to identify the units for which alternative local

fiscal capacity measures wore developed. Finally, the availability

of population and economic indicator data was ascertained to facilitate

development of local fiscal capacity and school finance equity measures

based on population units and economic indicators.









Phase III. Data concerning local fiscal capacity and the North

Carolina state school finance context were collected in Phase III.

Tax base accessibility data were obtained from published reports of

the North Carolina Department of Revenue and from work papers of the

North Carolina Governor's Commission on Public School Finance. Eco-

nomic indicator data were collected from published reports of the

North Carolina Department of Revenue and the U.S. Census Bureau.

Population data were obtained from published U.S. Census Bureau re-

ports. Educational need unit data and local revenue data were collected

from published reports and computer tapes of the North Carolina Depart-

ment of Public Education. The parameters of the North Carolina state

school finance system were obtained from work papers of the Governor's

Commission on Public School Finance and from computer tapes of the

Institute for Educational Finance, University of Florida.

Phase IV. Alternative revenue distributions among school districts

for the 1976-77 school year were simulated in Phase IV based on the in-

clusion of alternative local fiscal capacity measures in the North

Carolina state school finance program. All variables in the state school

finance program except measurement of local fiscal capacity were held

constant in all simulations, including total state equalization aid and

each school district's state basic program revenue and local revenue.

Nine simulations were completed, the first based on the existing North

Carolina state school finance method and the remaining eight involving

the use of different measures of local fiscal capacity in computing the

distribution of state equalization aid among school districts. Simu-

lated total revenue distributions among school districts were computed by










summing the state basic revenue, state equalization revenue, and local

revenue for each district. Simulated total revenue for each school

district was then divided by the number of educational need units in

the district to obtain simulated total revenue per educational need

unit.

Phase V. In Phase V the quantitative measures of school finance

equity selected in Phase I were computed for each simulated revenue dis-

tribution, and the resulting school finance equity statistics were

analyzed to determine the relative impact of the alternative local

fiscal capacity measures on school finance equity within the state of

North Carolina.


Delimitations


1. The analysis of local fiscal capacity measures was confined to

eight selected alternatives.

2. Criteria of school finance equity incorporated in the model

were restricted to quantitative measures of resource equality,

ex post fiscal neutrality, and ex ante fiscal neutrality.

3. Analysis of the relationships between fiscal capacity and

school finance equity measures was completed holding other

elements of the state school financing method constant,

Simulation of state equalization aid distributions under

alternative local fiscal capacity measures was restricted to

computations based on the state school financing method

recommended by the North Carolina Governor's Commission on

Public School Finance.









4. The analysis was confined to the state of North Carolina

using 1975-76 fiscal capacity data and 1976-77 revenue data.


Limitations


The concepts and measurement approaches identified in this study

may be employed by state planners and researchers in analyzing the im-

pact of alternative measures of local fiscal capacity on the equity of

state school finance programs. The analysis completed in this study pro-

vides information concerning the short-run fiscal equity effects of

alternative local fiscal capacity measures in one particular state at

one point in time. This information may be utilized in the development

of hypotheses concerning the relationships between alternative local

fiscal capacity measures and selected school finance equity standards

in other states or time periods. Longitudinal studies will be required

for assessment of long-run fiscal equity effects as the procedures de-

veloped in this study were not designed to permit prediction of the

fiscal response of school districts to alternative equalization programs.

Substantive conclusions concerning the equity effects of alternative local fis-

cal capacity measures are generalizable to other states only to the

extent that the distribution of wealth among districts, the pattern of

school district organization, and the state school financing method are

similar.










Justification of the Study


The concept of fiscal capacity is a central component in the theory

and practice of public school finance. The requirement for state par-

ticipation in the financing of public education derives partially from

the variation among school districts in fiscal capacity to support public

schools (Morphet, 1952, p. 151). The definition and measurement of local

fiscal capacity is a critical factor in determining the distribution of

state revenue among school districts in the states employing the fiscal

equalization approach to public school finance (R. L. Johns, 1952, p. 219).

In 1978, 48 states employed this approach, under which state dollars are

apportioned among districts in direct relation to educational need and

inverse relation to local fiscal capacity.

Property valuation per pupil has long been the standard measure of

local fiscal capacity utilized in state school equalization programs;

however, reliance on this measure has received much criticism in the

school finance literature since the late 1960s (Alexander & Jordan,

1976; Benson, 1972; Callahan, Wilken, & Sillerman, 1973; Hickrod 5

Hubbard, 1978; Hickrod & Sabulao, 1969; Odden, 1977; Rossmiller, Hale, &

Frohreich, 1970). Between 1973 and 1978,the states of Connecticut,

Missouri, Pennsylvania, and Virginia enacted school finance legislation

incorporating income and/or retail sales as adjustments to the tradi-

tional property measure of local fiscal capacity. Other states such as

New Mexico broadened the measurement of local fiscal capacity to include

such sources of school district revenue as motor vehicle license fees

and federal impact aid funds. In 1977 and 1978,a number of states









considered alternative fiscal capacity measures in school finance

studies funded through P.L. 93-380, Section 842.

Considerable discussion was devoted during the 1960s and 1970s to

the concepts of fiscal capacity and school finance equity; however, only

limited research was directed toward examining the relationships between

these variables. The development of a cumulative body of knowledge in

the field of public school finance requires that major school finance

concepts be defined operationally and that the relations among these

concepts be studied empirically. Analysis of the relationships between

local fiscal capacity measurement and school finance equity is needed to

(1) provide school finance researchers with a conceptual framework and

hypotheses for further study of the relationships between these vari-

ables and (2) provide state fiscal policy analysts with a practical

approach for examining the fiscal equity implications of alternative

local fiscal capacity measures. While the substantive conclusions ob-

tained from analyses conducted within individual states may not have

broad external validity, the combined results of a number of such studies

may provide significant insights into the relationships between fiscal

capacity measures and fiscal equity indicators.

Analysis of the relationships between concepts of local fiscal

capacity and school finance equity within the state of North Carolina

provided information employed by the North Carolina Governor's Commission

on Public School Finance in the development of a recommended school

finance equalization program for that state. The study of alternative

local fiscal capacity measures formed one component of a comprehensive










report on North Carolina public school finance. The selection of North

Carolina for analysis had particular significance in that in 1978 North

Carolina was the only state in the nation with neither a full state fund-

ing system nor a fiscal equalization program for financing the public

schools.


Definition of Terms


Economic index. Economic index as used in this study refers to a

method developed by Cornell (1936) for estimating equalized property

valuations by regressing assessed property valuations on a series of

economic characteristics.

Economic indicator approach. The economic indicator approach is a

method for measuring the relative level of economic resources within

governmental jurisdictions for the support of public services based on

identification of general economic indicators such as income, consumption,

and wealth.

Educational need unit. An educational need unit is the specific

parameter used in the school finance program of a particular state for

the measurement of educational need. Most states employ some form of

pupil unit such as Average Daily Attendance (ADA), Average Daily Member-

ship (ADM), Full Time Equivalents (FTE) or pupil units weighted by pro-

grams (e.g., WADM); however, some states utilize teacher units or in-

structional units as the measure of educational need, which are also

often weighted by programs.

Fiscal capacity. Fiscal capacity is a quantitative measure of the

economic resources within a governmental jurisdiction per unit of need









for public services. Alternative methods for measuring the resources

within a governmental jurisdiction include the economic indicator

approach and the tax base accessibility approach. Alternative measures

of need for public services include educational need units and population

units.

Fiscal neutrality. Fiscal neutrality is a school finance equity

standard which holds that the quality of a child's education should not

be a function of wealth, other than the wealth of the state as a whole.

Two interpretations of fiscal neutrality are included in this study.

Ex ante fiscal neutrality is a school finance equity standard which holds

that equal local tax effort should result in equal revenue per educa-

tional need unit. Ex post fiscal neutrality is a school finance equity

standard which holds that variations in actual revenue per educational

need unit should not be related to variations in local fiscal capacity.

Population unit. A population unit is a measure of need for general

governmental services based on the number of persons within a governmental

jurisdiction.

Resource equality. Resource equality is a school finance equity

standard which holds that all children within a state should have equal

access to the economic resources necessary for the provision of educa-

tional programs suited to their individual needs.

Revenue. Except as modified specifically by other terms, revenue

as used in this study) refers to the sum of local revenue for current

operations plus state general aid. Local revenue for capital outlay

and debt service, local nonrevenue receipts, and state categorical aids

are excluded from this term.





s15



School finance equity. School finance equity is a concept dealing

with the fairness or impartiality of a state school finance system as

related to pupils and taxpayers. Standards of school finance equity

include fiscal neutrality and resource equality.

Tax base accessibility approach. The tax base accessibility approach

is a method for measuring the relative level of economic resources within

governmental jurisdictions for the support of public services based on

identification of tax bases and tax rates legally accessible to the

jurisdictions.















CHAPTER II

REVIEW OF RELATED LITERATURE



The focus of this study was on an analysis of the relationships

between alternative local fiscal capacity measures and selected school

finance equity standards. To establish a conceptual framework for the

study; a review of related literature was completed to identify (1) alter

native standards of school finance equity for students and taxpayers,

(2) alternative measures quantifying school finance equity standards,

and (3) alternative measures of local fiscal capacity.


Alternative School Finance Equity Standards


The development of state school finance systems designed to provide

fiscal equity for students and taxpayers has long been a central concern

of writers in the field of public school finance. Discussion of fiscal

equity for students has focused primarily on the concept of equality of

educational opportunity and the fiscal aspect of this concept, resource

equality. Analysis of taxpayer equity has centered on the benefit and

ability-to-pay principles of taxation and on horizontal and vertical

tax equity. During the 1970s,the fiscal neutrality principle emerged as

a standard of fiscal equity for both students and taxpayers.

In 1906, Cubberley examined the fiscal characteristics of school

districts in six states, concluding that the magnitude of local fiscal

16










capacity disparities was such that "any attempt at the equalization

of opportunities for education, much less any attempt at equalizing

burdens, is clearly impossible under a system of exclusively local taxa-

tion" (p. 54). Recognizing the limitations inherent in school finance

models based entirely or predominantly on local taxation, Cubberley

recommended that general state aid be used to facilitate movement toward

equality of educational opportunity and taxpayer equity. lie expressed

his conception of state responsibility for public school finance as

follows:

Theoretically, all the children of the state are equally
important and are entitled to have the same advantages;
practically this can never be quite true. The duty of the
state is to secure for all as high a minimum of good instruc-
tion as possible, but not to reduce all to that minimum; to
place a premium on those local efforts which will enable local
communities to rise above the legal minimum as far as possible;
and to encourage communities to extend their educational
energies to new and desirable undertakings. (Cubberley,
1906, p. 17)

Cubberley's perception of the state's role in public school finance

involved both an equalization principle and a reward-for-effort prin-

ciple. Updegraff, in a 1922 New York study, extended the work of

Cubberley by developing a state school finance model incorporating both

equalization and reward for effort. Mort and Reusser (1941), in summariz-

ing the Updegraff model, noted that it "called upon the state to provide

financial conditions such that any effort on the part of a community of

less than average wealth would yield the returns equal to the same

effort exercised by communities of average wealth" (p. 391).

Strayer and Ilaig (1923, p. 175) rejected the reward-for-effort

concept, suggesting that reward for effort is fundamentally inconsistent









with resource equality. Reviewing the concepts of "equalization of

educational opportunity" and "equalization of tax support," Strayer

and Haig (1923) observed that strict interpretation of these concepts

would imply that

The state should ensure equal educational facilities to every
child within its borders at a uniform effort throughout the
state in terms of the burden of taxation; the tax burden of
education should throughout the state be uniform in relation
to tax-paying ability, and the provision of schools should be
uniform in relation to the educable population desiring edu-
cation. (p. 173)

Noting that most individuals would insist upon the provision of at

least a minimally adequate educational program in all school districts

but would not preclude individual districts from going beyond that mini-

mum at their own expense, Strayer and Haig (1923, pp. 173-174) recommended

that the concepts of equalization of educational opportunity and equali-

zation of school support be operationalized by (1) furnishing all chil-

dren within the state with equal educational opportunities up to a

prescribed minimum and (2) raising the funds necessary for this purpose

through state and local taxation adjusted so as to bear upon taxpayers

in all districts at the same rate in relation to local fiscal capacity.


Resource Equality


The standards of fiscal equity for students and taxpayers suggested

by Cubberley, Updegraff, and Strayer and Ilaig have been gradually refined,

modified, and extended by later writers in the field of public school

finance. Discussion of fiscal equity for students has focused primarily

on the provision of resource inputs necessary for the attainment of

equality of educational opportunity. Reflecting the philosophic position









prevalent in American society during the 1920s, the operational defini-

tion of equality of educational opportunity offered by Strayer and Haig

(1923, pp. 173-174) was a restricted one, requiring only that a minimum

foundation level of educational services be provided to each child

within the state.

Extension of this interpretation of state responsibility in provid-

ing for equality of educational opportunity proceeded slowly until the

decade of the 1960s. In 1941, Mort and Reusser defined equality of edu-

cational opportunity in a manner similar to that of Strayer and Haig:

Equality of educational opportunity means . the provision
by state or local means of at least certain minimum essentials
in the provision of schools, their supervision, and their finan-
cial support. . Equalization of educational opportunity
demands leveling up, not leveling down. It demands helping
the slow, not hobbling the swift. (pp. 99-100)

A decade later, Morphet (1952) described the role of the states in provid-

ing fiscal equity for students as one of helping "to assure reasonably

adequate and well-rounded educational opportunities for all children

and youth throughout the state" (p. 154). This concept of state responsi-

bility for the provision of an adequate foundation level of education

for all children remained the most common interpretation of the resource

equality standard in the public school finance literature throughout

the 1950s.

