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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
Creator:
Melcher, Thomas Robert, 1950-
Copyright Date:
1978
Language:
English
Physical Description:
viii, 175 leaves : graphs ; 28 cm.

Subjects

Subjects / Keywords:
Average revenue ( jstor )
Equal education ( jstor )
Equity ( jstor )
Finance ( jstor )
Personal income ( jstor )
Public schools ( jstor )
School districts ( jstor )
Schools ( jstor )
Tax base ( jstor )
Taxes ( jstor )
Dissertations, Academic -- Educational Administration and Supervision -- UF ( lcsh )
Educational Administration and Supervision thesis Ph. D ( lcsh )
Local finance -- North Carolina ( lcsh )
Public schools -- Finance -- North Carolina ( lcsh )
City of Gainesville ( local )
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bibliography ( marcgt )
non-fiction ( marcgt )

Notes

Thesis:
Thesis--University of Florida.
Bibliography:
Bibliography: leaves 167-174.
General Note:
Typescript.
General Note:
Vita.
Statement of Responsibility:
by Thomas R. Melcher.

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University of Florida
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University of Florida
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Copyright [name of dissertation author]. Permission granted to the University of Florida to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
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05325546 ( OCLC )
AAK0697 ( NOTIS )

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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




Full Text

PAGE 1

THE RELATIONSHIPS BETWEEN ALTERNATIVE LOCAL FISCAL CAPACITY MEASURES AND SELECTED SCHOOL FINANCE EQUITY STANDARDS By THOMAS R. MELCHER A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 1978

PAGE 2

Copyright by Thomas R. Melcher 1978

PAGE 3

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.

PAGE 4

TABLE OF CONTENTS Page ACKNOWLEDGMENTS iii ABSTRACT v i CHAPTER I INTRODUCTION 1 Statement of the Problem 4 Procedures 4 Delimitations 9 Limitations 10 Justification of the Study 11 Definition of Terms 13 II REVIEW 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

PAGE 5

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 Distributions 94 Computation of School Finance Equity Statistics 100 IV PRESENTATION AND ANALYSIS OF FINDINGS 106 Resource Equality 106 Ex Post Fiscal Neutrality 113 Lx Ante Fiscal Neutrality 126 V SUMMARY, IMPLICATIONS, AND RECOMMENDATIONS 135 Summary 135 Implications 141 Recommendations 145 APPENDIX 149 BIBLIOGRAPHY 167 BIOGRAPHICAL SKETCH 175

PAGE 6

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. (2J To analyze the relationships between alternative local fiscal capacity measures and selected school finance equity standards within the state of Nortli Carolina. Eight alternative approaches for measuring local fiscal capacity were operational! zed by combining tax base accessibility, personal income, tax base accessibility plus personal income, and personal incomemodified 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. Alternative 1976-77 revenue distributions among North Carolina school districts

PAGE 7

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 educational 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 deviation, (_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) regression 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 .

PAGE 8

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 affect 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 educational 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; rankings based 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.

PAGE 9

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. Numerous 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, 1952Rossmiller, 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 Haig (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 systems designed to provide varying degrees of fiscal equalization among school districts. Under the fiscal equalization concept, state dollars

PAGE 10

are apportioned among school districts in direct relation to educational 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 equalizing formula, or other method, is that the state is responsible for facilitating 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:

PAGE 11

The ex po st interpretation is that the actual level of educational 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 19 70s. 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 accessibility would more accurately reflect local revenue potential (Garms, Guthrie, $ Pierce, 1978, p. 235; R.L. Johns, 1972b; p. 565; Moore, 1971, p. 209). Second, the use of income or related economic indicators regardless 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 $ Hubbard, 1978, pp. 272-278; Odden, Augenblick, 5 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 capita measure would alleviate this problem (Callahan, Wilken, fj Sillerman, 1973, pp. 18-19; Odden, 1977, pp. 560-563). As alternative measures of local fiscal capacity are considered for use in state school finance programs, information concerning the relationships between these measures and widely recognized school finance

PAGE 12

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.

PAGE 13

Ill 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 1L 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 concepts 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 accessibility, (2) economic indicators, (5) the additive combination of resource availability and economic indicators, and (4) the multiplicative combination of resource availability and economic

PAGE 14

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 educational need unit. Statistics selected for the measurement of ex post fiscal neutrality were (Ij 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 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 educational need unit, (3) the coefficient of variation in local operating tax

PAGE 15

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 was North Carolina. Examination of the North Carolina school finance context involved collection and analysis of information concerning (1] the state school finance program, (2) the statelocal 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 educational 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 operational measures of local fiscal capacity and school finance equity involving tax base accessibility. Third, the school district organization pattern was examined to identify the units for which alternative local fiscal capacity measures were 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.

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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. Economic 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 reports. Educational need unit data and local revenue data were collected from published reports and computer tapes of the North Carolina Department 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 19 76-77 school year were simulated in Phase IV based on the inclusion 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. Simulated total revenue distributions among school districts were computed by

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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. Ph ase V . In Phase V the quantitative measures of school finance equity selected in Phase I were computed for each simulated revenue distribution, 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. Delimitatio ns 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 pos t 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.

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10 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 impact of alternative measures of local fiscal capacity on the equity of state school finance programs. The analysis completed in this study provides 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 developed 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 fiscal 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.

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11 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 participation 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, 5 Sillerman, 1973; Hickrod § 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 traditional 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

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12 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 variables 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 obtained 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

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15 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 funding 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 Membership (ADM), Full Time Equivalents (FTE) or pupil units weighted by programs (e.g., WADM) ; however, some states utilize teacher units or instructional 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

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14 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 educational 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 educational 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.

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15 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 .

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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) alternative 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. A lternative School Finance Equity Standa rds 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

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17 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 taxation" (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. He 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 instruction 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 principle. 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 summarizing 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 Haig (1923, p. 175) rejected the reward-for-effort concept, suggesting that reward for effort is fundamentally inconsistent

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with resource equality. Reviewing the concepts of ''equalization of educational opportunity" and "equalization of tax support," Strayer and Haig (1925) 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 education, (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 minimum at their own expense, Strayer and Haig (1923, pp. 173-174) recommended that the concepts of equalization of educational opportunity and equalization of school support be operationalized by (1) furnishing all children 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 Haig 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

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19 prevalent in American society during the 1920s, the operational definition 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 providing for equality of educational opportunity proceeded slowly until the decade of the 1960s. In 1941, Mort and Reusser defined equality of educational 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 financial 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 providing 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 responsibility 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 shortcomings 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

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20 opportunity was broadened to include (1] substantial equality in the provision of educational services beyond the minimum level and (2) equality of educational outputs as well as inputs. R. L. Johns and Morphet observed in 1960 that most Americans apparently 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 educational 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 5 Morphet, 1960, p. 5). Studies during the early 1960s pointed out the magnitude of disparities 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 parents, Sexton (1961, pp. 116-154) 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 highincome 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 highincome children. Conant (1961) examined the disparities between schools in large city slums and affluent suburbs, concluding that "the contrast

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21 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. He 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 provision, (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 educational inputs. Following the publication of the Coleman Report in 1966

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22 the generally recognized definition of this concept was broadened dramatically to include the outcomes of schooling. Coleman (1968, pp. 1819), 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, consequences 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 Mosteller and Moynihan (1972) noted, following the publication of the Coleman Report "it became increasingly the practice, even the demand, that equality be measured by school outputs" (p. 6) . Wise (1967, pp. 145-159) 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 judgments for^allocating educational resources to ensure equality of educational 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

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23 Table 1 Alternative Definitions of Equality of Educational Opportunity Definition Equality of educational opportunity criterion Negative Full opportunity Foundation Minimum attainment Level in Competition Equal dollars per pupil Maximum variance ratio Classification A child's educational opportunity is not dependent upon parental wealth or geographic location. Each child is given the opportunity for maximum 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 S choo ls, Poor Sc hools by A. E. Wise. Chicago: University of Chicago Press, 1967, pp. 143-159.

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24 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 expenditure per pupil definition was dismissed because of its lack of flexibility. The negative, maximum variance ratio, and classification definitions 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 attainment of equality of educational opportunity must specify a unit of analysis 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. With 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 alternatives 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.

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25 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 economists 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 (Musgrave, 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 concerning 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 societies 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 benefit 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 abilityto-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).

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26 The problem of taxpayer equity received considerable attention from the classical economists (Herber, 1971, p. 117). Both the benefit and abilityto -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. 117-125). The horizontal equity standard provides that equals should be treated equally while the vertical equity standard suggests that unequals should be treated unequally. Application 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 benefits 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. Tts 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

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27 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 5 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 distribution 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 unitary form of government, local fiscal capacity would be inconsequential in the determination of standards of public services or tax burdens. Buchanon (1970) observed that "the most serious problems of intergovernmental coordination arise because the separate subordinate units of

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28 government differ substantially in fiscal capacity' 1 (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 achieving 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 (Rossmiller, Hale, 5 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 earl)1900s is that equal local tax burdens among schoo.l 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. 54J 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

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29 to education. Me 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 (1925, 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 principle of equal educational revenue for equal local tax effort to the required minimum local effort level, in effect permitting wealthy districts to generate greater revenue per unit of local effort above the minimum than poor districts. Benson (1965) made the following observation concerning the taxpayer inequities resulting from the traditional foundation program approach: The power of some districts to include estates or large industrial holdings within their boundaries but to exclude highdensity residential areas allows these districts to provide expensive educational programs at extremely low tax rates. The 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)

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50 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 provided 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)

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51 Fi scal Neu t rality 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 Schoo l District, 357 F. Suppl . 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 Amendment 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 reapportionment. A central element in the Wise argument was a statement of the Court in Bro wn v. Board of Education of Topeka (347 U.S. 483, 1954) concerning 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

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52 been attained in a state. Under this definition, "equality of educational opportunity exists when a child's educational opportunity does not depend upon either his parents' economic circumstances or his location 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 districts 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 classification 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) provided 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

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53 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. 504) 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. 201-205) standard focuses only on wealth-related disparities and would permit variations among communities in educational opportunities for children based upon factors such as differences in taxpayer aspirations and tastes for public education. Coons et al. (pp. 339-540) argued that education is a fundamental interest, entitled to a place within the "inner sanctum of equal protection," 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. (5) 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. 596) As Benson (1978) observed, the arguments developed by Coons et al. "led directly to court action" (p. 337). The California Supreme Court in Serrano v. Priest ( Serrano 1 ) (487 P. 2d 1241, 1971) held that the California school finance system violated the equal protection provisions of the state and federal constitutions. In building the rationale

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34 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 I, 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 Di s trict v. Rodriguez (411 U.S. 1, 1975) held that a state school finance system resulting in wealth-related revenue disparities among school districts does not violate the equal protection clause of the 14th Amendment to the federal Constitution. The R odrigue z 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 evaluating state school finance program equity. S erran o 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

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55 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 educational quality for its children with less tax effort" (p. 1251). Concerning 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 guarantees of the California Constitution despite modifications made during the period between 1971 and 1974 (Benson, 1978, p. 541). As in Serrano I, the trial court included both taxpayer and student equity concepts in its analysis of the fiscal neutrality standard. Kith 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:

