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«Introduction This paper examines the fiscal condition of school districts in Nebraska. Our methodology is a new one that has been applied to ...»

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Kerri Ratcliffe

Bruce Riddle

John Yinger*


This paper examines the fiscal condition of school districts in Nebraska. Our methodology is a new one

that has been applied to municipalities by several authors (see Bradbury et al. (1984), Ladd and Yinger

(1989), and Yinger (1988)), but has not yet been applied to school districts. This approach defines "fiscal condition" as the ability of a district to provide reasonable quality services at a reasonable tax burden on its residents, and is based on new methods for estimating revenue-raising capacity and public service costs. On the basis of this approach, we examine the impact of social and economic factors on the fiscal condition of school districts, determine what types of districts are in good fiscal condition, estimate the extent to which current state assistance is directed to the school districts in greatest need, and calculate the potential gains from school-district consolidation.

Nebraska contained 927 school districts, which provided educational services to over 266,000 students in pre-kindergarten, kindergarten, elementary and secondary grades. State-wide school enrollment has declined steadily from a peak of 390,000 in the late 1960s. This decline has been accompanied by some consolidation; since 1984-85, 30 districts have been consolidated into others. Table 1 provides a three-year history of the number of school districts and students.

Most of the consolidation has involved class 1 districts, which provide elementary education only and cover areas of 1,000 inhabitants or fewer. Approximately 95 percent of the 582 active class 1 districts serve fewer than 100 students; 60 percent of the districts serve fewer than 20 students. Class 2 districts, which also serve populations of 1,000 or fewer, differ from class 1 districts in that they maintain a high school along with elementary schools. The 58 class 2 districts range in size from 30 to 250 students. The 222 class 3 districts provide elementary and secondary education in areas with populations between 1,000 and 100,000. Class 3 enrollments range from 70 to 1,500 students, and 75 percent of these districts have enrollments below 600. Classes 4 and 5 are reserved for Lincoln and Omaha. These two school systems contain 25 percent of total public school enrollment in the state.

The 23 class 6 districts, which only maintain high schools, range in enrollment from 30 to 670 students.

Our analysis focuses on 865 districts. Districts reporting no school age children for which they are responsible and districts that send all their school-age children to other districts were eliminated from the analysis, along with a few small districts lacking some key information.

District Finances in Nebraska Table 2, which is based on the accounting system employed by the U.S. Bureau of the Census, provides a picture of FY 1986 school finances in Nebraska and in the United States as a whole. The first two columns present amounts per student in the average school district. The second two columns present percentage distributions. The percentages in the second two columns are state-wide averages weighted by population and cannot be derived from the amounts in the first two column, which are unweighted averages across all school districts.

The average school district in Nebraska raised $4,484 per student in general revenue and spent $3,992 per student in general expenditure during 1986.The small "surplus" in these numbers does not imply that school districts run a surplus in their own budgetary accounts.

The majority of Nebraska schools' general revenue, 67 percent, comes from their own sources, and about 80 percent of this own-source revenue comes from the property tax. Charges and miscellaneous sources make up the other approximately 20 percent of own-source revenue.

The Fiscal Condition of School DistrictsThe Concept of Fiscal Condition

As we use the term, a school district's is its ability to deliver a reasonable level of public education to its children at a reasonable tax burden upon its residents, as determined by economic and social factors outside the control of the school district's administrators. Our measure of fiscal condition does not reveal a school district's budgetary situation and it is not affected by management skill, teaching capabilities, or service preferences. In effect, a school district's fiscal condition indicates the severity of the constraints under which its administrators and teachers must operate, but it does not indicate how they respond to those constraints.

This approach to fiscal condition has three key advantages. First, it facilitates comparisons across school districts of different sizes, classes, and characteristics. Our measure, for example, enables us to compare different districts' potential for providing the same quality education with the same tax burden on each district's residents. Second, because it excludes political and management factors, as well as the residents' preferences for education, our measure can serve as an objective guide for state assistance to school districts. Finally, our measure enables us to investigate the fiscal effects of consolidation, such as its impact on differences in fiscal condition among school districts.

Our measure of a school districts' fiscal condition is called the need-capacity gap and is the difference between a district's expenditure need and its revenue-raising capacity, both expressed in per student terms. A school district's revenue-raising capacity is the amount of money per student it can raise at an average tax burden on its residents. A district's expenditure need is the expenditure per student that is required in order for it to provide an average-quality education to its students.

Revenue -Raising Capacity

Our measure of revenue-raising capacity does not include state and federal aid, nor is it a measure of the revenue districts actually raise. Instead, it is a measure of the revenue that the school district could generate from its own resources if it imposed the state-wide average tax burden on its residents. The revenue that a district actually raises is influenced by the management skill of school administrators and the educational preferences of the district's residents. Our measure of revenue-raising capacity, as we explain below, depends on the school district's income and economic structure, which are outside the direct control of school officials. The technical details of our calculations are explained Ratcliffe, Riddle, and Yinger (1988).