Beginning in the early 1960s,numerous writers focused on the short-

comings of the traditional foundation method of equalizing educational

opportunities. Reflecting a general movement in the United States toward the

elimination of inequality of opportunity based on economic and racial

factors, the generally accepted definition of equality of educational









opportunity was broadened to include (1) substantial equality in the

provision of educational services beyond the minimum level and (2) equal-

ity of educational outputs as well as inputs.

R. L. Johns and Morphet observed in 1960 that most Americans appar-

ently believed that "everyone should have equality of opportunity for

the kind and quality of educational program which will best meet his

needs and those of the society in which he lives" (p. 5). They noted

that this standard had not been attained in many communities due to such

factors as inefficient school district organization, inadequate state

school finance programs, ineffective local policies, and inept educa-

tional leadership; however, they reasoned that more complete attainment

of equality of educational opportunity would be forthcoming because of

growing acceptance of the concept as a public policy objective (R. L. Johns

& Morphet, 1960, p. 5).

Studies during the early 1960s pointed out the magnitude of dispari-

ties in educational opportunity within and among school districts. Sexton

(1961) analyzed the variations in educational opportunity within a large

eastern city school district. Grouping schools by income level of par-

ents, Sexton (1961, pp. 116-134) found low-income schools to have larger

class size, more frequent use of substitute teachers, and fewer specialized

facilities such as science labs and auditoriums than high-income schools.

Additionally,schools attended by low-income children tended to be older

and more likely to be rated as fire hazards than those attended by high-

income children. Conant (1961) examined the disparities between schools

in large city slums and affluent suburbs, concluding that "the contrast









in money spent per pupil in wealthy suburban schools and in slum schools

of the large cities challenges the concept of equality of opportunity in

American education' (p. 146).

Benson (1965, pp. 23-25) reported that high-wealth, high expenditure

school districts tended to have higher teacher salaries, smaller class

sizes, more attractive school facilities, and more extensive auxiliary

services than low-wealth, low-expenditure districts. lie pointed out that

the foundation program concept of providing all children with an adequate

basic education resulted in resource disparities directly related to

school district wealth:

Under the plan, districts are generally free to spend what they
wish in excess of the foundation program, and the richer the
district the easier it can raise its school expenditure to high
levels. It is sometimes claimed that this freedom represents
no inequity, because the foundation program covers the basic
costs of education, and so when a district spends in excess of
the dollar amount of the program it is using its own money at
its own discretion to buy a few educational frills. This is an
absurdity. High spending districts use their wealth to command
the services of large numbers of superior teachers and to provide
them with high-quality supplies and equipment. .. Thus, the
foundation program fails by design to achieve equality of pro-
vision. (p. 86)

As an alternative to the foundation concept of equality, Benson (1965)

suggested that equality of educational opportunity "implies that any two

children of the same abilities shall receive equivalent forms of

assistance in developing those abilities, wherever they live in a given

state and whatever their parental circumstances are' (p. 62).

The concept of equality of educational opportunity prevalent in the

literature of the early 1960s focused primarily on equality of educa-

tional inputs. Following the publication of the Coleman Report in 1966









the generally recognized definition of this concept was broadened dra-

matically to include the outcomes of schooling. Coleman (1968, pp. 18-

19), reviewing the development of the Equality of Educational Opportunity

Survey, noted that five elements were considered essential in measuring

the extent of equality. The first three elements, resource inputs,

racial composition, and intangible factors such as student morale and

expectations, reflected school inputs. The last two elements, conse-

quences of the school for individuals with equal and unequal backgrounds

and abilities, respectively, focused on school outputs. The Coleman

analysis of school outcomes set the direction for later studies of

equality of educational opportunity. As Nosteller and Moynihan (1972)

noted, following the publication of the Coleman Report "it became in-

creasingly the practice, even the demand, that equality be measured by

school outputs" (p. 6).

Wise (1967, pp. 143-159) reviewed nine alternative definitions of

equality of educational opportunity as applied to the field of public

school finance. These definitions were based on alternative value judg-

ments fortallocating educational resources to ensure equality of educa-

tional opportunity. A summary of the definitions suggested by Wise is

provided in Table 1. Citing the work of Benson (1965), Wise (1967,

pp. 149-150) concluded that the foundation definition of Strayer and Haig

(1923) was inadequate to provide fiscal equity for students in poor

school districts. The full opportunity definition was viewed as the

best theoretical measure of equality of educational opportunity, but it

was noted that limitations in available resources for public education












Table 1

Alternative Definitions of Equality of Educational Opportunity


Definition



Negative


Full opportunity


Foundation


Minimum attainment


Leveling


Competition


Equal dollars per pupil


Maximum variance ratio


Classification


Equality of educational opportunity criterion



A child's educational opportunity is not de-
pendent upon parental wealth or geographic
location.

Each child is given the opportunity for maxi-
mum development within his/her limitations.

A satisfactory minimum offering is provided
to each pupil.

Resources are provided to enable each child
to attain a specific level of achievement.

Resources are provided in inverse relation to
individual ability.

Resources are provided in direct relation to
individual ability.

An equal allocation is provided for each child
regardless of need variations.

A specified range in expenditure per pupil is
not exceeded.

Equal allocation per child within specific
categories of need based on abilities and
interests.


Note. Adapted from Rich Schools, Poor Schools by A. E. Wise.
Chicago: University of Chicago Press, 1967, pp. 143-159.









and the lack of understanding of the input-output process in education

resulted in this definition having little practical applicability for

state school finance programs. The leveling and competition definitions

were rejected as being politically unfeasible, while the equal expendi-

ture per pupil definition was dismissed because of its lack of flexibil-

ity. The negative, maximum variance ratio, and classification defini-

tions were suggested as potential standards for litigation concerning

the lack of equal educational opportunity.

In 1974,Cohn (pp. 25-31) noted that efforts to facilitate the attain-

ment of equality of educational opportunity must specify a unit of analy-

sis and define what is to be equalized. States, school districts within

states, schools within school districts, and families were viewed as

possible units of analysis. Ilitl respect to the question of what is to

be equalized, it was suggested that state school finance programs could

focus on equalization of (1) resources, (2) "educational opportunity,"

(3) tax effort per educational expenditure, (4) program options,

(5) student achievement, (6) student economic/noneconomic benefits,

or (7) societal economic/noneconomic benefits. The first four alterna-

tives speak to the equalization of educational inputs while the last

three address the issue of equalizing educational outputs. Cohn (1974,

p. 26) observed that wide agreement had not been reached in the school

finance literature or the courts concerning either the appropriate unit

of analysis or what should be equalized.









Taxpayer Equity


The development of alternative concepts of taxpayer equity in the

school finance literature has been influenced greatly by the older, more

global issue of taxpayer equity in the context of public finance. Since

the Middle Ages, innumerable philosophers, political theorists and econo-

mists have espoused widely varying conceptions of equity in taxation;

the struggle to overcome arbitrariness in taxation has been a major

objective in the development of constitutional governance (lusgrave,

1959, p. 61). While there has been nearly universal acceptance of the

principle that the costs of governmental activities should be distributed

fairly among the members of society, no consensus has been reached con-

cerning the definition and measurement of taxpayer equity. The question

of what constitutes equitable treatment is not one of theory but of

personal philosophy and values (Due, 1976, p. 258; Eckstein, 1967, p. 59).

Equity is not a static concept, but varies among individuals and socie-

ties within a given period and over time.

Two general philosophies of taxpayer equity have received wide

acceptance in the development of modern Western civilization. The bene-

fit principle, deriving from the contract theory of the state, calls for

the distribution of tax burdens among individuals in accordance with the

benefits received from public services. The ability-to-pay principle,

dating back to the sixteenth century, calls for the distribution of tax

burdens according to individual ability to pay, regardless of the benefits

received from governmental activities (Musgrave & Musgrave, 1976,

p. 211).










The problem of taxpayer equity received considerable attention from

the classical economists (Herber, 1971, p. 117). Both the benefit and

ability-to-pay principles are included in Adam Smith's (1776/1937) first

canon of taxation as described in The Wealth of Nations:

The subject of every state ought to contribute towards the
support of the government as nearly as possible in proportion
to their respective abilities; that is, in proportion to the
revenues which they respectively enjoy under the protection
of the state. . In the observation or neglect of this
maxim consists what is called the equality or inequality of
taxation. (p. 777)

The interrelationships between the benefit and ability-to-pay

principles and the standards of horizontal and vertical tax equity have

frequently been reviewed (Benson, 1978, pp. 271-274; Buchanon, 1970,

pp. 99-107, Herber, 1971, pp. 117-123). The horizontal equity standard

provides that equals should be treated equally while the vertical equity

standard suggests that unequals should be treated unequally. Applica-

tion of these standards to the benefit principle of taxation implies

that individuals receiving equal benefits from governmental services

should bear equal tax burdens and that individuals receiving large bene-

fits from governmental services should bear larger tax burdens than

individuals receiving small benefits from these services. The benefit

principle involves an approximation of private sector market behavior

and cannot be applied in the apportionment of tax burdens for pure

public goods such as national defense or for redistributive programs

such as public welfare. Its use in the United States has been limited

to such areas as road tolls, public park user fees, and public utility

assessments.

Application of the horizontal and vertical equity standards to

the ability-to-pay principle suggests that individuals in the same










economic position should bear equal tax burdens while wealthy individuals

should bear greater tax burdens than poor individuals. A number of

economic indicators including income, consumption, and wealth have been

employed in measuring the economic position of individuals; in the United

States personal income has been the most frequently used measure. The

ability-to-pay principle is applicable to a wider variety of governmental

services than the benefit principle. It is generally viewed as the most

widely accepted principle of taxation in the United States (Benson, 1978,

p. 272; R. L. Johns & Morphet, 1975, p. 155).

In 1976,Due summarized the major criteria of taxpayer equity which

have gained general recognition in contemporary American society:

Usually equity is considered to require: (1) equal treatment
of equals--persons regarded as being in the same circumstances
should be taxed the same amount; (2) distribution of tax burden
on the basis of ability to pay as measured by income, wealth,
consumption or other criteria; (3) exclusion from tax of persons
in the lowest income groups on the grounds that they have no
taxpaying capacity; (4) a progressive overall distribution of
tax relative to income on the basis that tax capacity rises more
rapidly than income. (p. 258)

Due further noted that the fourth requirement is not as broadly accepted

as the first three, but that there is general agreement that the dis-

tribution of taxation should be at least proportional to income.

The achievement of equity in taxation is more difficult under a

federal system of government than under a unitary system. Under a uni-

tary form of government, local fiscal capacityiould be inconsequential

in the determination of standards of public services or tax burdens.

Buchanon (1970) observed that "the most serious problems of intergovern-

mental coordination arise because the separate subordinate units of









government differ substantially in fiscal capacity' (p. 431). Under a

federal system, differences in fiscal capacity create differences in

standards of service or tax burdens among localities in the absence of

equalization by the higher level of government. The problem of achiev-

ing taxpayer equity in a federal system is further complicated by the

presence of multiple claims on the fiscal resources of individuals;

analysis of tax burdens must involve consideration of the overall impact

on individuals of the taxes levied by all relevant jurisdictions (Ross-

miller, Hale, & Frohreich, 1970, p. 1).

Taxpayer equity has been a central goal in the development of

state school finance programs since the writings of Cubberley, Updegraff,

and Strayer and Haig during the first three decades of the twentieth

century. The standard of fiscal equity for taxpayers most frequently

mentioned in the school finance literature since the early 1900s is

that equal local tax burdens among school districts in relation to

ability-to-pay should result in equal resource levels per educational

need unit irrespective of variations in local fiscal capacity. This

standard may be viewed as an eclectic application of the ability-to-pay

and benefit principles to public school finance systems combining state

and local revenue sources.

Early school finance theorists pointed out the key role of the

state in facilitating the attainment of fiscal equity for taxpayers.

Cubberley (1906, p. 54) observed that widely varying tax local rates

would be required to approach the goal of equality of educational

opportunity among districts within states in the absence of state aid









to education. He suggested that state school finance programs be

developed to provide greater equality of local tax burdens as well as

equality of educational opportunity. Updegraff (1922) suggested that

the states should provide all school districts with a guaranteed revenue

per unit of educational need for any given level of local effort equal to

that produced in the district of average wealth. Strayer and Haig (1923,

pp. 174-175) developed the foundation program method of state school

finance based on the premise that a uniform level of local tax effort

should provide a prescribed minimum level of educational services in each

school district within a state.