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36 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 opportunities 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 interpretation 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 pos t interpretation is that the actual level of educational 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)

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37 Friedman (1977) offered similar definitions of ex post and ex ant e 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. 495-494) observed, the two standards are essentially independent and there is only a small chance that a system 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 overcompensate for wealth differences among school districts in that state, resulting in a negative relationship between wealth and spending. Most school finance researchers , on the other hand, have suggested that the introduction of a UPE system based on ex ante fiscal neutrality would fail to remove the existing positive relation between local fiscal

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38 capacity and revenue per pupil. Benson (1975, p. 99) suggested that high-income districts would tend to levy higher tax rates than lowincome 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 expenditures 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 pos t 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 statistical analysis of resulting behavior showed that wealth differences accounted for no significant part of the spending variation, (p. 522) Quantitative Measures of School F inance Equity During the decade of the 1970s, educational finance researchers became increasingly cognizant of the need for systematic development and application of quantitative school finance equity measures. T. Johns

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39 and Hagers (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. 375). 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. 518). Hickrod, Yang, Hubbard, and Chaudhari (1975, pp. 24) suggested that operational definitions of school finance equity concepts 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 (197Sb) 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 various 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) Resou rce Ecjua lit y Berne (1977) summarized the characteristics of several quantitative measures of resource equality and e x post fiscal neutrality. As shown

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40 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 alternative 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 resource 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 percentage 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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m c o (N CC u
PAGE 50

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 restricted 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 Z P. lu X. I / E P. u, . , 1 1 ' . . l i=l i=l where u is the state mean expenditure per pupil, N is the number of school districts, P. is the number of pupils in district i, and X. is the per pupil expenditure in district i. Unlike the various range statistics, 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 computed 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

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43 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 variation, standard deviation of logarithms, and Gini coefficient. The variance, the average of the squared deviations about the mean, is unlike the three other measures in that it is insensitive to equal percentage increases and sensitive to equal additions to all units in the distribution. 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 regardless of the level of per pupil expenditure. The standard deviation of logarithms may be defined as follows: 1/2 I ? i (log u log X.) Z / I P i-1 i=l 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)

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44 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 coefficient. 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 population 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 45° 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 45° 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 45° line that is between the Lorenz Curve and the 45° 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 statistics 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 percent of current expenditure required to raise low-spending classroom units to the state median, and (5) the Gini coefficient.

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45 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 unified 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 expenditure 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 coefficient 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.

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46 Ex Post Fiscal Neutrality The ex post fiscal neutrality standard requires that variations in revenue per educational need unit not be systematically related to variations in local fiscal capacity. Measurement of ex post fiscal neutrality 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 regression 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 districts 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. 1422) employed two measures of ex post fiscal neutrality in evaluating the Illinois school finance program: (1) the bivariate 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 et al. (1977, pp. 18-20) divided eacli state's student population into three groups: the

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47 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 valuation, (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 specifications 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:

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48 (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, 2 (3) The slope obtained by regressing REV on W and W , evaluated at the mean value of W, 2 3 (4) The slope obtained by regressing REV on W, W , and IV , evaluated at the mean value of W, (5) The predicted difference in REV between points one standard deviation above and below the mean of W based on the regression 2 3 equation REV = a + b W + b~W + b-W , (6J The bivariate Gini coefficient computed after ordering districts in ascending sequence based on W, (73 The elasticity of the regression equation REV = a + bjW at the mean value of W, (83 The elasticity of the regression equation REV = a + b.W + b~W at the mean value of W, and (9 3 The elasticity of the regression equation REV = a + b^W + b~W + bJV 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 Stiefcl (1978, pp. 199-2053 found considerable disagreement among alternative measures used in evaluating the progress of individual states toward resource equality over time; however,

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49 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 individual 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)

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50 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 variation 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 liq uity Measur es 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

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51 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 expenditures. 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 ( Feder al 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 Registe r 42 [December 30, 1977] pp. 65524-65527). Procedures used for determining which revenues are wealth neutral and which are nonwealth neutral were summarized by T. Johns and Magers (1978, pp. 581-382). 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

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52 State School Finance Program Affected Class Pupils Taxpayers Equity Condition Measure of Equity Resource Differentials Relative Mean Deviation Resource Sufficiency 'ercent Below National Average Wealth Disparity Percent of Revenue Wealth Neutral 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 , 19 78, 3, 378. Copyright 1978 by Institute for Educational Finance. Reprinted by permission.)

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55 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 percentage 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. 573). Alternative Local Fiscal Capacity Measu res 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 Relations, 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

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54 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 substantially different results. The economic indicator approach is based on the position that the fiscal capacity of a governmental unit is a function of economic characteristics 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 determined by these factors irrespective of the system of taxation actually in use (Clune, 1975, 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 fiscal 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. 629661; R. L. Johns § Morphet, 1975, pp. 274-275; Mort, 1935, pp. 129-130).

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55 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 abilityto-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 (1VADA) , and weighted full-time equivalent (1VFTE)" (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. Dev elopment 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

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56 1923, Strayer and Haig (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 economic resources of the various counties than either property or income alone. Mort (1933, pp. 129-130) criticized the method suggested by Strayer and Haig, 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 abilityto-pay under the taxing system established by the state rather than the abilityto-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 consider 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 communities, simply because there happened to be wealth in those communities that was not taxable under the existing system of taxation. (p. 16)

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5 7 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, however, as is apparent from a review of Morrison's School Revenue, written in 1950. 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 educational load is inadequate since the requirements for equivalent education 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.

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58 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 valuation 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 equalizing property valuation ratios would fail to produce an equitable distribution of burdens with respect to true valuations (Morrison, 1950, pp. 172-173). It was also recognized that the use of unadjusted valuations would be susceptible to local manipulation; districts could appear poor and generate additional state aid by lowering assessment ratios (Mort, 1933, p. 151). 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 1935, Mort (pp. 131-135) suggested that the problem of assessment equalization could be dealt with by equalizing

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59 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. 131-153) 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 contributions. This approach has been used in most states using the equalizing state school support model; in 1978, 52 states employed property assessment 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. 458459) 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 apportionment of state school equalization funds in Alabama, Arkansas, Florida,

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60 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 assessment 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 requirement for the economic index approach has declined. In 1978, economic 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°s of total state grants to local education agencies were allocated on an equalization 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).

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61 During the 1950s and early 1960s, property valuation per pupil maintained 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 component. 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 manipulation 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.

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62 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 administration of the tax or refinements in the structure of the tax such as economic classifications of property or a circuit breaker for low income taxpayers. The economic index approach was described by Burke (pp. 647-651) as being strong on objectivity and stability but weak on most other evaluative 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

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03 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 nonmonetary; 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 generally 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

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64 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 incorporation 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 criticisms 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 economic 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 suggested new measures independent of property valuations and/or public school pupil counts. Certain suggested adjustments such as the inclusion of nonproperty taxes available to local units of government are fully consistent with the tax base per pupil approach. Those opposing

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05 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 Meas ures 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 measurement 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 nonproperty 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 Sj Morphet, 1975, p. 147) .

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66 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 (Iron, 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 appropriations 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 nonproperty 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 disequalizing 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 NEFP with regard to alternative measures of local fiscal capacity:

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67 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 foundation 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"o weighting for property valuation per pupil and a 40°6 weighting for personal income per pupil. Each of these measures of local fiscal capacity was consistent with the tax base approach in that local school districts in each state had legal access to the economic bases incorporated in their state's capacity measure.

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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 distribution 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 significant factors in determining school district fiscal behavior. Differences in the distribution of income and property among districts 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. During the 1960s, several researchers found low correlations between property and income measures of local capacity. James, Thomas, and Dyck (1965, pp. 7-8) derived simple correlations between school district property valuation per capita and median family income of .56 in Wisconsin, .40 in New York, .58 in Oregon, .54 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 (1965, p. 8), found a rank order correlation coefficient of .22 between per capita income and per capita property valuations for California counties;

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09 the correlation for urban counties separately (.14) was lower than that for rural counties (.38). Hickrod and Sabulao (1969, p. A-ll) 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 correlations 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 correlation 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 valuation 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 relationship between property and income, related research has documented the

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70 fact that poor families do not necessarily reside in property poor school districts. The impact of this research was evident in the Rodriguez (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 concentrated 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. 25). Other researchers, including Benson (1975, p. 99) and Hickrod, Yang, Hubbard, 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 families; however, their high average wealth precludes these families from receiving the benefits of school equalization programs. Research identifying a relationship between income or other wealthrelated 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 1965 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

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71 predictors of educational expenditures in a 1966 study of large city school districts (James, Kelly, § Garms, pp. 108-128). More recent studies have provided further documentation of the relationships among wealth measures, tax effort, and educational expenditures. 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 income 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 llickrod 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 associated with high effort. Odden (1978b, p. 19) observed that the relationship 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 economic indicator approach have asserted that an income adjustment should

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72 be made in the apportionment of state equalization aid. Such an adjustment 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 (Ilickrod § 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 guaranteed 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 capita; Virginia included individual income with taxable sales and property in a composite index. The weightings in the Virginia index were 50% property, 40°i, 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

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75 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 available 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. Mort (1935) questioned the equity of this approach, noting that it would unfairly burden

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74 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 districts with a high ratio of income to property levy higher property tax rates than other districts to obtain a given level of state funding. 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 income 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 guarantee 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

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75 effects on low income households in eight California school districts were examined. Under the standard DPE program, it was found that approximately 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 concentrations 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 industrial and commercial property. In other words, while progressive 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.

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76 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 education 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 educational work to be performed or educational load or need are total population, number of children of school age, and average daily attendance" (p. 253). R. L. Johns (1952), reviewing local fiscal capacity studies, noted similarly that "nearly all of those studies have used . . . some kind of unit measure of educational load, such as wealth per capita, 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), sucli 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)

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77 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 approximately determining the number of children for whom education must be provided" (p. 94). He reported that, while a number of states had employed population as a basis for the apportionment of school funds during the mid19th 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 expenditure comparisons of various districts, and in comparisons of ability to support schools. During this period it has been subjected to continuous refinements. (p. 491)

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78 Since the development of state school finance equalization programs 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. 32-53). 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. 129-154) 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 governmental 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. 560). Supporters of the per capita approach have noted that federal revenue sharing is distributed among states based on a per capita measure of income and that several states employ per capita 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

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79 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, Wilken, and Sillerman, in a 1975 study for the National Urban Coalition, identified several factors suggesting a need for municipal overburden adjustments. It was found that per capita 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 reducing the proportion of total city budgets available for education; thus the percent of total local expenditures spent for education in the central cities of the nation's 56 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

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80 per pupil property valuations overstate the true wealth of the central cities and recommended that fiscal capacity indexes including per capita personal income be used in the apportionment of state equalization 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 Hickrod (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 nonpublic 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 nonpublic 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) suggested that nonpublic school pupils be included in the measurement of fiscal capacity per load unit. In 1978, two states used the per capita approach in the measurement of school district fiscal capacity; none employed a specific weighting

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81 for nonpublic school pupils (Augenblick, 1978). The Connecticut Guaranteed Tax Base program defined local capacity as property valuation per capita 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 capita and a per pupil basis. The weighting of the per pupil index was double that of the per capita 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 nonpublic schools, it has been noted, are more able to support public education because the proceeds from a given tax levy are divided among fewer public school pupils (Oddcn, 1977, pp. 361-362). While the per capita measure has been defended as a device to direct aid to communities with high total tax burdens, T. Johns (19 76, p. 403) has pointed out

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82 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 capita 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 accomplished more efficiently through direct action rather than indirectly through the school equalization formula (R. L. Johns § Alexander, 1971, pp. 344-345; Michelson, 1974, p. 455). Alternative Loca l Fis cal 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 empirically, iiou (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 capita income to state per capita income, (2) the ratio of district median family income to state

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83 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 expenditure distributions were evaluated using the resource equality and ex post fiscal neutrality standards of school finance equity. Evaluation 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 elasticity 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 resulting from the use of the per capita income and median family income weightings were most consistent with the resource equality standard for elementary districts and high school and unit districts, respectively. The expenditure distribution derived through the use of the

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84 income per TWADA weighting was most consistent with the ex post fiscal neutrality standard for all classes of school districts.