Most of the literature on the fiscal condition of school districts assumes that a district's revenue-raising capacity is the same as its property tax base per pupil. Moreover, this view is implicit in the use of a district power-equalizing grant or the search for wealth neutrality. Although revenue-raising capacity as we measure it is strongly correlated with the property tax base, its conceptual motivation is different because it explicitly holds the tax burden constant across residents. Comparing the property tax base does not do this because it does not consider the extent to which property taxes are paid, directly or indirectly, by nonresidents. Our approach also differs from the so-called representative tax system approach developed by the U.S. Advisory Commission on Intergovernmental Relations (see ACIR, 1986). As shown by Ladd and Yinger (1989, Ch. 3), capacity calculated by the representative tax system approach can involve very different tax burdens in different districts.

General Principles

As we use the term, a tax burden indicates the magnitude of public sector claims on private incomes, such as a property tax payment as a percentage of income. Revenue-raising capacity is calculated with the same tax burden, namely the state-wide average tax burden, in every school district. Because we hold the tax burden constant, variations in revenue-raising capacity across school districts can arise for only three reasons: differences in income per student, in the ability of school districts to export taxes to nonresidents, or in the extent to which districts must share their taxable resources with other school districts. Cohen (1983) develops a measure of tax capacity based on income and the property tax base, but does not explicitly account for income or attempt to hold tax burden constant.

School districts with high resident incomes can raise more revenue at a given tax burden than other districts. As shown in Table 3, income per student varies widely across school districts in Nebraska.

The smallest districts have the highest average income per student, and income per student tends to decrease as the number of students increases. In addition, income per student is particularly high among class 1 and class 6 districts, and particularly low among class 2 and class 3 districts. Within each enrollment group and district class, however, income per student varies widely.

The second component of revenue-raising capacity is the ability of a district to export its tax burden to nonresidents. A school district's tax burden is "exported" whenever its taxes are paid by nonresidents, either directly or indirectly in the form of higher prices or lower wages. Exported tax burdens increase a school district's revenue-raising capacity because they allow the district to raise more revenue with no added burden on residents. As explained below, a school district's ability to export its property tax burden to nonresidents depends on the composition of its property tax base.

We observe an overlap of school districts in Nebraska because some classes of districts are responsible for educating all of their school age children whereas others are responsible for educating only high school or only elementary students. For example, class 6 districts and affiliated class 1 districts overlap and both collect taxes from the same residents. Class 1 districts not affiliated with a class 6 district provide only elementary education, and a separate tax, called nonresident high school tuition, must be levied to finance payments to the districts that provide education to the secondary students who live in these class 1 districts. Another form of overlap arises when a district sends some or all of its students requiring special education (along with the appropriate tuition payments) to another district. In addition, Nebraska has established 19 Educational Service Units (ESUs), which provide a variety of services to the participating school districts, including special education and audio visual services. During the school year 1985-1986, all school districts in 85 of the state's 93 counties received services from ESUs, which levy separate taxes on all participating districts.

To account for overlapping taxes and inter-district payments, we focus on the capacity of each district to raise revenue for the students it actually educates, holding constant across districts the burden of all school-related claims on the incomes of district residents. Under this approach, a district's total revenue-raising capacity is reduced when it makes tuition or transportation payments to another district or when overlapping districts collect taxes from its residents. Moreover, a district's revenue-raising capacity is increased when it receives payments from another jurisdiction for tuition or transportation. In making these adjustments, we do not use the revenue actually raised by an overlapping district or the payments actually exchanged between districts. Instead, we use the revenue that would be collected at the relevant state-wide average tax burden or the state-wide average payment. This approach insures that a district's net revenue-raising capacity does not depend on the actual revenue raised by other districts to which that district sends students, just as it does not depend on the actual revenue raised by the school district itself.

Revenue -Raising Capacity Through the Property

The property tax is the single most important source of revenue for school districts in Nebraska. To calculate revenue-raising capacity through the property tax, we estimate the average property tax burden in the state for the provision of education services to elementary, secondary and special education students. This burden, expressed as the ratio of total property taxes collected to aggregate income, is called the baseline tax burden. As we discussed earlier, this burden is adjusted to reflect taxes collected by overlapping districts. Interdistrict payments are considered in a later section.

In order to determine the extent to which property taxes can be exported to nonresidents, we combine an analysis of the incidence of the property tax with data on the composition of the property tax base.

Data on the composition of property within school districts are not available, so we estimated school district property composition on the basis of the composition of property within the district's county and the share of the district that is within a city or village. See Yinger (1988).

Using data and analysis presented by Bradbury and Ladd (1985), we assume that the tax on commercial and industrial property is borne primarily by company owners and land owners and that many of these owners are nonresidents stockholders. To be specific, we assume that 50 percent of the tax burden on commercial real estate and 25 percent of all public utility and personal property taxes are paid by nonresidents.

A school district's pre-exporting revenue-raising capacity per student equals the baseline tax burden (adjusted for the taxes collected by overlapping districts) multiplied by the income per student in the school district. The export ratio is defined to be the share of taxes exported to nonresidents divided by the share of taxes paid by residents. To adjust for export potential, we multiply pre-export capacity by one plus the export ratio.

Export ratios, which are presented in Table 4, range from zero to 0.21. The export ratio in the average school district is 0.03; that is, only $0.03 of tax burden are exported for every dollar of taxes paid by residents. On average, as districts increase in size their capacity to export grows. Because of the severe limitations on data concerning school district property composition, our approach is conservative and probably understates exporting, at least in the most urban districts.

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