Acceptance of the Strayer-Haig concept of state responsibility for

providing an adequate minimum level of educational services based on a

uniform local tax effort was reflected in the development of state school

finance formulas between the 1920s and 1960s. Beginning in the early

1960s, this concept underwent growing criticism for limiting the prin-

ciple of equal educational revenue for equal local tax effort to the

required minimum local effort level, in effect permitting wealthy dis-

tricts to generate greater revenue per unit of local effort above the

minimum than poor districts. Benson (1965) made the following observa-

tion concerning the taxpayer inequities resulting from the traditional

foundation program approach:

The power of some districts to include estates or large indus-
trial holdings within their boundaries but to exclude high-
density residential areas allows these districts to provide
expensive educational programs at extremely low tax rates. 'he
other result, of course, is that poorer districts (in terms of
real property base) must levy taxes at high rates in order to
finance even a minimum program. (p. 44)









The shortcomings of the foundation method of state school finance

with respect to taxpayer equity were summarized by Coons, Clune, and

Sugarman (1970):

The foundation plan has never provided that all districts can
have the same offering if they make the same effort; the state
will not equalize local ability to tax above the foundation
level. Rich districts can turn out a better offering at every
level of local effort above the minimum rate. The effect, of
course, is to radically exacerbate disparities between rich and
poor with every tax increment above the foundation level. (p. 65)

As an alternative to the foundation program concept of taxpayer

equity based on a uniform local tax rate, Coons et al. (1970) proposed

that the principle of equal resource inputs per educational need unit

for equal local tax effort be applied at all levels of local effort

selected by school districts through a "power equalizing" system of

state school financing. This concept was similar to the percentage

equalizing approaches suggested earlier by Updegraff (1922) and Benson

(1961) except that power equalizing contemplated complete tax base

equalization either by guaranteeing all districts the tax base of the

wealthiest district or by recapturing local dollars raised by local

districts above the guarantee level while the earlier approaches pro-

vided equalization only up to a guarantee level such as the state average

wealth with no provision for recapturing excess revenues of wealthy

districts. Coons et al. (1970) summarized the philosophy underlying

power equalizing as follows:

Power equalizing is a commitment by the state to the principle
that the relationship between effort and offering of every
district will be the same irrespective of wealth and that the
district is to determine the effort. (p. 202)









Fiscal Neutrality


The principle of fiscal neutrality requires that "the quality of

public education may not be a function of wealth other than the wealth

of the state as a whole" (Rodriguez v. San Antonio Independent School

District, 337 F. Supply. 280, 1971). Through the writings of Wise (1967)

and Coons, Clune, and Sugarman (1970), the fiscal neutrality principle

was developed as a legal basis for challenging the constitutionality of

state school finance systems. During the decade of the 1970s,the fiscal

neutrality principle emerged as a major standard for evaluating the equity

of state school finance programs. Fiscal neutrality received varying

interpretations in the school finance literature of the 1970s, being

viewed as a fiscal equity standard for both students and taxpayers.

In 1967, Wise advanced the argument that the failure of a state to

provide for substantial equality of educational opportunity may constitute

a denial of equal protection of the laws in violation of the 14th Amend-

ment to the U.S. Constitution. Legal precedent supporting this argument

was identified through a review of U.S. Supreme Court cases involving

school desegregation, indigent criminal defendants, and voter reapportion-

ment. A central element in the Wise argument was a statement of the

Court in Brown v. Board of Education of Topeka (347 U.S. 483, 1954) con-

cerning the significance of equality of educational opportunity: "the

opportunity of an education, . where the state has undertaken to

provide it, is a right which must be made available to all on equal

terms" (p. 484). Wise suggested that the Court could apply a negative

definition to determine whether equality of educational opportunity had









been attained in a state. Under this definition, "equality of educa-

tional opportunity exists when a child's educational opportunity does

not depend upon either his parents' economic circumstances or his loca-

tion within the state" (p. 146).

State school finance systems,according to Wise (1967), tended to

classify school districts on the basis of wealth in that wealthy dis-

tricts tended to enjoy the benefits of higher expenditure levels than

poor districts. Wise questioned whether a reasonable constitutional

basis existed for such a classification:

At least as conceived by the framers of state constitutions
and by state courts, the obligation for education and school
financing resides in the state legislature. Thus, the classi-
fication which results from school-finance legislation must
bear a reasonable relation to the state's purpose in education.
The question is then: If the amount of money spent on the
education of a student is determined primarily by the wealth of
the area in which he lives, does this constitute a reasonable
classification? In other words, is the wealth of the local
geographic area the relevant criterion for determining how
much is spent on the education of students? (p. 121)

Coons, Clune, and Sugarman (1970) developed a detailed rationale for

school finance litigation similar to that offered by Wise in that (1) a

negative definition of equal educational opportunity was proposed as a

school finance equity standard and (2) the constitutionality of state

school finance systems was challenged on equal protection grounds. The

standard of school finance equity developed by Wise (1967, p. 146) pro-

vided that the quality of a child's education may not be a function of

either local wealth or geographic location. Coons et al. (pp. 350-355)

were critical of the locational aspect of the Wise definition, suggesting

that locational factors could not be substantiated as a basis for










challenging state school finance systems on equal protection grounds

and that the utilization of such factors would lead to an undesirable

"undifferentiated sameness" among local school systems. Coons et al.

(p. 304) therefore proposed a more restricted standard, that the quality

of a child's education may not be a function of local wealth. The Coons

et al. (pp. 201-203) standard focuses only on wealth-related disparities

and would permit variations among communities in educational opportuni-

ties for children based upon factors such as differences in taxpayer

aspirations and tastes for public education.

Coons et al. (pp. 339-340) argued that education is a fundamental

interest, entitled to a place within the "inner sanctum of equal protec-

tion," and should therefore be given "special scrutiny on substantive

grounds." They suggested that arguments challenging the constitutionality

of state school finance programs based on the wealth discrimination issue

could be developed by demonstrating the following:

(1) The factual showing of gross discrimination by wealth.
(2) The practical unavailability of legislative relief.
(3) The fundamental significance of the interest at stake.
(4) Precedent rendering wealth suspect as a classifying fact,
at least when used to affect "fundamental interests."
(5) A class of defenseless victims similar in interest and
suffering serious injury.
(6) Available practical alternatives which satisfy legitimate
state goals without continuing the existing discrimination.
(7) An intelligible and limited standard preserving legislative
discretion. (p. 396)

As Benson (1978) observed, the arguments developed by Coons ct al.

"led directly to court action" (p. 337). The California Supreme Court

in Serrano v. Priest (Serrano I) (487 P.2d 1241, 1971) held that the

California school finance system violated the equal protection pro-

visions of the state and federal constitutions. In building the rationale









for its decision, the Court determined that (1) the right to an education

is a "fundamental interest," (2) the state school finance system created

a "suspect classification" based on wealth, and (3) the state had no

"compelling interest" necessitating the maintenance of a state school

finance system conditioning the quality of education on local wealth.

Applying the "strict scrutiny" standard, the Court found the state school

finance system unconstitutional.

The Serrano I decision provided the impetus for much litigation

challenging state school finance systems on equal protection grounds.

Within a year following Serrano 1, 52 such actions were filed in 31

states (Geske & Rossmiller, 1977, p. 517). In 1973, however, the U.S.

Supreme Court in San Antonio Independent School District v. Rodriguez

(411 U.S. 1, 1973) held that a state school finance system resulting in

wealth-related revenue disparities among school districts does not vio-

late the equal protection clause of the 14th Amendment to the federal

Constitution. The Rodriguez decision effectively terminated school

finance litigation on federal equal protection grounds, shifting the

focus of such litigation to state constitutional issues. Despite its

rejection as a federal constitutional issue by the U.S. Supreme Court

in Rodriguez, fiscal neutrality has remained a major standard for evalu-

ating state school finance program equity.

Serrano 1, in establishing the fiscal neutrality standard as a legal

issue, did not clearly identify a specific operational definition of

fiscal neutrality. The Court found that the California state school

finance system "invidiously discriminates against the poor because it

makes the quality of a child's education a function of the wealth of










his parents and neighbors" (p. 1244). Reference was made in the analysis

of fiscal neutrality to both the structure and the results of the state

school finance program, and the impact of the program on both students

and taxpayers were major considerations. Structurally, it was noted

that "the richer district is favored when it can provide the same educa-

tional quality for its children with less tax effort" (p. 1251). Con-

cerning system results, it was observed that "the system as a whole

generates school revenue in proportion to the wealth of the individual

district" (p. 1251). Inequities for both students and taxpayers were

identified: "Affluent districts can have their cake and eat it too:

they can have a high quality educational program for their children

while paying lower taxes. Poor districts, by contrast, have no cake at

all" (pp. 1251-1252).

The California Supreme Court remanded the Serrano case to a lower

court for trial; in April 1974 the trial court found that the state

school finance system continued to violate the equal protection guaran-

tees of the California Constitution despite modifications made during

the period between 1971 and 1974 (Benson, 1978, p. 341). As in Serrano I,

the trial court included both taxpayer and student equity concepts in its

analysis of the fiscal neutrality standard. With respect to taxpayer

equity the trial court, as quoted by Friedman (1977), stated that "the

equal protection provisions of the California Constitution require that

school districts receive the same revenue for the same tax rate" (p. 496).

Concerning equity for students, the trial court,as quoted by Friedman,

held:










Wide disparities in expenditure levels between low-wealth
school districts and high-wealth school districts . are
unconstitutional because they have significant adverse effects
on the quality of educational programs and opportunities
afforded the children in the low-wealth school districts as
compared with the quality of educational programs and oppor-
tunities afforded the children in the high-wealth school
districts. (p. 496)

The trial court decision was upheld by the California Supreme Court in

Serrano v. Priest (Serrano II) (557 P.2d 929, 1976), maintaining the

presence of both student and taxpayer equity issues in the interpreta-

tion of the fiscal neutrality standard.

The lack of a specific operational definition of fiscal neutrality

in the Serrano decisions has been reflected in varying interpretations

of the standard in the school finance literature. Benson (1973) made

the following observation concerning the definition of fiscal neutrality:

The heuristic use of the concept of fiscal neutrality in Serrano
and related cases has no thorough development in the literature
of public finance. I suggest that we are free, those of us who
are interested in social policy, to define the term in any
sensible way we wish. (p. 55)

Benson then defined fiscal neutrality broadly as existing "when we see no

warping or distortion of choice in consumption of tax-financed goods and

services on irrational or socially undesirable grounds" (p. 56).

Barro (1974) categorized alternative interpretations of fiscal

neutrality as follows:

The ex post interpretation is that the actual level of educa-
tional support must not correlate with wealth. On that basis,
a system that resulted in both higher spending and higher tax
effort in wealthy districts would not be acceptable. The
ex ante formulation is that the ability of a district to support
schools should not depend on wealth. This means only that a
unit of effort must produce the same support everywhere. In
that case a correlation between expenditure and wealth might
be acceptable. As a practical matter, systems based on the
ex ante notion are much simpler and more likely to be adopted.
(p. 32)










Friedman (1977) offered similar definitions of ex post and ex ante

fiscal neutrality:

The ex post wealth neutrality test is essentially concerned
with the results of any school financing plan, e.g., that
actual expenditures not be systematically related to the
wealth of districts. . On the other hand, the ex ante
wealth neutrality test is inherently concerned with the rules
of any school financing plan, e.g., that equal tax efforts lead
to equal expenditures. (p. 491)

Friedman further noted that the ex post standard focuses on equity for

students while the ex ante standard centers on taxpayer equity (p. 494).

As an alternative to the Friedman definitions, it may be argued that the

ex post standard is concerned with the pupil equity effects of a school

finance system while the ex ante standard is concerned with the taxpayer

equity effects of such a system.

The development of a state school finance system based on the ex ante

fiscal neutrality standard may result in movement toward ex post fiscal

neutrality; however, as Friedman (pp. 493-494) observed, the two standards

are essentially independent and there is only a small chance that a sys-

tem based on the ex ante standard will result in the attainment of ex post

fiscal neutrality. Feldstein (1975, p. 88) and Grubb and Michelson

(1974, pp. 157-181), in separate econometric studies of Massachusetts,

concluded similarly that the introduction of a district power equalizing

(DPE) system based on ex ante fiscal neutrality would tend to overcompen-

sate for wealth differences among school districts in that state, re-

sulting in a negative relationship between wealth and spending. Most

school finance researchers, on the other hand, have suggested that the

introduction of a DPE system based on ex ante fiscal neutrality would

fail to remove the existing positive relation between local fiscal










capacity and revenue per pupil. Benson (1975, p. 99) suggested that

high-income districts would tend to levy higher tax rates than low-

income districts, thereby maintaining wealth-related disparities.

Hickrod and Hubbard (1978, pp. 274-275), reviewing analyses of the

effects of the introduction of DPE systems in Illinois and Ohio,

concluded that low-wealth districts continuedto have lower expendi-

tures than high-wealth districts.

Friedman (1977, p. 491) suggested that it is generally impossible

to ensure the attainment of both ex ante and ex post fiscal neutrality

simultaneously except by redistricting to eliminate interdistrict wealth

differentials or by enacting a system of full state funding. Given a

conflict between the two standards of fiscal neutrality, Friedman (p. 494)

expressed a preference for the ex post standard based on the rationale

that while taxpayer equity is important, equity for pupils should be

given first priority. Sugarman (1977), however, warned against sole

reliance on the ex post standard:

The ex post test is not concerned with a principled state aid
formula; rather, it focuses entirely on results. This means
that it would be permissible to structure a price schedule
that would create inequities among districts (indeed identical
districts could all be treated differently) as long as a statis-
tical analysis of resulting behavior showed that wealth differ-
ences accounted for no significant part of the spending varia-
tion. (p. 522)


Quantitative Measures of School Finance Equity


During the decade of the 1970s,educational finance researchers be-

came increasingly cognizant of the need for systematic development and

application of quantitative school finance equity measures. T. Johns










and lagers (1978) observed that "in recent years . there has been an

increasing impetus to agree upon standard measures of equity and to

apply these periodically to the public school finance systems in the

nation" (p. 373). Garms, Guthrie, and Pierce (1978) stated a basic

justification for the development of quantitative school finance equity

measures: "Inequality cannot be measured in the abstract. It must

be measured against a criterion based on a clearly defined philosophical

position" (p. 318). Hickrod, Yang, Hubbard, and Chaudhari (1975, pp, 2-

4) suggested that operational definitions of school finance equity con-

cepts are necessary to (1) facilitate school finance litigation, (2)

assist state and federal legislators in determining whether their intent

has been carried out, (3) reduce the extent of "sheer opportunism" in

school finance reform, and (4) facilitate the development of a cumulative

body of knowledge in the field of public school finance.