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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 (5j local fiscal capacity measurement approaches. In Phase II operational definitions were developed for the selected measures of local fiscal capacity and school finance enuity 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 (13 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 computed for each alternative revenue distribution and analyzed to determine 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, 85

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86 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 Stan dards, Qua ntitative 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 alternative pupil equity standards. The resource equality standard provides that all public school children within a state should have equal access to the economic resources necessary for the provision of educational 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. t : -x an te 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

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review. The 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation in revenue per educational need unit and the Gini coefficient were selected for measuring the extent of resource equality under alternative revenue distributions. Statistics selected for the measurement of ex post fiscal neutrality were (1J 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 coefficients 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 percentile 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 identification of alternative approaches for measuring local fiscal capacity. Fiscal capacity is a quantitative measure of the economic resources

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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 capita, (3) personal income per educational need unit, (4) personal income per capita, (5) tax base access plus personal income per educational need unit, (6) tax base access plus personal income per capita, (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 capita. 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 concerning (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 organization, and (4) the availability of data concerning such factors as local tax bases, income, and population.

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89 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 instructional programs; some states utilize teacher units or instructional units, which are also often weighted by programs. Average Daily Membership has traditionally been employed in North Carolina as the basic unit of educational need; however, the North Carolina Governor's Commission 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 programs 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

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90 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 accessibility. 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 $53,50S,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 district property tax did not approach statutory limitations. In 1975-76 supplemental property levies for current operations exceeded two mills in 11 of the 52 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 countywide general property tax levies totaled $429,814,760 (N.C. Dept. of

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91 Revenue, 1976, Table 47). While recognizing that full fiscal equalization 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 predominant 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 concerning 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 computation of school finance equity statistics were collected at the school district level. This procedure permitted analysis of the impact of a

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92 county-level school finance equalization program on pupils and taxpayers 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 concerning 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 capita personal income and population data were available for municipalities and counties; 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) alternative 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 University of North Carolina. Wilde adjusted county property valuations

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93 to correct for the eight-year revaluation cycle for real property in North Carolina but did not make corrections for inaccuracies resulting from nonuniform assessment practices. While the Commission recommended that the state legislature fund the North Carolina Department of Revenue to perform annual sales ratio studies, equalized property valuation data by county were not available at the time of this research. Taxable retail sales data by county for 1975-76 were obtained from the North Carolina Department of Revenue (1976, Table 28). Population and personal income data by county were obtained from the most current report available from the U.S. Census Bureau (1977). This report included 1975 population and 1974 per capita personal income data. Total personal income by county for 19 75-76 was estimated by multiplying the 1974 per capita income of each county by its 1975 population. Total weighted classroom units by county for 1976-77 were obtained from computer printouts submitted to the Governor's Commission by the Institute for Educational Finance, University of Florida. Data regarding selected characteristics of the existing North Carolina public school finance program and the revised program recommended by the Governor's Commission on Public School Finance were collected from computer tapes supplied to the Governor's Commission by the Institute for Educational Finance. These data included (1) the 1976-77 state basic program allocation to each school district under the existing and recommended public school finance programs, (2) total 1976-77 weighted classroom units by school district as defined in the recommended program, and (3) total 1976-77 local revenue receipts by school district under the existing program.

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94 Simulation of Alternative Revenue Distributions Alternative 1976-77 revenue distributions among school districts were simulated in Phase IV based on systematic variation of the measurement of local fiscal capacity holding other aspects of the state school finance method constant. Nine distributions were computed, one based on the existing 1976-77 state school finance method and eight based on the inclusion of alternative local fiscal capacity measures in the state school finance method recommended by the Governor's Commission on Public School Finance. The existing 1976-77 state school finance method consisted of a state flat grant to each local school district based on a series of categorical computations , supplemented with local revenue. Local fiscal capacity was not a factor used in determining the state allocation to local school districts. The sum of the 1976-77 state Foundation, Vocational, and Trainable Mentally Retarded distributions to local school districts was $863,103,908. This total was defined as the basic state program. The state allocation was supplemented in 1976-77 with $258,330,864 in local revenue for current operations. In Phase IV, revenue per weighted classroom unit for each school district under the existing 1976-77 school finance method was determined by summing state basic program revenue and local current operating revenue, then dividing by the number of units. Federal revenue, state categorical aid, local revenue for capital outlay and debt service, and local nonrevenue receipts were excluded. The North Carolina Governor's Commission on Public School Finance recommended that a two-tiered state school finance method be

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95 established. In the first tier, state basic program funds would be allocated among school districts on a weighted classroom unit basis, modified by a teacher training and experience (T § E) factor. The T § E factor would adjust the level of state basic program support to reflect variations among school districts in staff costs associated with varying levels of teacher training and experience. The recommended initial funding level for the state basic program was $863,103,908, equal to the actual 1976-77 basic program amount but distributed among districts in a different manner. In addition to the state basic program, a second-tier equalization program involving a required local effort of $150,000,000 and state equalization aid of $60,000,000 was recommended. To qualify for participation in the second-tier program, each county would be required to levy a specified minimum countywide tax effort based on county fiscal capacity. State equalization aid would be apportioned among participating counties in inverse relation to fiscal capacity per weighted classroom unit, then distributed within counties on a weighted classroom unit basis. Eight alternative second-tier distributions were simulated in Phase IV, each based on a constant level of state and local revenue while varying the measure of fiscal capacity employed in the distribution formula. Local revenue per weighted classroom unit was assumed to remain at the 1976-77 level in each school district, except that districts whose 1976-77 local effort fell below the required level were assumed to increase their effort to that level. The determination of state equalization aid distributions under the alternative local fiscal capacity measures involved calculation of

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96 (1) local fiscal capacity indexes, (2) local required effort distributions, (3) fiscal capacity guarantee levels, and (4) state equalization aid amounts. Local fiscal capacity was measured at the county level using a series of indexes based on common units of measure. The fiscal capacity indexes computed for each county were assigned to all school districts within the county. First, personal income per weighted classroom unit, personal income per capita, adjusted property valuation per unit, adjusted property valuation per capita, taxable retail sales per unit, and taxable retail sales per capita were computed for each county. Each of these capacity measures was then divided by its respective state mean, yielding a series of indexes for which 1.000 reprsented the state mean. The expression of the various fiscal capacity measures in common units facilitated further computations combining capacity indexes. Tax base accessibility indexes, expressed on per weighted classroom unit and per capita bases, were computed by summing 78% of each property valuation index and 22% of the corresponding taxable retail sales index. The respective weightings for property valuation and taxable retail sales were selected to reflect the relative contributions of these tax bases to total county revenue in 1975-76; personal income was excluded as North Carolina counties did not have access to personal income tax revenue. Tax base accessibility plus personal income indexes were constructed by summing 50% of each tax base accessibility index and 50% of the corresponding personal income index. The tax base accessibility plus personal income indexes were designed to give equal weight to tax base and personal income factors, respectively. Based on

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97 alternative value judgments greater weight could be given to either tax bases or personal income by varying the percentages assigned to these respective factors. Finally, indexes involving the modification of tax base accessibility with an income multiplier were constructed. Adjusted personal income indexes were computed by reducing the deviation between personal income per unit or per capita and the respective state mean by a factor of two. The tax base accessibility indexes for each county were then multiplied by the corresponding adjusted personal income indexes to yield the personal income-modified tax base accessibility indexes for each county. The formula used to compute the personal income-modified tax base accessibility indexes was: [(Personal Income Index + l)/2] x Tax Base Index, This procedure was selected to provide an income factor equivalent to the income adjustment incorporated in the Missouri state school finance program as described by Odden (1978a, pp. 466-467]. Substantial variability was observed in the range ratio of local fiscal capacity among North Carolina counties associated with the various measures. The range ratio in fiscal capacity was greatest for the personal income-modified tax base accessibility indexes; the respective ratios for the weighted classroom unit and population-based indexes were 7.501 and 7.543. The third and fourth largest range ratios. 6.443 and 5.650, were recorded for the tax base accessibility per capita and tax base accessibility per unit measures, respectively. The

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98 lowest range ratios, 3.121 and 1.928, were recorded for the personal income per pupil and personal income per capita measures, respectively. Finally, the range ratios for the tax base access plus personal income indexes, 3.581 and 3.278 for the per unit and per capita-based measures, respectively, fell between the range ratios associated with the tax base access and personal income indexes. Total required local effort was set at $150,000,000 for each of the eight simulations involving a second-tier equalization program. This amount was distributed among districts on the basis of equal effort in relation to fiscal capacity. Four alternative required local efforts were computed for each school district based on the four alternative resource availability measures: tax base accessibility, personal income, tax base accessibility plus personal income, and personal incomemodified tax base accessibility. Total district resource availability under each measure was determined by multiplying each of the four per weighted classroom unit fiscal capacity indexes by district total weighted classroom units. Total statewide resource availability under each measure was then determined by summing the district amounts, and required local effort was apportioned among districts based on district percentage of statewide resource availability. The equalization program recommended by the North Carolina Governor's Commission on Public School Finance is a fixed level program rather than a variable level program. State aid would be provided to equalize the required local effort up to a specified fiscal capacity guarantee; additional local levies above the required local effort would remain

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99 unequalized. Total state equalization aid was set at $60,000,000. A guaranteed fiscal capacity level was established for each simulation based on the allocation of dollars among districts, beginning with the poorest and moving to districts of greater wealth, until the $60,000,000 equalization fund was depleted. Guaranteed capacity levels for the tax base accessibility per unit, tax base accessibility per capita, personal income per unit, personal income per capita, tax base access plus personal income per unit, tax base access plus personal income per capita, personal income-modified tax base access per unit, and personal incomemodified tax base access per capita were 1.398, 1.401, 1.360, 1.370, 1.390, 1.395, 1.353, and 1.378, respectively. Given information concerning school district fiscal capacity, school district required local effort, and guaranteed fiscal capacity levels, the computation of state equalization aid was completed according to the following formulas: r ^ r*. *. x< 4. i n *. Guaranteed Fiscal Capacity , (a) State Matching Ratio = -. . . -. T — * — * — r— J1 District Fiscal Capacity (b) State Equalization Aid = State Matching Ratio x District Required Local Effort Under this program, districts whose fiscal capacity was greater than the state guarantee would receive no equalization aid, and no provision was made for recapture of funds generated by these districts in excess of the state guarantee. The state matching ratio for districts below the guarantee would increase as district fiscal capacity decreased. For example, a district whose fiscal capacity was 75% of the state guarantee would receive 33 cents from the state for a dollar of required