Odden (1978b) noted that careful attention should be given to the

selection of specific statistics for measuring the equity of state school

finance systems because alternative statistics may yield substantially

different results:

There are a great number of conceptual issues related to the vari-
ous statistical tests that can be used. There are many tests of
equality; each has its strengths and weaknesses. A state could
score high on one equality test but low on another. Similarly,
there are many tests of fiscal neutrality that could conceivably
rank a state differently. (p. 17)


Resource Equality


Berne (1977) summarized the characteristics of several quantitative

measures of resource equality and ex post fiscal neutrality. As shown










in Table 2, the range, restricted range, restricted range ratio, relative

mean deviation, permissible variance, coefficient of variation, standard

deviation of logarithms, and Gini coefficient were identified as alterna-

tive resource equality measures (pp. 21-36). Eleven characteristics

or "value judgements" were described for each measure (pp. 15-21). The

first characteristic is whether all units of observation are taken into

account. Characteristics two through five deal with the types of re-

source transfers among districts consistently affecting the various

equality measures. Characteristics six and seven reflect the sensitivity

of each measure to equal dollar additions for all units and equal per-

centage increases for all units, respectively. Whether or not given

dollar changes at various levels of the distribution affect the measure

equally is addressed in characteristic eight. Characteristics nine

through eleven describe whether the mean, median, or all units serve as

the standard of comparison for each equality measure.

The range, restricted range, and restricted range ratio are three of

the simplest equality measures. The range is defined as the difference

between the highest and lowest observations in a distribution. The

restricted range is the difference between two specific points within

the distribution, usually expressed in percentiles. Frequently employed

restricted range statistics include the 95th to 5th percentile range and

the interquartile range. The restricted range ratio is computed by

dividing the restricted range by the smaller value used in calculating

the restricted range. The three range measures have the common weakness

of using only two points in the distribution, and are therefore insensitive

to a large number of transfers within the distribution which may improve







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actual equity. The range is sensitive to the extreme values in the

distribution which may not reflect the overall degree of inequality;

the restricted range statistic ignores these extreme values and shows

less inequality among units of observation. The restricted range ratio

is insensitive to equal percentage increases while the range and re-

stricted range are not. Use of the restricted range ratio statistic

facilitates comparison among states or within a state across time.

The relative mean deviation was defined by Berne (p. 25) as the sum

of the absolute value of deviations from state mean expenditure per

pupil expressed as a percentage of total state expenditure. The formula

for this statistic based on the pupil as the unit of analysis is:


N N
E Pil. X. / E P. u,
i 1 1 I
i=l i=1

where u is the state mean expenditure per pupil, N is the number of

school districts, Pi is the number of pupils in district i, and Xi is

the per pupil expenditure in district i. Unlike the various range sta-

tistics, the relative mean deviation takes into account all units within

the distribution and is sensitive to all transfers crossing the mean.

The permissible variance statistic described by Berne (p. 26)

focuses on the dollars needed to raise all districts below the median

expenditure per pupil to the median level. Permissible variance is com-

puted by dividing the actual total expenditure of districts below the

median by the product of state median expenditure per pupil and total

number of pupils in districts below the median. The permissible










variance statistic is based on the philosophical position that state

school finance programs should level up low-spending districts without

restricting high-spending districts; therefore, variations above the

median are not considered and improvements are recorded only when

transfers cross the median.

Four of the resource equality measures discussed by Berne include

all units of observation in the analysis and are consistently sensitive

to transfers of resources both within a given side of the mean or median

and crossing the mean or median: the variance, coefficient of varia-

tion, standard deviation of logarithms, and Gini coefficient. The vari-

ance, the average of the squared deviations about the mean, is unlike the

three other measures in that it is insensitive to equal percentage in-

creases and sensitive to equal additions to all units in the distribu-

tion. The coefficient of variation is defined as the square root of

the variance divided by the mean. Like the variance but unlike any

of the remaining equality measures reviewed by Berne, the coefficient

of variation places the same weight on transfers among districts regard-

less of the level of per pupil expenditure.

The standard deviation of logarithms may be defined as follows:

S1 1/2
N N
E P. (log u log Xi)/ P
i- i=l1


where u is the mean expenditure per pupil, N is the number of districts,

P. is the number of pupils in district i, X. is the per pupil expenditure

in district i, and the natural logarithm is employed. Berne (p. 31)









observed that the characteristics examined for this measure are the same

as those for the coefficient of variation except that changes at the low

end of the distribution are weighted more heavily than those at the high

end of the distribution.

The final equality measure discussed by Berne is the Gini coeffi-

cient. Berne outlined the procedures used in computing this statistic:

The Gini coefficient . is based on the Lorenz Curve which
is constructed as follows: If we order the population in
terms of mean per pupil expenditures from low to high, we can
plot this ordering on a graph using the percentage of the pop-
ulation on the X axis and the percentage of the expenditure
accruing to the population on the Y axis. The plot for a
distribution where expenditures per pupil are the same for
the entire population will thus be a 450 line, assuming equal
units on each scale. Twenty percent of the population will
receive twenty percent of the expenditures, thirty percent of
the population will receive thirty percent of the expenditures,
etc. If per pupil expenditures are not distributed equally
then the distribution will be represented by a curve below the
450 line. X percent of the population will receive Y percent
of the expenditures and at some point X will be less than Y.
The Gini coefficient is then defined as the percentage of the
area below the 450 line that is between the Lorenz Curve and
the 450 line. The lower the Gini coefficient the greater the
"equality". (pp. 31-32)

Quantitative measures of resource equality were applied in several

national, regional, and state school finance studies during the 1960s and

1970s. Representative national studies include those conducted by

Harrison and McLoone (1965), Briley (1971), the President's Commission

on School Finance (1972), and Brown, Ginsburg, Killalea, Rosthal, and

Tron (1977). Harrison and McLoone (1965) utilized the following statis-

tics in describing the variation in current expenditure per classroom

unit within each state: (1) the interquartile range, (2) the 98th to

2nd percentile range, (3) various restricted range ratios, (4) the per-

cent of current expenditure required to raise low-spending classroom

units to the state median, and (5) the Gini coefficient.









National studies during the 1970s relied primarily on various range

ratio statistics and the coefficient of variation for the measurement of

resource equality. Briley (1971, pp. 53-58), based on a sample of uni-

fied districts in each state with average daily attendance greater than

1500, calculated the ratio of revenue per pupil from high to low within

each state. The President's Commission on School Finance (1972, p. 13),

using the population of districts in the nation, calculated the range,

95th to 5th percentile range, and 90th to 10th percentile range in ex-

penditure per pupil within each state, comparing the various states by

expressing each range statistic in ratio form. Brown et al. (1977,

pp. 9-18) calculated (1) the ratio of expenditure per pupil at the 95th

and 5th percentiles and (2) the coefficient of variation in expenditure

per pupil for each state.

Similar resource equality measures were employed in regional and

state studies. Weiss (1970, pp. 16-18) calculated the 90th to 10th

percentile range and the coefficient of variation in current expenditure

per pupil for six New England states. Hickrod, Yang, Hubbard, and

Chaudhari (1975, pp. 8-10) utilized the coefficient of variation and a

permissible variance statistic adapted from McLoone (1974) to assess the

resource equality effects of the Illinois school finance reforms of

1973. Grubb and Michelson (1974, pp. 55-58) employed the Gini coeffi-

cient to describe the variation in expenditure per pupil within several

selected states. The range, 95th to 5th percentile range, relative mean

deviation, variance, coefficient of variation, standard deviation of

logarithms, and Gini coefficient were used by Odden (1978b, pp. 468-471)

to describe the extent of expenditure per pupil inequality in Missouri.










Ex Post Fiscal Neutrality


The ex post fiscal neutrality standard requires that variations in

revenue per educational need unit not be systematically related to vari-

ations in local fiscal capacity. Measurement of ex post fiscal neutral-

ity involves quantitative analysis of the relationship between local

fiscal capacity and revenue per educational need unit. Berne (1977,

pp. 41-44) discussed four measures of ex post fiscal neutrality: (1) the

simple correlation between expenditure per pupil and fiscal capacity,

(2) the regression coefficient of expenditure on capacity, (3) the re-

gression coefficients of expenditure based on polynomial expressions of

capacity, and (4) the Gini coefficient calculated by ordering districts

based on fiscal capacity rather than expenditures. The measurement of

ex ante fiscal neutrality was not addressed by Berne; however, each of

the statistics suggested for measuring resource equality could also be

applied in measuring the dispersion in fiscal effort among school dis-

tricts necessary for all districts to attain a specified expenditure per

pupil.

Quantitative measures of this standard were applied in several

school finance studies during the 1970s. Hickrod et al. (1975, pp. 14-

22) employed two measures of ex post fiscal neutrality in evaluating the

Illinois school finance program: (1) the hivariate Gini coefficient,

calculated by ordering districts based on local fiscal capacity rather

than expenditure level, and (2) the linear regression slope between

revenue per pupil and local fiscal capacity. Brown ct al. (1977, pp.

18-20) divided each state's student population into three groups: the










25% of students residing in the poorest school districts as measured

by property valuation per pupil, the middle 50%, and the 25% residing

in school districts with the highest assessed valuation of property per

pupil. Average per pupil expenditures were then calculated for each

group and compared to the overall state average per pupil expenditure.

Feldstein (1975, p. 77) computed the elasticity of expenditure per

pupil with respect to property valuation per pupil for Massachusetts

school districts by regressing the natural logarithm of expenditure per

pupil on the natural logarithm of property valuation per pupil; Yang

(1975, pp. 86-88) employed similar procedures in a study of school

revenue equity in Illinois, Michigan, and Kansas. Odden (1978b, p. 472)

calculated (1) the simple correlation of expenditure and property valu-

ation, (2) the simple correlation of expenditure and income, and (3) the

regression slope, evaluated at the mean value of local fiscal capacity,

between expenditure per pupil and linear, quadratic, and cubic specifi-

cations of (a) property valuation and (b) income in a study of the

Missouri school finance system. Harris (1978, pp. 491-492) employed

the linear regression slope between revenues per pupil and local fiscal

capacity in a study of the Pennsylvania public school finance system.

Berne and Stiefel (1978) analyzed the consistency of alternative

measures of resource equality and ex post fiscal neutrality when used

to assess the extent of school finance equity within a state over time

or across a number of states at one point in time. The nine resource

equality measures discussed by Berne (1977) and the following ex post

fiscal neutrality measures were included in the study:










(1) The simple correlation between revenue per pupil (REV)

and equalized property valuation per pupil (W),

(2) The regression coefficient (slope) obtained by regressing

REV on W,

(3) The slope obtained by regressing REV on W and ~2 evaluated

at the mean value of W,

(4) The slope obtained by regressing REV on W, 2 and W3

evaluated at the mean value of W,

(5) The predicted difference in REV between points one standard

deviation above and below the mean of based on the regression

equation REV = a + blW + b2 \2 + bW3,

(6) The bivariate Gini coefficient computed after ordering districts

in ascending sequence based on W,
P
(7) The elasticity of the regression equation REV = a + blW at

the mean value of W,

(8) The elasticity of the regression equation REV =

a + b W + b2 2 at the mean value of I, and

(9) The elasticity of the regression equation REV = a + b l +

b2 2 + b3W3 at the mean value of W.

The selected measures of resource equality and ex post fiscal

neutrality were computed for a sample of states at various points in

time using both the school district and the public school pupil as the

unit of analysis. Berne and Stiefel (1978, pp. 199-203) found con-

siderable disagreement among alternative measures used in evaluating the

progress of individual states toward resource equality over time; however,










there was substantial agreement among the coefficient of variation,

standard deviation of logarithms, Gini coefficient, and relative mean

deviation. Alternative measures used to assess whether or not indi-

vidual states had moved toward greater ex post fiscal neutrality over

time also differed considerably, while there was general agreement among

the three elasticity measures. Interstate resource equality comparisons

were shown to be affected by the measure of resource equality and the

unit of analysis employed. For either unit of analysis there was greater

consistency among the coefficient of variation, standard deviation of

logarithms, Gini coefficient, relative mean deviation, and restricted

range ratio than among any other subset of five measures. With respect

to the consistency of alternative ex post fiscal neutrality measures in

making interstate comparisons, considerable agreement was found among

the three slope measures and among the three elasticity measures, but

substantial disagreement was identified among the slope, elasticity,

and correlational approaches.