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100 local effort while a district whose wealth was 50% of the state guarantee would receive 50 cents from the state for the same effort. A hold-harmless provision was included in the recommended state school finance method to ensure that no school district would receive less state funds per weighted classroom unit from the recommended twotier program than it would have received from the existing basic state program in the year immediately preceding implementation. Reflecting this provision, simulated state equalization aid under each alternative local fiscal capacity measure was added to the state basic program aid for each school district, divided by the number of weighted classroom units, and compared to the 1976-77 per unit allocation under the existing basic state program. Districts receiving less state funds per unit under the recommended program than under the existing basic program were then allocated hold-harmless funds to make up the difference. Simulated total revenue per weighted classroom unit for each district under each alternative local fiscal capacity measure was then computed by summing the respective state basic program, equalization, hold-harmless, and local revenue amounts. Computation of School Finance Equity Statistics The final phase of the study involved the computation and analysis of a set of descriptive statistics measuring the consistency of the alternative revenue distributions computed in Phase IV with the resource equality, ex post fiscal neutrality, and ex ante fiscal neutrality standards of school finance equity. Since the population of North Carolina school districts rather than a sample was employed in the

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101 study, statistical significance levels were not relevant to the analysis and were therefore not reported. Evaluation of the alternative revenue distributions with respect to the resource equality standard was completed using (1) the 95th to 5th percentile range ratio in revenue per weighted classroom unit, (2) the relative mean deviation in revenue per weighted classroom unit, (3) the coefficient of variation in revenue per weighted classroom unit, and (4) the Gini coefficient based on variation in revenue per weighted classroom unit . The 95th to 5th percentile range ratio was defined as the revenue per weighted classroom unit at the 95th percentile weighted classroom unit divided by the revenue per weighted classroom unit at the 5 tli percentile unit. The relative mean deviation in revenue per weighted classroom unit was computed based on the following formula: N Z U. X X. N z u. X i=l where N is the number of school districts (145), X is the state mean revenue per weighted classroom unit, X. is the revenue per weighted classroom unit in district i, and Uis the number of weighted classroom units in district i. The closer the relative mean deviation in revenue per weighted classroom unit is to zero, the greater the degree of resource equality. The coefficient of variation in revenue per weighted classroom unit was computed by dividing the square root of the variance in revenue per classroom unit by the state mean revenue per weighted classroom unit.

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102 The formula used to compute the coefficient of variation based on the weighted classroom unit as the unit of analysis, was 1/2 N i=l U. (X X.) N I u. i-1 1 where N is the number of school districts, X is the state mean revenue per weighted classroom unit, X. is the revenue per weighted classroom unit in district i, and U. is the number of weighted classroom units in district i. The coefficient of variation, similar to other resource equality statistics, approaches zero as the distribution of revenue approaches perfect equality. Gini coefficients used in evaluating the alternative revenue distributions with respect to the resource equality standard were computed by sorting the 145 North Carolina school districts in ascending order based on revenue per weighted instructional unit, then applying the following formula: N I I A i=2 . , Y. X. Y. , i-l i l l-l where N is the number of school districts, X. is the cumulative proportion of state total weighted classroom units in the first i districts, and Y. is the cumulative proportion of state total revenue in the first i districts. The closer the Gini coefficient is to zero, the greater the degree of resource equality. The consistency of each alternative revenue distribution with the ex pos t fiscal neutrality standard was examined through the computation

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103 and evaluation of (1] Pearson product-moment correlations, (2) regression coefficients, and (3) Gini coefficients. Each of these statistics approaches zero as complete ex post fiscal neutrality is approached. The Pearson product-moment correlation is a measure of the direction and magnitude of the relation between two variables (Kerlinger § Pedhazur, 1973, pp. 11-12). The correlation coefficient may range in value from -1 through to +1. Values of -1, 0, and +1 indicate a perfect negative relation, no discernible relation, and a perfect positive relation between two variables, respectively. In the present study, the Pearson product-moment correlation was employed to determine the direction and strength of the relation between revenue per weighted classroom unit and two alternative measures of local fiscal capacity: tax accessibility per unit and personal income per unit. Three alternative regression approaches were employed in assessing the consistency of each simulated revenue distribution with the ex post fiscal neutrality standard. First, simple linear regression equations were computed by regressing simulated revenue per unit on (a) tax base access per unit and (b) personal income per unit. This procedure was used to determine the change in revenue per unit associated with changes in the selected local fiscal capacity measures assuming a constant linear relationship. A second series of regression equations was computed after expressing simulated revenue per unit, tax base access per unit, and personal income per unit in natural logarithm form. Loglinear regression coefficients computed using this approach indicated the elasticity of simulated revenue per unit witli respect to each of the selected local fiscal capacity measures, assuming constant elasticities at various local fiscal capacity levels. Finally, simulated

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104 revenue per unit was regressed on quadratic and cubic specifications of local fiscal capacity to examine the possibility of nonlinear relations. Gini coefficients for evaluating the alternative revenue distributions with respect to the ex post fiscal neutrality standard were computed using the same formula employed in conjunction with the resource equality standard, except that the 145 North Carolina school districts were placed in ascending order based on local fiscal capacity rather than revenue per weighted classroom unit, Two alternative capacity specifications were employed, tax base accessibility per unit and personal income per unit. The Gini coefficient, unlike the correlation and regression coefficients, is not based on an assumed linear relationship between variables. The 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation in local operating tax rate required to attain state mean revenue per weighted classroom unit and the Pearson product-moment correlation between local operating tax rate and revenue per weighted classroom unit were utilized in assessing the consistency of each alternative revenue distribution with the ex ante fiscal neutrality standard. Local operating tax rate was defined as the rate of tax in relation to the tax base accessibility measure of available county resources. Attainment of ex ante fiscal neutrality would imply a 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation of zero in local operating tax rate to attain state average revenue per weighted classroom unit, or alternatively, a

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105 correlation of 1.00 between local operating tax rate and revenue per unit. The latter measure assumes a desired linear relationship between local tax rate and revenue per unit of educational need at all levels of local tax effort while the former three measures apply the equal revenue for equal effort test at one selected revenue level.

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CHAPTER IV PRESENTATION AND ANALYSIS OF FINDINGS The focus of the present study was on analysis of the relationships between alternative local fiscal capacity measures and selected school finance equity standards within the state of North Carolina. The research was conducted in five phases as described in Chapter III. Alternative concepts of local fiscal capacity and school finance equity were identified and operationally defined, relevant data were collected, alternative revenue distributions among school districts based on alternative local fiscal capacity measures were simulated, and statistics describing the consistency of the simulated revenue distributions with selected school finance equity standards were computed. In Chapter IV the statistical findings of the research are presented and analyzed in three sections: (1) resource equality, (2) ex post fiscal neutrality, and (3) ex ante fiscal neutrality. Resource Equality The resource equality standard of school finance equity holds that all public school children within a state should have equal access to the economic resources necessary for the provision of educational programs suited to their individual needs. Four statistics measuring the dispersion in revenue per weighted classroom unit were employed in 10b

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107 assessing the consistency of the simulated revenue distributions with the resource equality standard: (1) the 95th to 5th percentile range ratio, (2) the relative mean deviation, (3) the coefficient of variation, and (4) the Gini coefficient. In Table 3 the 95th to 5th percentile range ratio data are presented. In 1976-77, revenue per weighted classroom unit in the school district at the 95th percentile level exceeded that in the school district at the 5th percentile level by 48.1%. Simulation of a $60 million equalization program based on the alternative fiscal capacity measures decreased that statistic by 7.63% to 9.79%; however, none of the simulated alternatives reduced the predicted 95th to 5th percentile range ratio to the 25% level established in the federal P.L. 81-874 expenditure disparity test. The tax base access per unit measure of local fiscal capacity generated the greatest predicted degree of resource equality as measured by this statistic, reducing the 95th to 5th percentile range ratio to 1.336. All of the fiscal capacity measures based on population as a unit of need were less effective in reducing this ratio than any of the weighted classroom unit-based measures. The consistency of each alternative revenue distribution with the resource equality standard as measured by the relative mean deviation is shown in Table 4. In 1976-77, the sum of revenue per weighted classroom unit deviations about the mean amounted to 9.41% of total statewide revenue. The simulated use of each of the alternative local fiscal capacity measures in a $60 million equalization program reduced this percentage substantially. The personal income-modified tax base access per unit fiscal capacity measure was predicted to be most

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110 effective in this regard, decreasing the relative mean deviation from .0941 to .0660, a 29.86% reduction. The tax base access per unit measure, lowering this statistic to .0673, was the second most effective alternative, while all of the population-based measures were less effective than any of the unit-based measures. The relative mean deviation showed greater sensitivity to the changes in the distribution of revenue brought about by the simulated equalization alternatives than the 95th to 5th percentile range ratio; the former decreased by 20.62% to 29.86% while the latter decreased by 7.63% to 9.79%. Coefficient of variation statistics for each alternative revenue distribution are presented in Table 5. The 1976-77 actual coefficient of variation in revenue per weighted classroom unit was .1089; the simulated alternative equalization programs lowered this statistic by 14.05% to 23.23% to a level between .0836 and .09 36. The personal income-modified tax base access per unit measure of local fiscal capacity was most effective in reducing the coefficient of variation while the personal income per capita index was least effective. Each of the unitbased fiscal capacity measures was more effective in reducing the coefficient of variation than any of the population-based measures. Gini coefficients measuring the consistency of each alternative revenue distribution with the resource equality standard are reported in Table 6. A Gini coefficient of .0635 was computed based on the 1976-77 actual revenue distribution. Implementation of alternative $60 million equalization programs based on the alternative local fiscal capacity measures was estimated to decrease the Gini coefficient

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113 by 20.00% to 28.35%, to between .0455 and .0508. The ranking of the alternative local fiscal capacity measures based on the Gini coefficient is identical to that based on both the relative mean deviation and the coefficient of variation: the personal income-modified tax base access per unit measure was predicted to be the most effective in reducing the Gini coefficient, followed in order by tax base access per unit, tax base access plus personal income per unit, personal income per unit, personal income-modified tax base access per capita, tax base access per capita, tax base access plus personal income per capita, and personal income per capita. In sum, implementation of a fiscal equalization program based on any of the selected local fiscal capacity measures was shown to reduce the extent of resource disparity within the state of North Carolina as indicated by each of the four statistical approaches reported in this section. The fiscal capacity measures based on weighted classroom instructional units were consistently more effective in reducing the simulated extent of resource disparity than those based on population. The personal income-modified tax base access per unit and the tax base access per unit fiscal capacity measures were identified as most effective in facilitating movement toward resource equality while the personal income per capita and personal income plus tax base access per capita measures were identified as the least effective. Ex Post Fiscal Neutrality The ex post fiscal neutrality standard of school finance equity states that variations in revenue per educational need unit should not

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114 be related to variations in local fiscal capacity. The consistency of the simulated revenue distributions with the ex post fiscal neutrality standard was examined using three statistical methods for analysis of the relationships between revenue per weighted classroom unit and local fiscal capacity per unit: (1) Pearson product-moment correlations, (2) regression coefficients, and (3] Gini coefficients. Pearson product-moment correlation coefficients, shown in Table 7, were computed to determine the direction and magnitude of the relation between revenue per weighted classroom unit under each alternative revenue distribution and two measures of local fiscal capacity: (1) tax base access per weighted classroom unit and (2) personal income per weighted classroom unit. In each case the correlations were found to be positive, ranging from .293 to .610. The 1976-77 actual revenue distribution among North Carolina school districts correlated .529 and .576 with tax base access per unit and personal income per unit, respectively. Implementation of a $60 million equalization program based on any of the alternative local fiscal capacity measures was predicted to reduce the magnitude of the relation between revenue per unit and tax base access per unit. Utilization of the personal income-modified tax base access per unit measure was most effective in this regard, lowering the correlation between revenue per unit and tax base access per unit to .293. The tax base access per unit measure was the second most effective, reducing the correlation to .336. Utilization of personal income per capita, the least effective local fiscal capacity measure, reduced the simulated revenue per unit/tax base access per unit correlation to .505.

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116 The magnitude of the relation between revenue per weighted classroom unit and personal income per weighted classroom unit was decreased by simulated $60 million equalization programs based on each of the weighted classroom unit-based local fiscal capacity measures; however, equivalent programs based on the population based-measures of local fiscal capacity increased the estimated correlation between revenue per unit and personal income per unit. The local fiscal capacity measure most effective in reducing the magnitude of the estimated relation between revenue per unit and personal income per unit, personal income-modified tax base access per unit, would have reduced the correlation between these variables to .370. Utilization of personal income per unit, second most effective in reducing the magnitude of the relation between these two variables, decreased the predicted correlation to .405. Use of the personal income plus tax base access per capita measure, on the other hand, increased the predicted correlation to .610. Three alternative regression approaches were employed in analyzing the relationships between each of the simulated revenue distributions and local fiscal capacity. First, simple linear regression coefficients, shown in Table 8, were computed by regressing simulated revenue per weighted classroom unit on (1) tax base access per unit and (2) personal income per unit. Prior to computing the regression coefficients each fiscal capacity index was multiplied by 1000, yielding a series of indexes for which 1000 represented the state mean value. Regression coefficients computed for the tax base access per unit index ranged from a low of 1.117 for the simulated revenue distribution based on the

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118 personal income-modified tax base per unit measure of local fiscal capacity to a high of 2.164 for the distribution based on the personal income per capita fiscal capacity measure. The regression coefficients indicate the slope of each regression equation. The range in regression coefficients computed using the personal income per unit index was from 2.180 for the simulated revenue distribution based on the personal income-modified tax base access per unit index to 4.018 for that based on the personal income modified-tax base access per capita index. The range in the tax base access per unit index was from 454 (45.4% of the state mean) to 2565 (256.5% of the state mean); that for the personal income per unit index was from 513 to 1601. Multiplying the difference between these extreme values by the relevant regression coefficients, the range in predicted revenue per weighted classroom unit for selected revenue distributions was obtained. The range in predicted revenue per unit for the 1976-77 actual distribution was $5463 (2111 x $2,588) when tax base access per unit was used as the independent variable; that range was reduced to $2360 for the simulated revenue distribution based on personal income-modified tax base access per unit. When personal income per unit was used as the independent variable the predicted range in revenue per unit for the actual 1976-77 revenue distribution was $4745 (1088 x $4,361); that range was reduced to $2572 for the simulated revenue distribution based on personal income-modified tax base access per unit. While the regression coefficients based on the tax base access per unit measure of local fiscal capacity were smaller than those based on the personal income per unit measure, the range in predicted revenue per unit was similar under the former fiscal capacity measure because of its greater variability.

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119 A second series of regression equations was computed after expressing each independent and dependent variable in natural logarithm form. The regression coefficients derived from this equation form, shown in Table 9, indicated the elasticity of revenue per weighted classroom unit with respect to (1] tax base access per unit and (2) personal income per unit, assuming constant elasticity across the range of local fiscal capacity levels. In 1976-77, a 1% change in tax base access per unit was associated with a .1389% change in revenue per unit, while a 1% change in personal income per unit was associated with a .1993% change in revenue per unit. Among the simulated alternative revenue distributions, that based on personal income-modified tax base access per unit was most effective in reducing the predicted elasticity of revenue per unit with respect to both tax base access per unit and personal income per unit, lowering the respective elasticities to .0536 and .0844. Use of tax base access per unit was the second most effective approach for reducing the predicted elasticity of revenue per unit with respect to tax base access per unit, while personal income per unit was the second most effective approach for reducing the predicted elasticity of revenue per unit with respect to personal income per unit. All of the weighted classroom unit-based local fiscal capacity measures were more effective in reducing simulated revenue per unit elasticities with respect to both tax base access per unit and personal income per unit than any of the population-based local fiscal capacity measures. The revenue per unit elasticities with respect to personal income per unit were consistently greater than those with respect to tax base

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121 access per unit; however, as noted previously, there was greater variability among North Carolina school districts in tax base access per unit than in personal income per unit. The highest North Carolina tax base per unit index was 565% of the lowest, while the highest North Carolina personal income per unit index was 312% of the lowest. Multiplying these percentages by the 1976-77 actual elasticities, a 78.5% difference in revenue per unit from high to low would be expected based on tax base access per unit while a 62.2% difference would be expected based on personal income per unit. The simulated equalization program utilizing the personal income -modified tax base access per unit index, most effective in reducing these elasticities, lowered the expected percentage variation from high to low based on tax base access per unit and personal income per unit to 50.5% and 26.3%, respectively. The first two series of regression equations were computed using a single independent variable, assuming a constant linear relation or a constant elasticity between revenue per weighted classroom unit and two selected local fiscal capacity indexes. In the third series of regression equations, quadratic and cubic specifications of the two selected local fiscal capacity indexes were employed to examine the possibility of nonlinear relationships. In each case, the addition of a squared term increased prediction accuracy as indicated by the standard error of the estimate while the addition of a cubed term failed to increase prediction accuracy. The multiple regression results reported, there2 fore, are of the form Y = A + BX + CX , where Y is the predicted revenue per unit, X is the local fiscal capacity index, and A, B, and C are constants. Regression equations and figures depicting the

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122 relationship between revenue per unit and (1) tax base access per unit and (2) personal income per unit under the 1976-77 actual distribution and each simulated alternative distribution are reported in the Appendix. The slope of each multiple regression equation at the mean value of the fiscal capacity index employed in the equation is presented in Table 10. The slope of the equatioii regressing 1976-77 actual revenue per unit on tax base access per unit and tax base access per unit squared was 5.183 at the mean value for tax base access per unit. The slope of the equation regressing revenue per unit on personal income per unit and its square was 4.034 at the mean personal income per unit value. The personal income-modified tax base access per unit index was most effective in reducing these slopes; slopes computed for equations regressing the simulated revenue distribution based on this index on tax base access per unit and its square and personal income and its square were 1.286 and 1.611, respectively. The rankings of the alternative revenue distributions were generally consistent with those reported in Table 8 for the simple linear regression equations; however, the multiple regression slopes based on tax base access per unit and the square of this index were uniformly higher at the mean than corresponding simple linear regression slopes while the reverse was true for the multiple regression slopes based on personal income per unit and its square. Examination of figures depicting the multiple regression equations (see Appendix) indicated that the slope of the equations based on tax base access per unit consistently decreased as the value of tax base access per unit increased, while the slope of the equations

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124 based on personal income per unit increased as the value of personal income per unit increased. The third general statistical approach used to assess the consistency of the simulated revenue distributions with the ex post fiscal neutrality standard was the Gini coefficient. Gini coefficients, shown in Table 11, were computed for the 1976-77 actual revenue distribution and each simulated distribution after ordering the school districts of North Carolina based on (1) tax base access per unit and (2) personal income per unit. Gini coefficients computed for the 1976-77 actual revenue distribution after ordering districts based on tax base access per unit and personal income per unit were .0448 and .0442, respectively. The lowest Gini coefficients were computed for the simulated revenue distribution based on personal income-modified tax base access per unit; the values were .0241 and .0244 after ordering the districts on tax base access per unit and personal income per unit, respectively. The simulated revenue distribution based on personal income per unit reduced the 1976-77 actual coefficients by the least amount, to ,0351 and .0355 after ordering the districts on tax base access per unit and personal income per unit, respectively. Each of the fiscal capacityweighted Gini coefficients shown in Table 11 was lower than the corresponding Gini coefficient shown in Table 6, indicating that only a portion of the revenue distribution inequality was associated with variations in local fiscal capacity. With the exception of Pearson product-moment correlations between revenue per unit and personal income per unit computed on simulated revenue distributions using population-based local fiscal capacity

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126 measures, each of the statistical analyses reported in this section indicated that the magnitude of the relation between revenue per unit and local fiscal capacity was lower in each of the simulated revenue distributions than in the 1976-77 actual revenue distribution in North Carolina. The simulated revenue distribution based on the personal income-modified tax base access per unit measure of local fiscal capacity was the most consistent with the ex post fiscal neutrality standard as measured by each of the statistical approaches employed. Tax base access per unit was consistently second most effective in reducing the relation between revenue per unit and tax base access per unit, while personal income per unit was generally identified as second most effective in reducing the relation between revenue per unit and personal income per unit. Each of the population-based measures of local fiscal capacity was less effective in reducing the relation between revenue per unit and local fiscal capacity than any of the weighted classroom unit-based measures. Ex Ante Fiscal Neutrality The ex ante fiscal neutrality standard of school finance equity holds that equal local tax effort should result in equal revenue per educational need unit. The 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation in local operating tax rate required to attain state mean revenue per weighted classroom unit and the Pearson product-moment correlation between local operating tax rate and revenue per weighted classroom unit were employed to assess the consistency of school finance methods utilizing the alternative

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127 local fiscal capacity measures with the ex ante fiscal neutrality standard. The disparity in local operating tax rate required to attain state mean revenue per weighted classroom unit under each alternative school finance method as measured by the 95th to 5th percentile range ratio is presented in Table 12. Under the actual 1976-77 North Carolina state school finance method, there existed a 3.943 to 1.000 range between the 95th and 5th percentile districts in local operating tax rate required to attain state mean revenue per unit. Each of the simulated equalization programs was predicted to decrease this range to between 3.010 and 2.164 to 1.000. The personal income modified-tax base access per unit measure of local fiscal capacity was the most effective in this regard, followed by the tax base access per unit index, while the personal income per capita and personal income-modified tax base access per capita measures were the least and second least effective, respectively, in reducing the 95th to 5th percentile range ratio. The relative mean deviation in local operating tax rate required to attain state mean revenue per weighted classroom unit under each alternative school finance method is reported in Table 13. The 1976-77 actual relative mean deviation was .2953. Implementation of a $60 million equalization program based on the selected alternative local fiscal capacity measures was estimated to reduce this figure to between .2478 and .1562. The personal income modified-tax base access per unit and tax base access per unit measures of local fiscal capacity were the most and second most effective, respectively, in reducing the relative