Ex Ante Fiscal Neutrality


The ex ante fiscal neutrality standard requires that equal tax

effort result in equal revenue per educational need unit irrespective

of variations in local fiscal capacity. Measurement of ex ante fiscal

neutrality involves quantitative analysis of the relationship between

local tax effort and revenue per educational need unit. Quantitative

measures of ex ante fiscal neutrality have seldom been applied in state

public school finance equity studies. Hickrod et al. (1975, p. 23)










employed the square of the Pearson product-moment correlation between

local tax rate and combined state and local revenue per pupil as a

measure of this standard in evaluating the Illinois school finance

system. Friedman and Wiseman (1978) computed the coefficient of varia-

tion in expenditure per pupil among Illinois school districts resulting

from an assumed uniform tax rate in all districts at the state average

effort level.

Hickrod et al. (1975) alluded to three reasons for the paucity of

quantitative applications of the ex ante fiscal neutrality standard.

First, it is often assumed that the adoption of a percentage equalizing

state school finance system constitutes prima facie evidence of the

attainment of ex ante fiscal neutrality since equal revenue for equal

effort is a basic principle in establishing the structure of such a

school finance system (p. 13). Second, there are major problems in

attempting to develop an adequate measure of local tax effort; equal

local tax rates may not necessarily represent equal effort (p. 22).

Finally, a simple linear relationship between effort and revenue per

pupil may not be desired; a nonlinear relationship guaranteeing greater

revenue per unit of effort at low expenditure levels may be preferable

(pp. 22-23).


National School Finance Equity Measures


The development of quantitative measures of school finance equity

was stimulated by Congress in 1974 through the enactment of an amendment

to Public Law 81-874 (P.L. 93-380, Sec. 5[d][2]). This amendment










provided that states with public school finance systems 'designed to

equalize expenditures" would be permitted to include P.L. 874 funds as

a local resource in the calculation of state equalization aid to local

school districts. The U.S. Commissioner of Education was required to

issue regulations establishing operational tests for determining whether

a state's public school finance system was designed to equalize expendi-

tures.

Two tests were developed: an expenditure disparity test and a

wealth neutrality test (Magers (1977, pp. 124-128). The P.L. 81-874

expenditure disparity test reflects the resource equality standard of

school finance equity. Essentially, this test requires that the 95th to

5th percentile range in expenditure (or revenue) per educational need

unit not exceed 25% of the 5th percentile level after adjusting for cost

differentials recognized by the state (Federal Register 42 [March 22,

1977] pp. 15540-15550). The P.L. 81-874 wealth neutrality test is based

on the equal yield for equal effort principle, reflecting the ex ante

fiscal neutrality standard. The wealth neutrality test requires that

85 percent of total state and local revenues be wealth neutral (Federal

Register 42 [December 30, 1977] pp. 65524-65527). Procedures used for

determining which revenues are wealth neutral and which arc nonwealth

neutral were summarized by T. Johns and Magers (1978, pp. 381-382).

In 1978,T. Johns and Magers proposed a national school finance

equity assessment model. The proposed model, depicted in Figure 1,

focuses on two classes of individuals directly affected by state school

finance systems: pupils and taxpayers. Resource disparity and resource





















Affected Class ---


Equity Resource Resource Ialt
Condition Differentials Sufficiency



-
Measure elative Mean Percent Below Rev
of Equity Deviation National Average








Figure 1. Johns-Magers School Finance
Equity Assessment Model
(From "Measuring the Equity of
State School Finance Programs"
by T. Johns and D. Magers,
Journal of Education Finance,
1978, 3, 378. Copyright 1978 by
Institute for Educational Finance.
Reprinted by permission.)










sufficiency were incorporated as conditions of pupil equity while wealth

disparity was incorporated as a taxpayer equity condition. Quantitative

measures of wealth disparity, resource disparity, and resource sufficiency

were included, respectively,

to produce coefficients reflecting (1) the extent to which
the access to resources vary, (2) the extent to which resources
vary, and (3) the extent to which the level of resources is
sufficient to provide an adequate educational program. (p. 381)

Statistics proposed for the measurement of wealth disparity, resource

disparity, and resource sufficiency were the P.L. 81-874 wealth neutrality

test, the relative mean deviation in expenditure per pupil, and the per-

centage by which state mean expenditure per pupil falls below national

mean expenditure per pupil, respectively. It was suggested that the

model could be used "as a national standard for judging the relative

equity of state school finance models" (p. 373).


Alternative Local Fiscal Capacity Measures


The definition and measurement of school district fiscal capacity

is one of the older and more elusive problems in the field of public

school finance. Fiscal capacity is a quantitative measure of the economic

resources present within a governmental unit for the support of public

functions (Advisory Commission on Intergovernmental Relations, 1962, p. 3).

Two basic approaches have been used in measuring the fiscal capacity of

states and local areas (Advisory Commission on Intergovernmental Rela-

tions, 1962, pp. 3-11). One approach defines capacity in terms of

economic indicators such as income, wealth, and consumption. The second

approach defines capacity in terms of the tax bases accessible to a










governmental unit and the amount of revenue these bases would produce at

various levels of taxation. To the extent that the economic indicators

used in measuring capacity under the first approach correspond to the

tax bases actually available to the governmental unit being studied, the

two approaches merge into one another; however, if the governmental unit

is unable to levy a tax on the indicators included under the first

approach the tax base and economic indicator approaches may yield sub-

stantially different results.

The economic indicator approach is based on the position that the

fiscal capacity of a governmental unit is a function of economic charac-

teristics and is not dependent upon the availability of various tax bases

to the unit. Supporters of this approach suggest that since all taxes

must be paid from income or accumulated wealth, fiscal capacity is de-

termined by these factors irrespective of the system of taxation actually

in use (Clune, 1973, pp. 681-682). Since the same taxpayers pay local,

state, and federal taxes, the local fiscal capacity of a geographic area

is viewed as identical to its state or federal fiscal capacity, and the

same measures of local capacity are viewed as appropriate for all levels

of analysis.

The tax base approach, in contrast, takes the position that the fis-

cal capacity of a governmental unit is a function of the tax bases

available to the unit and the yield of these bases at legally permissible

rates of taxation. Supporters of this approach reason that sources of

wealth which are not subject to taxation by the unit should not be

included in measuring the unit's fiscal capacity (Burke, 1957, pp. 629-

661; R. L. Johns & Morphet, 1975, pp. 274-275; Mort, 1933, pp. 129-130).










Furthermore, it is held that the capacity of a geographic region for

the support of local functions may differ from its capacity to support

state or federal functions because local units of government may not be

able to tax all aspects of the region's wealth. While measures of

theoretical ability-to-pay under an ideal tax system may be appropriate

for comparing the fiscal capacities of states, they are inappropriate

for comparing the fiscal capacities of localities which are legally

unable to tap major wealth bases (Burrap, 1974, p. 138).

To facilitate analysis of the relative fiscal capacity position of

governmental units, fiscal capacity is generally expressed as a ratio

of available economic resources per unit of need for public services

(Advisory Commission on Intergovernmental Relations, 1962, p. 9).

Alexander and Jordan (1976) identified "ADA, ADM, population, proportion

of total wealth, school-age child, school-attending child, weighted

average daily attendance (WADA), and weighted full-time equivalent

(IWFTE)" (p. 342) as alternative need units for measuring school district

fiscal capacity. Population has commonly been employed as a measurement

unit for determining the relative fiscal capacity of general state and

local governments while the relative fiscal capacity of school districts

has most frequently been measured using some form of pupil unit.


Development of Local Fiscal Capacity Measurement


Continuing controversy has existed in the public school finance

literature over the measurement of local fiscal capacity since the

initial development of the equalizing state school support model. In










1923, Strayer and llaig (pp. 169-172) suggested that economic indicators

could be used as an alternative to property valuations in measuring local

fiscal capacity for equalization purposes. Local fiscal capacity for

each county in New York state was measured by summing taxable income

and one-tenth of the full value of real estate, then dividing by two.

Noting that the distribution of taxable income among counties was quite

different from that of property valuations, it was suggested that a measure

combining property and income is a more useful measure of overall eco-

nomic resources of the various counties than cither property or income

alone.

Mort (1933, pp. 129-130) criticized the method suggested by Strayer

and llaig, noting that the economic indicator approach defined theoretical

taxpaying ability under an ideal system of taxation as the criterion for

measuring the fiscal capacity of school districts. Observing that the

power to adjust the tax system rests with the state legislature, not

the local school districts, he suggested that: "the true criterion of

the relative ability of local units to pay for education is the ability-

to-pay under the taxing system established by the state rather than

the ability-to-pay under an ideal taxing system" (pp. 129-130).

The shortcoming of the theoretical approach, according to Mort

(1926), is that

Since we must deal with communities which have no power over
their tax systems except through state action, we cannot con-
sider their ability as it would be under an ideal tax system.
To build our system of state aid on such a foundation would
throw excessive burdens upon actual taxpayers in some communi-
ties, simply because there happened to be wealth in those com-
munities that was not taxable under the existing system of
taxation. (p. 16)










Applying the tax base approach to local fiscal capacity, Mort concluded

that the value of taxable property provides a satisfactory measure of

local capacity when the property tax is the only major source of local

revenue.

Mort's position on the measurement of school district fiscal

capacity reflected the prevalent point of view during the 1920s and

1930s as evidenced in the writings of other school finance scholars and

in the fiscal equalization statutes enacted by several state legislatures

during the period. Agreement on this issue was far from universal, how-

ever, as is apparent from a review of Morrison's School Revenue, written

in 1930. Morrison (pp. 164-236) predicted that fiscal equalization

programs based on the property tax were bound to fail because (1) it is

difficult if not impossible to measure the valuation of property by

school district; (2) even if such valuations were available equal

property tax rates would imply unequal burdens since the ratio of

property valuation to income varies greatly among districts; (3) there

are large variations among districts in the burden of public obligations

other than schools; and (4) the use of pupil counts as a measure of edu-

cational load is inadequate since the requirements for equivalent edu-

cation for the same number of children vary greatly among districts.

Concluding that equality of educational opportunity and taxpayer equity

could not be attained through the equalization approach, Morrison

recommended that local school districts be abolished, that the state

itself assume full administrative and financial responsibility for the

public schools, and that revenues for public education be derived from

statewide income taxation.










Morrison's recommendations for state school financing were not

widely accepted; however, the defects he perceived in state equalization

programs have not been fully remedied to this day. The first problem

noted by Morrison, that of inaccurate measurement of local property

valuations, received much attention in the school finance literature

of the 1930s and 1940s. The need for equalized property valuations

was readily apparent to those involved in the development of state

school equalization programs. A 1933 New Jersey study cited by Mort

and Reusser (1941, p. 433), reported that the ratio of assessed valua-

tion to true valuation of property ranged from less than 15% to more

than 75% among the state's municipalities. Given the magnitude of such

disparities, it was recognized that equalizing tax rates without equaliz-

ing property valuation ratios would fail to produce an equitable distri-

bution of burdens with respect to true valuations (Morrison, 1930,

pp. 172-173). It was also recognized that the use of unadjusted valu-

ations would be susceptible to local manipulation; districts could appear

poor and generate additional state aid by lowering assessment ratios

(Mort, 1933, p. 131).

Two major approaches were identified for dealing with the problem

of variable property assessment ratios: (1) equalization of assessments

among districts through state reassessments, sales ratio studies, or

similar procedures, and (2) estimation of equalized property valuations

through the use of economic indexes. In the report of the National

Survey of School Finance in 1933, Mort (pp. 131-133) suggested that

the problem of assessment equalization could be dealt with by equalizing










assessments among districts through a central authority or estimating

the ratio of assessed valuation to true valuation and equalizing based

on the estimated true valuation of property. It was reported by Mort

(1933, pp. 131-133) that field studies were employed in Wisconsin for

this purpose while Kansas obtained similar data through sales ratio

studies. Mort and Reusser (1941, p. 436) recognized that it is not

necessary to have the property within each school district assessed at

full value or even at some fractional value; it is sufficient to identify

the fractional value in each district and to adjust for variations in

actual assessment ratios in the computation of state and local contribu-

tions. This approach has been used in most states using the equalizing

state school support model; in 1978, 32 states employed property assess-

ment ratios to adjust valuations for school funding purposes (Augenblick,

1978).

The economic index approach was developed by Cornell in a 1936 New

York study. He demonstrated that the equalized property valuations of

local governmental units could be predicted with reasonable accuracy

through regression equations including such factors as population, retail

sales, motor vehicle registrations, gross production, number of individual

income tax returns and postal receipts. Mort and Reusser (1941, pp. 438-

439) suggested that the economic index could be used to assist state

equalization boards in identifying discrepancies in valuation practices

or as an alternative means of estimating equalized property valuations.

Following a study by R. L. Johns (1938),the state of Alabama adopted an

economic index measure of local fiscal capacity in 1938. In 1957, Burke

(pp. 648-649) reported that economic indexes were used for the apportion-

ment of state school equalization funds in Alabama, Arkansas, Florida,










Georgia, Mississippi, and Texas, and that West Virginia had employed

such an index from 1948 until 1953.

Since the purpose of the economic index method is to approximate

the equalized valuation of property in the absence of accurate assess-

ment data, this approach has been recommended only when adequate

appraisals of the true value of property are not available for all of

the districts in a state. As states have established agencies charged

with completing property appraisals and sales ratio studies, the re-

quirement for the economic index approach has declined. In 1978, eco-

nomic indexes were employed in the apportionment of school equalization

funds in two states, Alabama and Mississippi (Augenblick, 1978).