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130 mean deviation. The personal income per capita and tax base access plus personal income per capita measures were the least and second least effective, respectively, in reducing this statistic. Each of the per capita measures of local fiscal capacity was less effective in reducing the relative mean deviation than any of the per weighted classroom unit measures. The rankings of the alternative school finance methods based on the coefficient of variation statistic, shown in Table 14, were identical to those based on the relative mean deviation statistic. The coefficient of variation in local operating tax rate required to attain state mean revenue per unit was .5845 in 1976-77 under the existing North Carolina state school finance method. The simulated state school finance method based on personal income-modified tax base access per unit was predicted to reduce the coefficient of variation to .2050 while a smaller reduction to .3135 was predicted for the simulated method based on personal income per capita. The percentage reductions generated in the 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation through the simulated equalization programs were of approximately the same magnitude, varying from about 20% for the least effective approaches to about 45% for the most effective approaches. The Pearson product-moment correlation coefficient was the fourth statistic employed in analyzing the consistency of school finance methods utilizing the selected alternative local fiscal capacity measures with the ex ante fiscal neutrality standard (see Table 15) . Unlike the first three measures used to analyze this standard, the correlation coefficient

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133 is based on more than one point in the revenue distribution and assumes a linear relation between revenue per unit and local operating tax rate. The actual 1976-77 Pearson product-moment correlation between local operating tax rate and revenue per unit was .463, indicating that approximately 21.4% of the variance in revenue per unit could be explained by variations in local tax rate. The school finance equalization program based on the personal income-modified tax base access per unit measure of local fiscal capacity was most effective in increasing the simulated relation between local operating tax rate and revenue per unit, increasing the Pearson product-moment correlation to .776. The personal income per capita approach was least successful in this regard, increasing the correlation to .580. Each of the populationbased equalization programs was less effective in increasing the simulated correlation between local operating tax rate and revenue per unit than any of the weighted classroom unit-based programs. In sum, the equalization programs based on personal income-modified tax base access per unit and tax base access per unit were consistently first and second most effective, respectively, in moving the North Carolina public school finance program toward the goal of ex ante fiscal neutrality. The four equalization programs based on per capita measures of local fiscal capacity ranked below the four "equalization programs based on per weighted classroom unit measures of local fiscal capacity on each of the statistics measuring consistency with the ex ante fiscal neutrality standard. The 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation in local operating tax

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134 rate to attain the state mean revenue per unit were substantially larger than comparable statistics measuring the degree of resource equality, indicating that the existing North Carolina state public school finance method may tend to create greater disparities from taxpayer equity standards than from pupil equity standards.

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CHAPTER V SUMMARY, IMPLICATIONS, AND RECOMMENDATIONS Summary Since the introduction of the foundation program method of state school financing in the 1920s, most states have adopted and maintained public school finance systems based on the concept of fiscal equalization. Whether implemented through a foundation program, power equalizing system, or related method, the fiscal equalization concept provides for apportionment of state dollars among school districts in direct relation to educational need and in inverse relation to local fiscal capacity. Property valuation per pupil has traditionally been employed as the standard measure of local fiscal capacity in state school finance systems; however, during the 1960s and 1970s the use of this measure was increasingly criticized. By 1978, several states had adopted alternative local fiscal capacity measures, frequently including personal income or retail sales as a measure of economic capacity to support public education and/or population as a measure of need for public services. As alternative local fiscal capacity measures are considered for use in state school finance programs, systematic evaluation of the fiscal equity effects of these measures is needed to facilitate the development of sound public policy. While considerable discussion may be found in the school finance literature regarding the advantages and 135

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136 disadvantages of alternative local fiscal capacity measures, little empirical research has been directed toward assessing the implications of these measures with respect to fiscal equity. The problem of this study, therefore, was to analyze the relationships between alternative local fiscal capacity measures and selected school finance equity standards. More specifically, the problem involved (1) identification of alternative local fiscal capacity concepts, school finance equity standards, and approaches for measuring local fiscal capacity and evaluating school finance equity and (2) analysis of the relationships between operational measures reflecting alternative local fiscal capacity measurement approaches and selected school finance equity standards within the state of North Carolina. The research for the study was conducted in five phases. In Phase I, the concepts and measurement approaches providing the foundation for the study were identified and selected through a review of the public school finance literature. The literature review focused on identification and analysis of school finance equity standards, quantitative techniques for evaluating school finance equity, and alternative approaches for measuring local fiscal capacity to support public education. Three fiscal equity standards were selected as most representative of the concepts of fiscal equity prevalent in. the school finance literature of the 1970s: resource equality, ex post fiscal neutrality, and ex ante fiscal neutrality. Resource equality is a pupil equity standard providing that all public school children should have equal access to the economic resources necessary for the provision of

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137 educational programs suited to their individual needs. Ex post fiscal neutrality, an alternative pupil equity 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, a taxpayer equity standard, provides that equal local tax effort should result in equal revenue per educational need unit. The second component of Phase I involved identification and selection of statistical procedures for evaluating each selected fiscal equity standard. Criteria employed in the selection of statistical procedures were (1) demonstrated feasibility in previous school finance equity analyses and (2) expression in standardized format, thereby facilitating comparability with related research. The 95th to 5th percentile range ratio, relative mean deviation, and coefficient of variation in revenue per educational need unit and the univariate Gini coefficient were selected for the measurement of resource equality. Statistics selected for the evaluation of ex post fiscal neutrality were (1) Pearson product-moment correlations between revenue per educational need unit and (a) tax base accessibility per unit and (b) personal income per unit; (2) regression slopes based on the regression of revenue per educational need unit on simple linear, quadratic, and cubic specifications of (a) tax base accessibility per unit and (b) personal income per unit; (3) elasticity coefficients based on the regression of the natural logarithm of revenue per unit on the natural logarithms of (a) tax base accessibility per unit and (b) personal income per unit;

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138 and (4) bivariate Gini coefficients based on the ordering of school districts on (a) tax base accessibility per unit and (b) personal income per unit. The 95th to 5th percentile 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 evaluating ex ante fiscal neutrality. In the third component of Phase I, alternative local fiscal capacity measures were selected based on analysis of the measures employed in the 48 states using the fiscal equalization approach to public school financing and the major alternatives discussed in the school finance literature. Eight approaches were selected for analysis by combining tax base accessibility, personal income, 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. The procedures for evaluating fiscal equity and the approaches for measuring local fiscal capacity identified and selected in Phase I were operationally defined in Phase II through analysis of the North Carolina public school finance context. Educational need unit was defined for this study as the weighted classroom unit measure of educational need incorporated in the state school finance method recommended by the North Carolina Governor's Commission on Public School Finance (1978, p. J).

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139 Tax base accessibility was defined as 7S ? o of an adjusted propertyvaluation index plus 22% of a taxable retail sales index, reflecting the relative contribution of property and sales taxes to North Carolina county revenue. Local fiscal capacity was measured at the county level, reflecting the fiscal dependence of school districts on county governments and the predominant role of county level revenue in making up total current operating revenue for the public schools. Phase III involved the collection of data concerning (1) alternative local fiscal capacity measures and (2) the existing and recommended North Carolina public school finance methods. Primary data sources included published reports of the North Carolina Department of Revenue, the North Carolina Department of Public Education, and the United States Census Bureau, work papers of the North Carolina Governor's Commission on Public School Finance, and computer tapes of the North Carolina Department of Public Education and the Institute for Educational Finance, University of Florida. Alternative 1976-77 revenue distributions among school districts were simulated in Phase IV based on systematic variation of the measurement of local fiscal capacity holding other aspects of the state school finance method constant. Nine simulations were completed, one based on the existing 1976-77 state school finance method and eight based on the use of alternative local fiscal capacity measures in the finance method recommended by the Governor's Commission on Public School Finance. The final phase of the study involved computation and analysis of the descriptive statistics selected for evaluating the consistency of

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140 the simulated revenue distributions with the selected fiscal equity standards, resource equality, ex post fiscal neutrality, and ex ant e fiscal neutrality. The major statistical findings of the research were : (1) The selection of a measure of local fiscal capacity, holding other state school finance system variables constant, may substantially affect the attainment of fiscal equity for public school pupils and taxpayers within a state. (2) Implementation of a $60 million fiscal equalization program in North Carolina based on any of the eight simulated alternatives would fail to provide for full resource equality, ex po st fiscal neutrality, or ex ante fiscal neutrality. (3) The simulated revenue distribution based on the personal income-modified tax base accessibility per weighted classroom unit measure of local fiscal capacity was generally more consistent with the selected fiscal equity standards than the distributions based on other selected local fiscal capacity measures . (4) The simulated revenue distributions based on population as a measure of need were uniformly less consistent with the selected school finance equity standards than any of the distributions based on weighted classroom units as a measure of need.

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141 (5) The relative mean deviation, coefficient of variation, and Gini coefficient procedures utilized to evaluate resource equality produced identical rankings of the alternative revenue distributions while the 95th to 5th percentile range ratio resulted in a somewhat different ranking. (6) Each evaluation of ex post fiscal neutrality generated identical rankings of the alternative revenue distributions with respect to the relationship between revenue per unit and tax base access per unit; however, the rankings with respect to the relationship between revenue per unit and personal income per unit were identical only when evaluated by the Pearson product-moment correlation, simple linear regression, and log-linear regression. (7) The relative mean deviation, coefficient of variation, and Pearson product-moment correlation methods of evaluating ex ante fiscal neutrality ranked the alternative revenue distributions in the same order while the ranking based on the 95th to 5th percentile range ratio differed slightly. I mplic ation s The need for systematic evaluation of alternative methods of public school finance has been widely recognized in the school finance literature since the work of Cubberley at the beginning of the twentieth

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142 century. Principal criteria employed in evaluating state school finance systems have included adequacy of fiscal support, uniformity in the provision of educational services, fiscal equity for public school pupils and taxpayers, efficiency in the use of scarce resources, and simplicity and objectivity in fiscal administration. During the 1960s and 1970s, fiscal equity provided a focal point for school finance reform efforts as existing state public school finance systems were increasingly challenged in state legislatures and the courts. Fiscal equity in school finance within a state is dependent on the characteristics of the state public school finance system and the context within which the system is established. State public school finance systems are comprised of program, distribution and revenue decisions. Program decisions involve determination of the instructional programs and support services to the funded, cost differentials to be applied to various programs, and units to be employed for the measurement of educational need. The levels of state and local funding and the methods used to distribute state dollars among local school districts are established through distribution decisions. Revenue decisions involve determination of the major tax bases and rates to be used in providing funds for public school financing. Each of the program, distribution, and revenue decisions incorporated in a public school finance system may affect the degree to which fiscal equity for public school pupils and taxpayers is attained within a state. Alexander and Jordan (1976, p. 537) have identified local fiscal capacity measurement, equalization of effort, recognition

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143 of variations in children's educational needs, and recognition of variations in the cost of delivering educational services as particularly essential decisions in facilitating the attainment of school finance equity. In the present study, the impact of local fiscal capacity measurement on school finance equity was examined holding other state school finance program decisions constant. The research demonstrated that alternative local fiscal capacity measures may differ substantially in their effect on school finance equity within a state. Simulated revenue distributions based on local fiscal capacity measures incorporating the weighted classroom unit were uniformly more consistent with the resource equality, ex post fiscal neutrality, and ex ante fiscal neutrality standards than distributions based on local fiscal capacity measures using total population. This finding implies that the use of measurement units relating directly to the task being financed are more efficient in distributing funds to the areas of greatest need, thereby facilitating greater fiscal equity for pupils and taxpayers . Among the simulated revenue distributions based on local fiscal capacity measures employing the weighted classroom unit, differences in consistency with the resource equality and ex ante fiscal neutralitystandards reflected the degree of variability in local fiscal capacity associated with the respective measures. The personal income-modified tax base accessibility measure was generally most consistent with these fiscal equity standards, followed in sequence by the tax base accessibility, personal income plus tax base accessibility, and personal income

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144 factors; range ratios in local fiscal capacity for these measures were 7.301, 5.650, 5.581, and 3.121, respectively. Given the moderately high intercorrelation among these local fiscal capacity measures in North Carolina, the various school districts were ranked similarly by the alternative local fiscal capacity measures; measures identifying wide disparities in fiscal capacity among districts tended to distribute a larger proportion of total state aid to the poorest districts, thereby facilitating greater fiscal equity. The methodology developed in this study for analysis of the relationships between alternative local fiscal capacity measures and selected school finance equity standards may be applied within any state; however, adaptations must be made to accommodate the specific state school finance context. For example, the definition of tax base accessibility is a function of the state tax structure, while the definition of educational need unit depends upon the unit employed for the measurement of educational need in the state school finance program. The research for this study was restricted to a limited subset of all feasible approaches for measuring local fiscal capacity and all appropriate quantitative procedures for evaluating fiscal equity. The methodology developed in this study may be readily expanded to incorporate additional variables. The substantive findings resulting from the application of this methodology are specific to the time period, state, and public school finance method employed in the research. The impact of alternative local fiscal capacity measures on school finance equity is indirect rather than direct; it is generated through the operation of the whole

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145 public school finance system within a specific state context. State public school finance programs are complex systems comprising a variety of program, distribution, and revenue decisions which operate interactively within a state school finance context to determine the extent to which fiscal equity for public school pupils and taxpayers is attained. Conclusions concerning the fiscal equity effects of alternative local fiscal capacity measures, therefore, are not broadly generalizable. Finally, the findings of this study do not imply that the goal of fiscal equity may best be attained through the manipulation of local fiscal capacity measurement or that the resource equality, ex post fiscal neutrality, and ex ante fiscal neutrality standards provide a complete model for evaluating state school finance systems. While appropriate determination of local fiscal capacity serves to indirectly facilitate the attainment of fiscal equity in school finance, state school finance program elements of more direct significance with respect to fiscal equity include accurate measurement of educational needs, appropriate limitation of variability in local tax effort for public education, and comprehensiveness in state financing of instruction programs and support services. In addressing the educational needs of public school children, a state school finance program must provide for adequacy of funding as well as distributional equity. Beyond the goal of ex a nte fiscal neutrality, taxpayer equity is dependent upon the characteristics of the state-local tax structure and the procedures used for tax administration. Additionally, efficiency in the use of

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146 scarce resources and simplicity and objectivity in fiscal administration should be characteristic of the state public school finance system. In sum, adequate determination of local fiscal capacity is an essential element of an equitable state school finance system, but is only one of several such elements. Recommendations The review of related literature, findings, and conclusions of this study suggest that additional research is needed to further delineate the nature of the relationships between alternative local fiscal capacity measures and school finance equity standards: (1) The North Carolina Department of Revenue should initiate annual sales ratio studies to determine the true market value of property for each school district and county within the state. Such studies would improve the data base for future research concerning the relationships between local fiscal capacity and school finance equity in North Carolina. (2) The analysis described in this report should be replicated by North Carolina Department of Public Education researchers at different levels of required local effort and state equalization funding to determine whether the substantive conclusions of the research will hold for the range of alternatives to be considered by the state legislature. (3) If structural changes in the school finance method recommended by the North Carolina Governor's Commission

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147 are considered by the state legislature, North Carolina Department of Public Education researchers should replicate the analysis reported in this study to determine the fiscal equity effects of alternative local fiscal capacity measures under the various structural characteristics to be considered by the state legislature. (4) The methodology developed in this study should be adapted and applied in other states to determine the relationships between alternative local fiscal capacity measures and selected school finance equity standards under different school finance methods and state contexts. (5} Additional measures of local fiscal capacity and school finance equity should be incorporated in future research to determine the relationships between the selected variables included in this research and other appropriate measures of local fiscal capacity and school finance equity. (6) Studies completed in North Carolina and other states should be replicated periodically to determine changes in the relationships between alternative local fiscal capacity measures and selected school finance equity standards within and among states over time. Such studies should be based on current data files and should reflect changes in the state school finance method, tax structure, and related contextual factors.

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APPENDIX

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REFERENCES Advisory Commission on Intergovernmental Relations. Measures of state and local fiscal capacity and tax effort . Washington, D.C.: U.S. Government Printing Office, 1962. Advisory Commission on Intergovernmental Relations. Measuri ng the fiscal capacity of s tate and local areas . Washington, D.C.: U.S. Government Printing Office, 1971. Alexander, K. Classification of state school funds. In R.L. Johns, K. Alexander, f, K.F. Jordan (Eds.), Financing education: Fisca l and legal alternatives . Columbus, Oh.: Merrill, 1972. Alexander, K. , 5 Jordan, K.F. Equitable state school financing. In IC. Alexander & K.F. Jordan (Eds.), Edu cational need in th e public econom y. Gainesville, Fl.: University Presses of Florida, 1976. Alexander, K., § Kay, H. The nature of school district fiscal effort in Kentucky. In Fin ancing the public schools of K entucky . Gainesville, Fl.: National Education Finance Project, 1975. Augenblick, J. School finance at a thir d glance. Denver, Co.: Education Commission of the States, 1978. Barro, S.M. Alternative post-Serrano systems and their expenditure implications. In J. Pincus (Ed.), Schoo l fi nance in transiti on: The courts and educational reform . Cambridge, Ma.: Ballinger, 1974. Benson, C.S. The economics of public education. Boston: Houghton Mifflin, T96T. Benson, C.S. The c heerful prospect: A stateme n t on the future of public education. Boston: Houghton Mifflin, 1965. Benson, C.S. Final report to the Senate Select Committee on School District Finance (Vol. 1) . Sacramento, Ca.: California Senate, 1972. Benson, C.S. Accomplishing fiscal neutrality. In School finance in transition: Pro ceedin gs of the 16th Nation al Confer e nce on School Finance. Gainesville, Fl.: National Educational Finance Project, 1975. 167

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108 Benson, C.S. Education finance in the com ing decade. Bloomington, In.: Phi Delta Kappa, 1975. Benson, C.S. The economics of public education (3rd ed.). Boston: Houghton Mifflin, 1978. Berne, R. Equity and public education: Concep tual issues of measu rement (Working Paper No. 4). New York: New York University, 1977. Berne, R., § Stiefel, L. A methodological assessment of educat ion equality and wealth neutrality measures . Denver, Co.: Education Commission of the States, 1978. Briley, W.P. Variation between school district revenue and financial ability. In R.L. Johns, K. Alexander, 5 D.JI. Stollar (Eds.), Status an d impact of ed ucational finance programs. Gainesville, Fl.: National Educational Finance Project, 1971. Brown v. Board of Education of Topeka , 374 U.S. 483 (1954). Brown, L.L. Ill, Ginsburg, A.L., Killalea, J.N., Rosthal, R.A., 5 Tron, E.O. Sc hool fina nce reform in the seventies: Achievements and failur es. Washington, D.C.: U.S. Department of Health, Education, and Welfare, 1977. Buchanon, J.M. The public finances (3rd ed . ) . Homewood, II.: Irwin, 1970. Burke, A.J. Financing the public schools in the U.S. (Rev. ed.). New York: Harper § Brothers, 1957. Burrap, P.E. Financing education in a climate of change. Boston: Allyn § Bacon, 19 74. Callahan, J.J., Wilken, W.H., £j Sillerman, M.T. Urban schools and school finance reform: Promise and reali ty. Washington, D.C.: National Urban Coalition, 1975. Clune, W.H., III. Wealth discrimination in school finance. Northwestern University Law Review , 1973, 68, 681-682. Cohn, E, Econo mics of state aid to education . Lexington, Ma.: D. C. I lea th , 19 74 . Coleman, J. The concept of equality of educational opportunity. Harvard Educational Review , 1968, 58, 7-22. Committee on Tax Education and School Finance. Guidelines to the de velop ment of state school finance programs. Washington, D.C.: National Education Association, 1949.

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169 Conant, J.B. Slums and suburb s. New York: McGraw-Hill, 1961. Coons, J.E., Clime, W.H. Ill, 5 Sugarman, S.D. Private wealth and public education. Cambridge, Ma.: Harvard University Press, 1970. Cornell, F.G. A measure of taxpaying ability of local school adminis tr ative units . New York: Teachers College, Columbia University, l~956l Council of State Governments, The forty-eight state school systems . Chicago: Author, 1949. Cubberley, E.P. School funds and their apportionment . New York: Teachers College, Columbia University, 1906. Due, J. Alternative state and local tax sources for education. In K. Alexander f, K.F. Jordan (Eds.), E ducational need in the public economy. Gainesville, Fl.: University Presses of Florida, 1976. Eckstein, 0. Public finance (2nd ed . ) . Englewood Cliffs, N.J.: Prentice-Hall, 1967. Farner, F. , f, Edmondson, J. Relationship of principle tax bases for pub lic school support in the counties of the eleven western states . Eugene, Or. : Bureau of Educational Research and Service, University of Oregon, 1969. Federal Register 42, March 22, 1977, pp. 15540-15550. Federal Register 42, December 30, 1977, pp. 65524-65527. Feldstein, M. Wealth neutrality and local choice in public education. American Economic Review, 1975, 65, 75-89. Friedman, L.S. The ambiguity of Serrano: Two concepts of wealth neutrality. Hastings Constitutional Law Quarterly , 1977, £, 487-505. Friedman, L.S., & Wiseman, M. Understanding the equity consequences of school-finance reform. Harvard Eduational Review , 1978, 4_8_, 193-226. Garms, W.I., Guthrie, J.W., (', Pierce, L.C. Schoo l finance: The economics and pol itics o f public education . Englewood Cliffs, TT7J7: Prentice-Hall, 1978. Geske, T.G., u Rossmiller, R.A. The politics of school finance reform in Wisconsin. Journal of Education Finance, 1977, 2,513-532.