By the late 1940s,a clear pattern had emerged in the development of

state school finance programs. In 1949, 42 of the 48 states used some

type of equalization formula in the distribution of one or more school

funds (Council of State Governments, 1949); approximately 45% of total

state grants to local education agencies were allocated on an equaliza-

tion basis (Alexander, 1972, p. 31). Property valuation per pupil was

the standard measure of school district fiscal capacity employed in the

apportionment of these equalization funds. Despite the efforts of Mort,

Cornell, R. L. Johns, and others in identifying the inequities inherent

in the use of unequalized valuations and the availability of alternative

approaches for estimating equalized property valuations, a committee of

the National Education Association reported in 1949 that only a few

states were using equalized valuations or economic indexes and that most

states were accepting local assessments with little or no supervision

(Committee on Tax Education and School Finance, 1949, pp. 17-18).










During the 1950s and early 1960s, property valuation per pupil main-

tained its position as the standard measure of school district fiscal

capacity without serious challenge from the advocates of alternative

measures. Most discussions of local fiscal capacity focused on the

merits of the property measure or on the need to improve property tax

administration and appraisal programs. In 1957, Burke (pp. 635-636)

identified 10 criteria for evaluating alternative measures of local

taxpaying ability. These criteria may be summarized as follows:

1. Reliable, dependable data should be available for each

component of the measure,

2. Current, up-to-date data should be available for each com-

ponent.

3. The data should be directly applicable to the unit of

government being studied.

4. The measure should reflect the taxpaying ability accessible

to the unit of government through its taxpaying powers.

5. The data should be available for all units.

6. The measure should be capable of equitable application to

all units.

7. The measure should not be subject to state or local manipula-

tion favoring some areas over others.

8. If more than one tax source is included in the measure, the

weightings should not create a bias or violate the equity

criterion.

9. The measure should be sufficiently stable to avoid creating

state or local fiscal problems.










10. The measure should be acceptable to the various units of

government.

Burke (1957, pp. 636-656) applied these criteria in evaluating the

equalized property valuation, economic index,and income measures of

local fiscal capacity. Advantages cited for the property measure

included the availability of current data, its applicability to the

units being analyzed, the fact that it reflects a source of tax revenues

accessible to all units, the availability of data for all units, its

stability, its objectivity in the sense of not being manipulatable by

local units,and its acceptability to local units. It was reported

that considerable progress had been made in the application of equalized

assessments, improving the reliability of the measure. Criticisms of

the property tax measure were viewed as focusing on the equity criterion,

beginning with the premise that property taxes must be paid from income

or credit. It was suggested, however, that given the dependence of

local school districts on the property tax there is no available

measure of capacity which could be applied more equitably. To improve

the equity of the property measure, Burke recommended better administra-

tion of the tax or refinements in the structure of the tax such as

economic classifications of property or a circuit breaker for low in-

come taxpayers.

The economic index approach was described by Burke (pp. 647-651) as

being strong on objectivity and stability but weak on most other evalu-

ative criteria. It was noted that the indexes were originally developed

as a substitute for adequate state equalization, and was concluded that

the latter is a more satisfactory long run solution to the problem of










varying assessment ratios. Criticisms of the economic index approach

included the lack of data for units smaller than a county, the lack of

up-to-date information on some elements of the indexes, and the absence

of a direct connection between the elements of the indexes and the tax

bases accessible to local units of government.

Burke (pp. 651-657) described income as having little potential

as an index of local fiscal capacity. While income would seem to have

theoretical advantages over alternative measures, Burke described it

as being more elusive than is generally realized. Numerous limitations

of the income approach were identified. Income may be monetary or non-

monetary; those with high nonmonetary income as a proportion of total

income will be better able to pay local taxes than others since the

monetary aspects of income are more susceptible to state and federal

taxation. Personal income includes only a portion of the income from

which local taxes are paid; corporate, institutional, partnership and

trust income may not be distributed to individuals within the locality.

The economic sacrifice associated with a given tax payment at a given

income level varies with such factors as dependency load, total wealth,

incidence of federal and state taxes, health, cost-of-living variations,

and numerous other factors. Current, reliable income data are gen-

erally not available at the school district level. Units with the

same total or average income may vary in taxpaying ability depending

upon the distribution of income among taxpayers in the unit. Income

measures lack stability unless averaged over a period of time. Few

local school districts have the power to tax income; none have the









capability of taxing proportionately the higher levels of income.

Finally, local units have access to taxes which are paid to varying

degrees from the income of nonresidents.

Burke (pp. 643-647) recommended that states in which all local

units have access to significant nonproperty taxes should consider in-

corporation of the potential yield of these taxes in the measurement of

local fiscal capacity. It was noted, however, that no state had yet

developed a well-conceived measure combining the potential yield of

local property and nonproperty taxes. Advantages cited for such a

measure included increased flexibility for local units to adjust the

mix of taxes to meet varying local conditions, and improved consistency

in reflecting the tax bases accessible to local units.

The property valuation per pupil measure received few major criti-

cisms during the 1950s and early 1960s. Since that time, opposition to

this approach has gradually mounted and critics have questioned both the

validity of property as a measure of wealth and the appropriateness of

public school pupil counts as a unit of load. Advocates of the economic

indicator approach have argued that income or some combination of eco-

nomic indicators is a better measure of local fiscal capacity than

property regardless of the particular taxes actually used. Some have

recommended formulas adjusting the traditional property per pupil

measure to correct for perceived inadequacies while others have sug-

gested new measures independent of property valuations and/or public

school pupil counts. Certain suggested adjustments such as the in-

clusion of nonproperty taxes available to local units of government are

fully consistent with the tax base per pupil approach. Those opposing










the public school pupil measurement unit have claimed that this measure

is unfair to certain types of school districts such as major urban

centers and communities with large concentrations of private school

pupils.


Alternative Resource Availability Measures


Opposition to the traditional property per pupil measure of school

district fiscal capacity since the early 1960s has focused primarily on

the validity of property as an indicator of wealth or available economic

resources. Two major lines of criticism are apparent. The first, based

on the tax base approach to measuring local fiscal capacity, points to

the increasing importance of local nonproperty tax revenues and suggests

that all major local revenue sources should be included in the measure-

ment of local fiscal capacity. The second criticism, consistent with

the economic indicator approach, contends that no measure of wealth is

satisfactory unless it correlates highly with income or related economic

indicators regardless of the tax bases actually utilized.

Since their introduction in the Depression of the 1930s, local non-

property taxes on such bases as income and sales have slowly grown in

significance as sources of local governmental revenues. Between 1942

and 1966, nonproperty taxes increased from 7.6% to 12.9% of total local

governmental revenues (Moore, 1971, p. 209). By 1974,this proportion

had increased to 17.8% (Benson, 1978, p. 265). Local school districts

in most states have not used these taxes as heavily as have general

local governments; during the mid-1970s 98% of local school district

revenues were derived from property taxation (R. L. Johns t Morphet,

1975, p. 147).










Despite the small average contribution of local nonproperty taxes

to school districts nationwide, these taxes were quite significant

revenue sources for school districts in a number of states during the

mid-1970s (Tron, 1976). School districts in Maryland and Pennsylvania

received revenue directly from local income taxation. In Kansas, 15% of

state income tax proceeds were returned to the school districts of

resident taxpayers. Nevada, Louisiana, and Alabama school districts

received revenues directly from local sales taxes. School districts

in Tennessee, North Carolina, Virginia, and other states received appro-

priations of local sales tax revenue from general county governments.

In a 1971 National Educational Finance Project study, Moore (pp.

209-222) examined the fiscal equalization implications of local non-

property taxes. Utilizing a sample of seven states with major local

nonproperty taxes, Moore found that central city districts received the

greatest amount of revenue per pupil from these sources, followed by

suburban, independent city, and rural districts, in that order. Use of

local nonproperty taxes was demonstrated to be significantly disequaliz-

ing as the rural districts were also the least wealthyin terms of

property valuation per pupil.

The disequalizing effects of these local revenues strengthens the

justification for including local nonproperty taxes in the measurement

of local fiscal capacity. R. L. Johns (1972b) alluded to this matter

in summarizing the conclusions of the NEJFP with regard to alternative

measures of local fiscal capacity:









The local taxpaying ability of school districts in reality
is not their theoretical taxpaying ability, but rather a
measure of their accessibility to local tax revenue. If a
district only has the authority to levy property taxes then
its local taxpaying ability (or effort to support schools)
should be measured only in terms of the equalized value of
the taxable property in that district. However, if a district
has the power to levy local nonproperty taxes, such as payroll
taxes, sales taxes, utility taxes, etc., then the yield of such
local nonproperty taxes can justly be incorporated in the
measure of the taxpaying ability of that district. (p. 365)

Several states authorizing school district access to nonproperty

tax revenues included measures reflecting this accessibility in their

respective school finance equalization programs during the mid-1970s

(Augenblick, 1978; Tron, 1976). Kansas utilized a local fiscal capacity

measure including a four-year average of adjusted property valuation and

taxable resident incomes. Required local effort for the Louisiana foun-

dation program included a five mill property tax plus severance tax

receipts and one-half of receipts from the leasing of school lands.

The Maryland school equalization program defined local fiscal capacity

in terms of property valuation and taxable income per pupil. In New

Mexico,Federal P.L. 874, forest reserve and regular vocational revenues,

as well as local share of motor vehicle license fees and the yield of an

8.925 mill property tax, were included in local required effort. The

Nevada foundation program required a local one cent sales tax as well as

a 7 mill property tax. Pennsylvania,in 1978,adopted a local fiscal

capacity index incorporating a 60% weighting for property valuation per

pupil and a 40% weighting for personal income per pupil. Each of these

measures of local fiscal capacity was consistent with the tax base ap-

proach in that local school districts in each state had legal access to

the economic bases incorporated in their state's capacity measure.










Proponents of the economic indicator approach have asserted that

the use of these indicators, especially income, should not be limited

to states in which local school districts have access to income, sales

or related nonproperty taxes. Three basic propositions have frequently

been used in support of this approach. First, personal income, as noted

in the taxpayer equity section of this review, is generally accepted as

the best available indicator of individual ability-to-pay regardless of

the tax being levied. Second, numerous studies have found that the dis-

tribution of income among school districts is not closely correlated

with the distribution of property wealth among districts. Finally, there

is growing evidence that income and other wealth variables are signifi-

cant factors in determining school district fiscal behavior.

Differences in the distribution of income and property among dis-

tricts within states have long been recognized by writers in the field

of school finance. Strayer and Haig (1923) and Morrison (1930) were

among those observing such differences during the 1920s and 1930s. Dur-

ing the 1960s,several researchers found low correlations between

property and income measures of local capacity. James, Thomas, and

Dyck (1963, pp. 7-8) derived simple correlations between school dis-

trict property valuation per capital and median family income of .56 in

Wisconsin, .40 in New York, .38 in Oregon, .34 in California, .30 in

Massachusetts, .26 in New Jersey, .09 in New Mexico, .01 in Washington,

and -.18 in Nebraska. Davis, cited by James, Thomas, and Dyck (1963,

p. 8), found a rank order correlation coefficient of .22 between per

capital income and per capital property valuations for California counties;










the correlation for urban counties separately (.14) was lower than that

for rural counties (.38). Iiickrod and Sabulao (1969, p. A-11) found

that correlations between median family income and assessed property

valuation per pupil among suburban school districts in the Boston,

Chicago, Cleveland, Detroit, and St. Louis metropolitan areas were

generally not significantly different from zero. Farner and Edmonson

(1969) found little or no correlation between equalized property value

per pupil and income per pupil in a study of fiscal capacity in 11

western states.

Studies conducted during the mid-1970s confirmed the continued

presence of these disparities. In 1977, Odden (p. 365) reported cor-

relations between assessed valuation per pupil and median family income

of .37 in Connecticut, .17 in Colorado, .11 in South Dakota, and -.10 in

Washington. In a Missouri study,Odden (1978a, p. 473) found a correla-

tion of .19 between average school district adjusted gross income per

tax return and property wealth per pupil. Hickrod and Hubbard (1977,

p. 9) observed that the relationship between income and property valua-

tion in Illinois was linear in the lower wealth ranges but that there

was no meaningful relationship between property and income above the

median wealth level. Given the low correlation between income and

property, it is frequently suggested that the two measures represent

different aspects of taxpaying ability and that a measure incorporating

both income and property would be a more comprehensive indicator of

school district wealth than property valuation alone.

In addition to the correlational research bearing on the relation-

ship between property and income, related research has documented the









fact that poor families do not necessarily reside in property poor

school districts. The impact of this research was evident in the Rod-

riguez (411 U.S. 1, 1973) decision of the U.S. Supreme Court. Justice

Powell, in the majority opinion of the Court, noted, "Yet recent studies

have indicated that the poorest families are not invariably clustered

in the most impecunious school districts. Nor does it now appear that

there is any more than a random chance that racial minorities are con-

centrated in property-poor districts" (p. 57). A Connecticut study

cited by the Court found that low income families commonly lived in

industrial or commercial communities with high property valuation per

pupil (p. 23). Other researchers, including Benson (1975, p. 99) and

Hickrod, Yang, Ilubbard, and Chaudhari (1975, p. 32),have observed that

the problem of poor families in rich districts is particularly apparent

in major cities. These cities tend to have large numbers of poor fami-

lies; however, their high average wealth precludes these families from

receiving the benefits of school equalization programs.

Research identifying a relationship between income or other wealth-

related variables and school district fiscal behavior is often cited as

a third major argument favoring incorporation of economic indicators in

the measurement of local fiscal capacity, A number of studies have

found income to be positively associated with school tax rates and/or

school district expenditures. In a 1963 study of 589 school districts

in 10 states, James, Thomas, and Dyck (pp. 99-100) concluded that a

definite positive relationship existed between educational expenditures

and wealth as measured by equalized valuation and by median family

income. Income and property valuation were among the most effective










predictors of educational expenditures in a 1966 study of large city

school districts (James, Kelly, 5 Garms, pp. 108-128).

More recent studies have provided further documentation of the

relationships among wealth measures, tax effort, and educational ex-

penditures. Alexander and Kay (1973, pp. 40-75) demonstrated that low

effort Kentucky school districts tended to have a high proportion of

income derived from farm property or had a high percentage of low in-

come families, while high effort districts in that state generally had

both high family income and a high percentage of tax paid by commercial

and industrial property. In a Missouri study Odden (1978a, p. 422)

reported that property valuation and income correlated .79 and .45,

respectively, with expenditure per pupil and .18 and .33,respectively,

with school tax rates. Gensemer, as reported by Hickrod and Hubbard

(1978, p. 275), identified a strong positive relationship between median

family income and tax effort for education in Ohio. Yang and Chaudhari

(1976) found low income to be associated with medium to low effort for

education in Illinois, while high income, high educational attainment,

high occupational status, and high residential housing value were as-

sociated with high effort. Odden (1978b, p. 19) observed that the rela-

tionship between wealth and expenditures depends upon composition of the

property tax base and the structure of the state school finance system

as well as property valuation and household income.

Citing the positive relationships between income, educational

property tax effort, and education expenditures, advocates of the eco-

nomic indicator approach have asserted that an income adjustment should










be made in the apportionment of state equalization aid. Such an adjust-

ment has been described as particularly important in states using a

District Power Equalizing (DPE) or Guaranteed Tax Base (GTB) approach

in that the apportionment of equalization aid depends in part on local

tax rates (Odden, Augenblick,& Vincent, 1976, p. 18). Supporters of

this position have argued that such incentives are needed to reduce

expenditure disparities and are justified because a given tax rate

represents a greater burden on low income districts in relation to

ability-to-pay (Iickrod & Hubbard, 1978, pp. 272-278). In effect, it

has been suggested that districts in which average incomes are low

should be guaranteed a higher expenditure level by the state for a

given tax rate than districts in which average incomes are high, or

conversely, that low income districts should receive the same guaran-

teed expenditure as high income districts for a lower property tax

rate.

Four states not authorizing school district access to income tax

revenues made adjustments based on local income in the apportionment

of state equalization aid in 1978 (Augenblick, 1978). The Connecticut

equalization program used the ratio of district median family income to

state median family income as an adjustment to property valuation per

capital; Virginia included individual income with taxable sales and

property in a composite index. The weightings in the Virginia index

were 50% property, 40% income, and 10% sales. The fiscal capacity of

Rhode Island school districts was computed based on equalized property

valuation per pupil modified by the ratio of district median family

income to state median family income. The Missouri school finance









program defined local fiscal capacity in terms of property valuation

per pupil; however, an income adjustment was applied in determining

each district's required local effort for the foundation portion of

the program. The local deduction tax rate was modified by one-half

of the deviation of the district's adjusted gross income per tax return

from the statewide average.

Criticism of the economic indicator approach as used in these four

states has focused primarily on three major issues. First, as Mort

(pp. 129-130) observed in 1933, local school districts have no power

over their tax systems except through state action; therefore, fiscal

capacity measurement should be limited to the economic bases available

to the local taxing jurisdiction to provide horizontal individual tax

equity. Second, as Benson demonstrated in a 1972 California study, the

use of an income factor in the apportionment of state equalization aid

is neither efficient nor effective in redistributing state aid and tax

relief to low income families. Finally, alternative methods are avail-

able for addressing the problems associated with the traditional property

valuation per pupil measure of local fiscal capacity.

The concept of horizontal tax equity is one of the oldest and most

widely accepted principles of taxation. It suggests that individuals

with equal ability to pay should bear equal burdens, The economic

indicator approach applies this concept to school equalization programs

using the district as the unit of analysis. Districts with equal

average wealth are said to have equal taxpaying ability regardless of

the tax bases available to the local district. Port (1933) questioned

the equity of this approach, noting that it would unfairly burden










individual taxpayers in school districts which have wealth which is

not taxable under the actual system of taxation: "A district may be

the situs of great wealth, yet if a large part of it cannot be taxed

locally, the part that is taxed is penalized heavily"(p. 130). Where

property is the only locally available tax base, use of theoretical

taxpaying ability in a state equalization program requires that dis-

tricts with a high ratio of income to property levy higher property

tax rates than other districts to obtain a given level of state fund-

ing. This disparity in tax rates has been defended on the grounds that

districts whose average income is above that for the state as a whole

can afford to pay higher tax rates; however, it violates the horizontal

equity principle as applied to the individual taxpayer. The fact that

poor families live in districts whose average income exceeds the state

average has been thoroughly documented; the use of adjustments for

average school district income requires these poor families to pay

higher property tax rates than families in districts whose average in-

come is lower. The same holds true at all other levels of individual

income: those with a given income who live in a district where average

incomes are low pay lower property tax rates for a given expenditure guar-

antee than taxpayers with the same income living in districts where

average incomes are high.

Benson (1972) demonstrated that a school district average income

adjustment in a state school finance program will not necessarily help

low income families. A standard property-based DPE program and an

income modified or progressive DPE program were simulated and the









effects on low income households in eight California school districts

were examined. Under the standard DPE program,it was found that ap-

proximately half of the low income households would experience school

tax increases rather than decreases because of their residence in

property wealthy districts. The income-weighted or progressive DPE

program was found to further increase tax rates and further decrease

expenditure levels of low income residents in San Francisco, Berkeley,

and Oakland, where average incomes were high despite large concentra-

tions of poor families. Additionally, a horizontal inequity concerning

the taxation of commercial and industrial property was noted:

Unfortunately, progressive DPE would protect entire districts
rather than individual households. It would impose lower tax
rates than regular DPE on all districts with less than average
income per pupil. But, if industrial and commercial property
tends to be concentrated in districts where the residents have
relatively low income, then progressive DPE would have the
effect of reducing the average property tax rate paid by in-
dustrial and commercial property. In other words, while pro-
gressive DPE is designed to protect low-income households, it
may also protect industrial and commercial enclaves. (p. 67)

Alternatives to the progressive DPE plan suggested by Benson (1972)

included full state funding of public education, standard DPE with a

circuit breaker to provide direct assistance to low income households,

and DPE with a split property tax roll to prevent horizontal inequities

in the taxation of industrial and commercial property. The standard DPE

with a circuit breaker was recommended because it would (1) provide

fiscal neutrality in the sense of requiring equal property tax rates

for an equal expenditure level and (2) provide direct tax relief to

low income households.









Alternative Need Units


Fiscal capacity is generally expressed as a ratio of available

economic resources per unit of need for public services. Norton and

Reutter (1952) suggested that fiscal capacity to support public educa-

tion may be "defined abstractly as the number of units of economic

power behind each unit of educational load or work to be performed'

(p. 252). Reviewing studies of state fiscal capacity, Norton and

Reutter observed that "the three most commonly used measures of educa-

tional work to be performed or educational load or need are total

population, number of children of school age, and average daily at-

tendance" (p. 253). R. L. Johns (1952), reviewing local fiscal capacity

studies, noted similarly that "nearly all of those studies have used

S. some kind of unit measure of educational load, such as wealth

per capital, per pupil, per teacher, and per weighted pupil" (p. 223).

R. L. Johns (1952) recommended that "unit comparisons of taxpaying

ability should be based upon true units of educational load" (p. 223),

such as weighted pupil units.

Population has often been employed in measuring the relative fiscal

capacity of general governmental units at both the state and local

levels. The Advisory Commission on Intergovernmental Relations (1962)

explained the rationale for the use of population as follows:

When the various income or tax base measures of capacity are
divided by population to show the relative resources of the
States, population serves essentially as a proxy for budgetary
loads or program requirements to be financed out of fiscal
capacity. (p. 97)









Population has less frequently been used in determining the capacity

of local school districts to support education as measurement units

more directly related to educational need have been sought. In 1906,

Cubberley observed that population is "only a rough method for approxi-

mately determining the number of children for whom education must be

provided" (p. 94). He reported that, while a number of states had em-

ployed population as a basis for the apportionment of school funds

during the mid-19th century, all but two states had abandoned the

practice by the beginning of the twentieth century (p. 99). Examining

a number of alternative units for the apportionment of school funds,

Cubberley (p. 195) recommended that a measure combining aggregate days

attendance and teachers actually employed be utilized.

School finance researchers following Cubberley developed more

refined measures of educational need. As reported by R. L. Johns

(1972a, p. 7) Updegraff (1922) introduced the teacher unit concept

based on standard numbers of pupils per teacher for various school

levels, urban versus rural districts, and different types of classes.

Mort (1924), based on analysis of average practice in the state of New

York, developed the weighted-pupil measurement unit. Reflecting on the

development of the weighted-pupil unit, Mort and Reusser (1951) stated:

The weighted pupil unit (or its mathematical equivalent--
the weighted classroom) is the most systematically refined of
all measures of educational need and has been in practical
use for a quarter of a century in state-aid laws, in expendi-
ture comparisons of various districts, and in comparisons of
ability to support schools. During this period it has been
subjected to continuous refinements. (p. 491)










Since the development of state school finance equalization pro-

grams during the 1920s,need measures directly related to the educational

task to be completed rather than general population have been the

standard measurement units for the determination of school district

fiscal capacity (Advisory Commission on Intergovernmental Relations,

1971, pp. 32-33). The primary criticism of the pupil unit of measure

since the early 1960s has been that it focuses specifically on the

revenue requirements of public education to the exclusion of other

demands on local resources. In 1963,Lindman (pp. 129-134) pointed out

that the per pupil approach assumes that each school district has the

same proportion of its property tax base available for the support of

public education irrespective of the tax rate required for other govern-

mental functions. Since the relationship between educational needs

and total public needs varies among communities, it has been suggested

that use of the pupil unit creates a bias favoring districts with high

educational needs relative to noneducational needs (Odden, 1977, p. 360).

Supporters of the per capital approach have noted that federal revenue

sharing is distributed among states based on a per capital measure of

income and that several states employ per capital property valuations in

the apportionment of equalization aid for noneducational services.

Advocates of school finance adjustments for municipal overburden

have relied to a great extent on the above criticism of the per pupil

measurement unit. The municipal overburden argument stresses the impact

of the high cost of urban government on the ability of large cities to

support public education. Lindman (1964), an early advocate of









municipal overburden adjustments, proposed that a correction factor

modifying property valuation per pupil be applied in the measurement

of school district fiscal capacity. The suggested correction factor

was based on the premise that equal effort to support the schools

exists where total property tax rates among districts are equal and

where the allocation of revenues from these taxes to the public schools

and to nonschool functions is proportional, respectively, to public

school attendance and to total population. The effect of this index

was to benefit school districts with low ratios of pupil attendance to

total population. The correction factor was applied to school districts

in four states with mixed results (R.L. Johns, 1965, p. 93). It was

found that urban centers generally benefited from the measure as did

resort centers and areas with a large proportion of nonpublic to

total school children.

Callahan, Wilkcn, and Sillerman, in a 1973 study for the National

Urban Coalition, identified several factors suggesting a need for munici-

pal overburden adjustments. It was found that per capital expenditures

for police, fire, and refuse disposal in the nation's 44 largest cities

were considerably higher than comparable averages for the states of

which they are a part. The high cost of these services was seen as re-

ducing the proportion of total city budgets available for education; thus

the percent of total local expenditures spent for education in the cen-

tral cities of the nation's 36 largest metropolitan areas was reported

as well below that of the aggregate of all local governments in their

respective states. Callahan et al. (1973, pp. 18-19) concluded that









per pupil property valuations overstate the true wealth of the central

cities and recommended that fiscal capacity indexes including per

capital personal income be used in the apportionment of state equaliza-

tion funds. It was further suggested that total urban tax rates be

taken into consideration as an effort factor in computing state aid

allocations.

The use of public school pupil counts as a measure of load has also

been criticized by those favoring school finance adjustments to reflect

variations in the number of nonpublic school pupils among districts.

Hubbard and Hlickrod (1978) argued that the public school pupil unit

"gives a warped idea of the actual wealth per pupil and the taxpayers'

ability to pay" (p. 1) in districts having a high proportion of non-

public school pupils. They noted that two districts with equal property

valuations and an equal number of students will have varying property

valuations per public school pupil due to variations in the proportion

attending nonpublic schools. Therefore, communities with large non-

public school enrollments in relation to total school enrollments will

not only have to pay the full cost of the nonpublic schools but will

also receive fewer state dollars per public school student than similar

communities with a low proportion of nonpublic school enrollments. To

solve this apparent problem, Hubbard and Hickrod (1978, pp. 3-4) sug-

gested that nonpublic school pupils be included in the measurement of

fiscal capacity per load unit.

In 1978, two states used the per capital approach in the measurement

of school district fiscal capacity; none employed a specific weighting









for nonpublic school pupils (Augenblick, 1978). The Connecticut

Guaranteed Tax Base program defined local capacity as property valu-

ation per capital adjusted by the ratio of the district's 1969 median

family income to the state average median family income for 1969. The

rationale for this measure was that it takes into account total local

tax burden rather than just the school-related portion of that burden

(T. Johns, 1976, p. 403). Virginia used a composite index of local

fiscal capacity which included property valuation, individual income

and taxable sales on both a per capital and a per pupil basis. The

weighting of the per pupil index was double that of the per capital

index. The sales base was accessible to the local school districts of

Virginia in that a portion of local revenue for the public schools was

derived from retail sales taxation; the income base was not accessible

to the schools.