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170 Grubb, 17. N., § Michelson, S. States and schools . Lexington, Ma.: D. C. Heath, 1974. Harris, R. Act 59 and the prospects for reforming school finance in Pennsylvania. Journal of Education Finance , 1978, 3, 487-501. Harrison, F.W., $ McLoone, E.P. Profiles in school support : A decennial overview. Washington, D.C.: U.S. Government Printing Office, 1965. Herber, B.P. Modern public school f inance: Th e study of pub lic sector economics. Homewood, II.: Irwin, 1971. Hickrod, G.A., § Hubbard, B.C. Illinoi s schoo l financ e research : Some knowns and unknowns. Chicago: Midwest Administration Center, University of Chicago, 1977. Hickrod, G.A., 5 Hubbard, B.C. The concept of fiscal effort in the Illinois general purpose grant-in-aid: Some legal and measurement problems. Journal of Education Finance, 1978, 3, 272-278. Hickrod, G.A., $ Sabulao, CM. Increasing social and economic ine qualities among suburban schools . Danville, II.; Interstate, 1969. Hickrod, G.A., Yang, T.1V., Hubbard, B.C., § Chaudhari, R. Measurabl e objectives for school finance reform: A further evaluation of the Illinois school finance reforms of 1975. Normal, II.: Illinois State University, 1975. Hou, J.D. Effects of various income weightings on the distribution of Illinois state aid to education. In J.M. Cronin (Ed.], Alterna tive measures of local wealth and effort . Springfield, II.: Illinois Office of Education, 1977. Hubbard, B.C. , d, Hickrod, G.A. A pilot study of poss ible a djustment s to the wealth measureme nt in I l linois based on using private or parochial students in the stud ent count. Normal, II.: Center for the Study of Education Finance, 1978. James, 11. T. , Kelly, J. A., § Garms, !V.I. Determinants of education expenditures in la rge cit ies of the U nited St ates. Stanford, Ca. : School of Education, Stanford University, 1966. James, 11. T. , Thomas, J. A,, Ei Dyck , H.J. Wealth, expenditure, and decision making for education. Stanford, Ca , : School of Education, Stanford University, 1963. Johns, R.L. An index of the financial ability of lo cal schoo l systems to su pport pub lic education. Montgomery, Al.: Alabama State Department of Education, 1938.

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171 Johns, R.L. Local ability and effort to support schools. In R.L. Johns § E.L. Morphet (Eds.)? Pr oblems a nd issues in school finance . New York: National Conference of Professors of~ Educational Administration, 1952. Johns, R.L. Indirect measures of local ability to support schools. In Trends in financing e ducation: Pr oceedings of the 8th National C onference on School Finance . Washington, D,C: National Education Association, 1965. Johns, R.L. Alternative state school finance plans. In R.L. Johns, K. Alexander, § K.F. Jordan (Eds.), Financing education: Fiscal and legal alternatives . Columbus, Oh.: Merrill, 1972a. Johns, R.L. The development of state support for the public schools. In R.L. Johns, K. Alexander, f? K.F. Jordan (Eds.), Financing ed ucation: Fiscal and legal alternatives . Columbus, Oh.: Merrill, 19 72b. Johns, R.L. Response to "Alternative measures of school district wealth" by Allan Odden. Journal of Education Finance, 1977, 3, 98-100. Johns, R.L., 5 Alexander, K. Alternative programs for financing educa tion. Gainesville, Fl . : National Educational Finance Project, 1971". Johns, R.L., § Morphet, E.L. F inancing the public schools . Englewood Cliffs, N.J.: Prentice-Hall, I960."" Johns, R. L. , § Morphet, E.L. The economics and financing of education: A systems approach (3rd ed.). Englewood Cliffs, N.J.: PrenticeHall, 1975. Johns, T. 1975 school aid legislation: A look at three states. Journal of Education Finance, 19 76, 1_, 397-406. Johns, T. , f, Magers, D.A. Measuring the equity of state school finance programs. Journal of Education Finance, 1978, 3, 373-585. Kerlinger, F.N., 5 Pedhazur, E.J. Multiple regression in behavioral r esearc h. New York: Holt, Rinchart, c ( Winston, 1973. Lindman, E.L. School support and municipal government costs. In Lo ng ran g e planning in school finance: Proceedings of the 6th National School Finance Conference. Washington, D.C: National Education Association, 1963. Lindman, E.L. St ate support an d muni cipal gov ernment costs. Los Angeles: University of California at Los Angeles, 1964.

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172 Magers, D.A. Two tests of equity under impact aid Public Law 81-874. Journal of Education Finance, 1977, 3, 124-128. McLoone, E.P. Profiles in school support, 1969-70 . Washington, D.C.: U.S. Government Printing Office, 1974. Michelson, S. What is a "just" system for financing schools? An evaluation of alternative reforms. Law and Contemporary Problems , 1974, 58, 436-458. Moore, D.O. Local nonproperty taxes for schools. In R.L. Johns, K. Alexander, and D.H. Stollar (Eds.), Status and impact of edu cational finance programs. Gainesville, Fl.: National Educational Finance Project, 1971. Morphet, E.L. Characteristics of state support programs. In R.L. Johns § E.L. Morphet (Eds.), Problems and issues in school finance . New York: National Conference of Professors of Educational Administration, 1952. Morrison, II. C. School revenue. Chicago: University of Chicago Press, 1930. — ' Mort, P.R. The measurem ent of educational need . New York: Teachers College, Columbia University, 1924. Mort, P.R. State support for the p ublic schools . New York: Teachers College, Columbia University, 1926. Mort, P.R. State support for public education . Washington, D.C.: American Council on Education, 1935. Mort, P.R., S Reusser, W.C. Public school finance . New York: McGrawHill, 1941. Mort, P.R., 5 Reusser, W.C. Publ ic school Finance (2nd ed . ) . New York: McGraw-Hill, 1951"] Mosteller, F., T, Moynihan, D.P. A pathbreaking report. In F. Hosteller q D.P. Moynihan (Eds.), On equality of educational opportunity . New York: Random House, 1972. Musgrave, R.A. The theory of p ublic finance . New York: McGraw-Hill, 1959. Musgrave, R.A., 5 Musgrave, P.B. Public finance in theory and practi ce (2nd ed.). New York: McGraw-Hill, 1976. North Carolina Department of Public Education. Statistica l profile: North Carolina public schools . Raleigh, N.C.: Author, 1977.

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175 North Carolina Department of Revenue. Statistics of taxation . Raleigh, N.C.: Author, 1976. North Carolina Governor's Commission on Public School Finance. Equita ble school financing in North Carolina , Raleigh, N.C.: Author, 1978. Norton, J.K., f, Reutter, E.E. Jr. Federal participation in the financing of education. In R.L. Johns 5 E.L. Morphet (Eds.), Problems and is sues in school finance . New York: National Conference of Professors of Educational Administration, 1952. Odden, A. Alternative measures of school district wealth. Journal of Education Finance , 1977, 2_, 356-379. Odden, A. Missouri's new school finance structure. Journal of Educa tion Finance , 1978a, 3, 465-475. Odden, A. Sc hool finance reform in the states: 1978 . Denver, Co.: Education Commission of the States, 1978b. Odden, A., Augenblick, J., $ Vincent, P.E. School f inance reform i n the states, 1976-77. Denver, Co.: Education Commission of the States, 1976". President's Commission on School Finance. Review of existing state school finance programs (Vol. 2). Washington, D.C.: Author, 1972. Rodriguez v. San Antonio Independent School District, 537 F.Suppl. 2S0 (1971). Rossmiller, R.A., Hale, J. A., £ Frohreich, L.E. Fisc al capacity and educational finance: Variation s among states, school districts and muni cipalities , National Education Finance Project Special Study No. 10. Madison, Wi. : Department of Educational Administration, University of Wisconsin, 1970. San Antonio Independent School District v. Rodriguez , 411 U.S. 1 (1973). Serrano v. Priest , 487 P. 2d 1241 (1971). Serrano v. Priest , 557 P. 2d 929 (1976). Sexton, P.C. Educa tion and inco m e: Inequalities of opportunity in our pulUiF'schools . New York: Viking, 1961. Smith, A. An inquiry into the n ature and causes of the wealth of nations? New York: Random" House, 1937. (Originally published, T776) .

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174 Strayer, G.D., m Haig, R.M. The financin g of edu cation in the state of New York. New York: MacMillan, 1923. Sugarman, S.D. Principled Serrano reform. Hastings Constitutional Law Quarterly , 1977, 4, 511-530. Tron, E.O. Public school finance programs , 1975-76. Washington, D.C.: U.S. Government Printing Office, 1976. U.S. Census Bureau. Population estimates and projections , Series P-25, No. 681. Washington, D.C.: U.S. Government Printing Office, 1977. Updegraff, H. Rural sc hool survey of New York state: Financial support . Ithaca, N.Y.: Author, 1922. Weiss, S.J. Exis ting disparities in public school finance and proposals for reform" Boston: Federal Reserve Bank of Boston, 1970. Wilde, J. Rev isions in property data . Raleigh, N.C.: North Carolina GovernoF r s — Commission on Public School Finance, 1978. Wise, A.O. Rich school s, poor schools: The promise of equal educa tional opportunity . Chicago: University of Chicago Press, 1967. Yang, T.W. Measurement of school revenue equity in the state of Illinois, Michigan, and Kansas. [Doctoral dissertation, Illinois State University, 1975). D issertation Abstracts International , 1976, 57, 758A (University Microfilms No. 76-18,098). Yang, T.W., f, Chaudhari, R. A study of the relationship between selected socioeconomic variables and local tax effort to support public schools in Illinois" Normal, 11.: Center for the Study of Education Finance, 1976.

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BIOGRAPHICAL SKETCH Thomas R. Melcher was born December 9, 1950, in Milwaukee, Wisconsin. Upon completion of high school in 1969, he entered the University of Wisconsin-Madison, receiving the Bachelor of Science degree in economics and secondary education in May 1973. After working briefly as a fiscal analyst for the Wisconsin Department of Public Instruction, Mr. Melcher was awarded a National Educational Finance Project fellowship in September 1975 to study for the Master of Education degree in educational administration at the University of Florida. Upon completion of the Master of Education degree in June 1974, Mr. Melcher was employed by the Collier County, Florida, Public Schools, where he served as an assistant business manager for three years. In June 1977, he was admitted to the doctoral program in educational administration at the University of Florida. While working toward the Doctor of Philosophy degree, Mr. Melcher served as a research associate with the Institute for Educational Finance, where he participated in state public school finance studies in Arkansas, North Carolina, and West Virginia. Thomas R. Melcher is a member of ttic Association of School Business Officials, Phi Beta Kappa, and Phi Delta kappa, lie is married to the former Linda R. Newsome. 175

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I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. S. Kern Alexander , /Chairman Professor of Educational Administration I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. (l, (4, XJL[ale rTtetae^iate Professor of Educational Administration I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. Wl 1/ , ! t H^t Robert S. Soar Professor of Foundations of Education This dissertation was submitted to the Graduate Faculty of the Department of Educational Administration in the College of Education and to the Graduate Council, and was accepted as partial fulfillment of the requirements for the degree of Doctor of Philosophy. December 1978 Dean, Graduate School

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UNIVERSITY OF FLORIDA 3 1262 08552 9377


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