Neither municipal overburden nor nonpublic school adjustments have

received widespread acceptance among writers in the field of public

school finance. The public school pupil measurement unit has been

defended as the most accurate and sensitive measure of variations in

public educational needs among communities (Michelson, 1974, p. 449).

Districts with a large proportion of school population attending non-

public schools, it has been noted, are more able to support public edu-

cation because the proceeds from a given tax levy are divided among

fewer public school pupils (Odden, 1977, pp. 361-362). While the per

capital measure has been defended as a device to direct aid to communities

with high total tax burdens, T. Johns (1976, p. 403) has pointed out








that it actually provides assistance to districts with low ratios of

pupils to population, which may or may not have high tax burdens.

According to Odden (1977, p. 362),some opposing the per capital measure

have suggested that alternatives to the per pupil approach attempt to

build noneducational needs into the school equalization model which

have no legitimate place there. R. L. Johns (1977, p. 99) has argued

that such alternatives represent concealed aid to nonpublic schools

and would create an incentive for increased racial segregation in the

schools. While the financial problems of the central cities are widely

recognized, it has been suggested that state assistance could be ac-

complished more efficiently through direct action rather than indirectly

through the school equalization formula (R. L. Johns & Alexander, 1971,

pp. 344-345; Michelson, 1974, p. 453).


Alternative Local Fiscal Capacity Measures
and School Finance Equity


The relationships between alternative local fiscal capacity

measures and standards of school finance equity have been frequently

discussed in the school finance literature but seldom analyzed em-

pirically. Hou (1977), in an exception to this generalization,

estimated the impact of five alternative local fiscal capacity

measures on school finance equity in Illinois, Measures of local

fiscal capacity analyzed in the study were assessed property valuation

and assessed property valuation weighted by four alternative income

factors: (1) the ratio of district per capital income to state per

capital income, (2) the ratio of district median family income to state










median family income, (3) the average of district assessed valuation and

district aggregate income, and (4) the ratio of district income per

Title I Weighted Average Daily Attendance (TWADA) to state income per

TWADA.

Alternative state aid distributions among school districts were

simulated by substituting each alternative local fiscal capacity

measure into the Illinois state school finance method while holding

all other variables constant. Estimated expenditure per TWADA by

district was computed by summing simulated state aid and district

local revenue, then dividing by district TWADA. The resulting expendi-

ture distributions were evaluated using the resource equality and

ex post fiscal neutrality standards of school finance equity. Evalu-

ation of the taxpayer equity effects of the alternative local fiscal

capacity measures was not included in the research design.

The coefficient of variation in estimated expenditure per TWADA

was employed in the measurement of resource equality while the elas-

ticity of expenditure per TWADA with respect to assessed valuation of

property (computed by regressing the natural logarithm of expenditure

per pupil on the natural logarithm of assessed property valuation

per pupil) was used for the measurement of ex post fiscal neutrality.

Hou (1977, pp. 17-18) found that the expenditure distributions result-

ing from the use of the per capital income and median family income

weightings were most consistent with the resource equality standard

for elementary districts and high school and unit districts, respec-

tively. The expenditure distribution derived through the use of the





84




income per TWADA weighting was most consistent with the e post fiscal

neutrality standard for all classes of school districts.















CHAPTER III

METHODOLOGY



The research for the present study was conducted in five phases.

Phase I involved identification and selection of (1) school finance

equity standards, (2) quantitative school finance equity measures,

and (3) local fiscal capacity measurement approaches. In Phase II

operational definitions were uevelopea for the selected measures of

local fiscal capacity and school finance equity through application of

the concepts and measurement approaches identified in Phase I to the

public school finance context of North Carolina. The identification

and collection of data concerning (1) selected local fiscal capacity

measures and (2) the North Carolina public school finance method was

the focus of Phase III. Alternative revenue distributions among school

districts for the 1976-77 school year were computed in Phase IV based

on the systematic variation of local fiscal capacity measurement holding

all other state school finance method variables constant. In Phase V

the selected quantitative measures of school finance equity were com-

puted for each alternative revenue distribution and analyzed to deter-

mine the relative impact of the different local fiscal capacity

measures on school finance equity within the state of North Carolina.

The purpose of Chapter III is to describe in detail the methodology

used in each phase of the research. Sources, procedures, data elements,










and statistical techniques employed are presented and explained. The

five phases of the research are described in sequential order.


Identification and Selection of School Finance Equity Standards,
Quantitative Measures of School Finance Equity, and
Alternative Local Fiscal Capacity Measures


The conceptual framework for the study was established in Phase I

through a review of the public school finance literature. The literature

review was organized into three components: (1) identification of

school finance equity standards, (2) identification of quantitative

measures of school finance equity, and (3) identification of alternative

local fiscal capacity measures.

The equity of state public school finance programs was examined

from the perspective of two affected classes: pupils and taxpayers.

Resource equality and ex post fiscal neutrality were selected as al-

ternative pupil equity standards. The resource equality standard pro-

vides that all public school children within a state should have equal

access to the economic resources necessary for the provision of educa-

tional programs suited to their individual needs. The ex post fiscal

neutrality standard provides that the access of public school children

to these resources may vary if and only if variations in resource

availability are unrelated to variations in local fiscal capacity.

Ex ante fiscal neutrality, providing that equal local tax effort should

result in equal revenue per unit of educational need, was selected

as a taxpayer equity standard.

Quantitative measures of each selected school finance equity

standard were identified in the second component of the literature










review. The 95th to 5th percentile range ratio, relative mean devia-

tion, and coefficient of variation in revenue per educational need unit

and the Gini coefficient were selected for measuring the extent of re-

source equality under alternative revenue distributions. Statistics

selected for the measurement of ex post fiscal neutrality were

(1) Pearson product-moment correlations between revenue per educational

need unit and (a) tax base accessibility per educational need unit and

(b) personal income per educational need unit; (2) regression coeffi-

cients based on (a) simple linear regression of revenue per educational

need unit on tax base accessibility per educational need unit and

personal income per educational need unit, (b) regression of the natural

logarithm of revenue per unit on the natural logarithms of tax base

accessibility per unit and personal income per unit, and (c) multiple

regression of revenue per educational need unit on quadratic and cubic

specifications of tax base accessibility per unit and personal income

per unit; and (3) Gini coefficients based on the ordering of school

districts on (a) tax base accessibility per educational need unit and

(b) personal income per educational need unit. The 95th to 5th percen-

tile range ratio, relative mean deviation, and coefficient of variation

in local operating tax rate required to attain state mean revenue per

educational need unit and the Pearson product-moment correlation between

local operating tax rate and revenue per educational need unit were

selected for measuring ex ante fiscal neutrality.

The third component of the literature review involved the identifi-

cation of alternative approaches for measuring local fiscal capacity.

Fiscal capacity is a quantitative measure of the economic resources










within a governmental jurisdiction per unit of need for public services.

Approaches for measuring local fiscal capacity consist of alternative

resource availability measures combined with different need units.

Eight alternative local fiscal capacity measures were selected for

analysis: (1) tax base access per educational need unit, (2) tax base

access per capital, (3) personal income per educational need unit,

(4) personal income per capital, (5) tax base access plus personal income

per educational need unit, (6) tax base access plus personal income per

capital, (7) tax base access multiplied by a personal income factor per

educational need unit, and (8) tax base access multiplied by a personal

income factor per capital.


Operational Definition of Selected Measures of
School Finance Equity and Local Fiscal Capacity


The measures of school finance equity identified and selected in

Phase I were operationally defined in Phase II through analysis of the

North Carolina public school finance context. While broad conceptual

approaches for measuring school finance equity and local fiscal capacity

may be employed in any state, application within a given state requires

specific adaptations to reflect the parameters of the state public school

finance context. More specifically, information must be obtained con-

cerning (1) the measure of educational need employed in the state

school finance program, (2) the specific tax bases and rates accessible

to local school districts, (3) the nature of school district organiza-

tion, and (4) the availability of data concerning such factors as local

tax bases, income, and population.










The term educational need unit was defined in this study as the

specific parameter used in a state school finance program for the

measurement of educational need. Most states employ some form of pupil

unit such as Average Daily Attendance (ADA), Average Daily Membership

(ADM), Full Time Equivalents (FTE), or pupil units weighted by instruc-

tional programs; some states utilize teacher units or instructional

units, which are also often weighted by programs. Average Daily Member-

ship has traditionally been employed in North Carolina as the basic

unit of educational need; however, the North Carolina Governor's Com-

mission on Public School Finance (1978, p. J) recommended the adoption

of the weighted classroom unit for the measurement of educational need.

The recommended method would count all pupils with the exception

of TMR pupils in a basic program (grades K-3, 4-8, or 9-12) for funding

purposes, with the added costs of exceptional or occupational education

recognized through supplemental units. Cost differentials recommended

for the basic programs were 1.23, 1.00, and 1.23 for grades K-3, 4-8,

and 9-12, respectively. Add-on weights for exceptional education pro-

grams were grouped into five cost levels, ranging from a high of 5.40

for the TMR and visually handicapped programs to a low of .20 for the

gifted and talented program. Add-on weights for Occupational programs

were classified into seven groups based on U.S. Office of Education

categories, with weights ranging from a high of .36 for the Health

category to a low of .27 for the Distributive category. The weighted

classroom unit as recommended by the Governor's Commission (1978,

p. J) was employed in the present study as the unit of educational

need in measuring local fiscal capacity and in evaluating the school









finance equity effects of alternative local fiscal capacity

measures.

The specific tax bases accessible to local school districts and

the relative yield of each accessible tax base must be identified

as a prerequisite to the development of operational measures of local

fiscal capacity and school finance equity involving tax base accessi-

bility. North Carolina school districts are fiscally dependent on

county governments, and the bulk of local public school revenues are

derived from general county revenues. In 1976-77, local revenue for

the public schools totaled $258,330,864, of which $224,822,125 or 87%

was derived from county sources and $33,508,739 or 13% was derived from

school district supplemental property levies.

Residents of school districts with populations below 100,000 could

vote up to a 5 mill tax on the assessed valuation of property while

residents of districts with larger populations could vote up to a 6 mill

tax; however, such taxes had to be approved and levied by the board of

county commissioners. In practice the utilization of the school dis-

trict property tax did not approach statutory limitations. In 1975-76

supplemental property levies for current operations exceeded two mills

in 11 of the 32 counties with more than one school district; the highest

such levy was 3.65 mills in Greensboro (N.C. Dept. of Revenue, 1976,

Table 67).

Levies on property and sales accounted for more than 95% of county

tax revenues in 1975-76. Ninety-six of the 100 counties levied an

optional local 1% sales tax, generating $124,258,074, while county-

wide general property tax levies totaled $429,814,760 (N.C, Dept. of










Revenue, 1976, Table 47). While recognizing that full fiscal equali-

zation cannot be attained without eventually equalizing to the school

district level, the North Carolina Governor's Commission on Public

School Finance recommended that initial equalization efforts be directed

toward the county level. This recommendation was based on the fiscal

dependence of local school districts on county government and the pre-

dominant role of county revenue in making up total local revenue for

the public schools (N.C. Governor's Commission, 1978, p. R).

Following the recommendation of the Governor's Commission, local

fiscal capacity was measured in the present study at the county level.

The tax base accessibility approach to the measurement of local fiscal

capacity was operationally defined in terms of property plus sales,

weighted to reflect the relative contribution of the two sources to

total county revenue.

Information concerning the school district organization pattern was

employed to determine the units for which local fiscal capacity and

school finance equity measurements would be made. In 1976-77, there

were 145 school districts in the state of North Carolina, including 68

county unit districts, 45 city districts, and 32 balance-of-county

districts (N.C. Dept. of Public Education, 1977). Local fiscal capacity

measurements were made on a county unit basis, aggregating data concern-

ing resource availability and need units for counties with more than

one school district at the county level. Data regarding state and

local revenues and educational need units as required for the computa-

tion of school finance equity statistics were collected at the school

district level. This procedure permitted analysis of the impact of a









county-level school finance equalization program on pupils and tax-

payers residing in the 145 school districts of North Carolina.

The availability of data concerning local tax bases, personal

income, and population was an additional factor necessitating the

measurement of local fiscal capacity at the county level. Data con-

cerning the assessed valuation of property for city school districts

and balance-of-county school districts were available only for those

districts with supplemental property levies. Taxable retail sales data

were also available only at the county level. Per capital personal in-

come and population data were available for municipalities and coun-

ties; however, municipal data could not be employed for city school

districts as these districts were found to encompass areas outside of

municipal boundaries.


Collection of Data


Phase III involved the collection of data concerning (1) alterna-

tive measures of local fiscal capacity and (2) characteristics of the

existing and recommended North Carolina public school finance methods.

Measurement of the fiscal capacity of the 100 counties of North Carolina

to support public education required information regarding property and

sales tax bases, personal income, population, and weighted classroom

instructional units.

The adjusted assessed valuation of property by county for 1975-76

was obtained from a report prepared for the Governor's Commission on

Public School Finance by Professor James Wilde (1978) of the Uni-

versity of North Carolina. Wilde adjusted county property valuations




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