Fiscal Capacity?Fiscal Capacity?

What is Fiscal Capacity?What is Fiscal Capacity?

Where do the numbers come from?Where do the numbers come from?

How is it calculated?How is it calculated?

What does it mean for my school What does it mean for my school system?system?

The answers.?.?.?.The answers.?.?.?.

……...I don’t know, but I did stay at a ...I don’t know, but I did stay at a Holiday Inn Express last night……Holiday Inn Express last night……

What is Fiscal Capacity?What is Fiscal Capacity?

Fiscal capacity is the relative ability Fiscal capacity is the relative ability of local governments to fund of local governments to fund education from their own taxable education from their own taxable sources.sources.

TACIR ModelTACIR Model Local RevenueLocal Revenue PropertyProperty SalesSales Per Capita IncomePer Capita Income Ratio of Residential & Farm to Total Ratio of Residential & Farm to Total

AssessmentAssessment Ratio of Average Daily Membership Ratio of Average Daily Membership

to Populationto Population

CBER Model (Fox Model)CBER Model (Fox Model)

The new formula determines a county’s capacity The new formula determines a county’s capacity to raise local revenues for education from its to raise local revenues for education from its property and sales tax base. property and sales tax base.

Property tax baseProperty tax base – add the equalized, assessed – add the equalized, assessed tax bases to the equalized, assessed public utility tax bases to the equalized, assessed public utility property and the estimated assessed value of property and the estimated assessed value of industrial development property. industrial development property.

Sales tax baseSales tax base - divide county sales tax revenue - divide county sales tax revenue by the county sales tax rate. Must adjust revenue by the county sales tax rate. Must adjust revenue for higher city rates, cities that cross county for higher city rates, cities that cross county boundaries and rate changes during the year. boundaries and rate changes during the year.

CBER Model (Fox Model)CBER Model (Fox Model)

Each county’s fiscal capacity is the sum Each county’s fiscal capacity is the sum of:of:

The county’s property tax base The county’s property tax base multiplied by a statewide average multiplied by a statewide average property tax rate for education (1.30%).property tax rate for education (1.30%).

The county’s sales tax base multiplied The county’s sales tax base multiplied by a statewide sales tax rate for by a statewide sales tax rate for education (1.57%).education (1.57%).

Property & Sales Tax Rates For Property & Sales Tax Rates For EducationEducation

Total State Property Tax Spent on Education Total State Property Tax Spent on Education ÷÷ Total State Property Tax BaseTotal State Property Tax Base

$1,487,147,245 $1,487,147,245 ÷÷ $114,014,886,851 = 1.30% $114,014,886,851 = 1.30%

Total State Local Option Sales Tax Spent on Education Total State Local Option Sales Tax Spent on Education ÷÷ Total State Sales Tax Total State Sales Tax RevenueRevenue

$973,366,074 $973,366,074 ÷÷ $62,122,196,778 = 1.57% $62,122,196,778 = 1.57%

Each county’s fiscal capacity index is the ratio of its total fiscal capacity to Each county’s fiscal capacity index is the ratio of its total fiscal capacity to total statewide fiscal capacity.total statewide fiscal capacity.

CBER?CBER? CBER (Center for Business and CBER (Center for Business and

Economic Research) Economic Research) is a is a department within the College of department within the College of Business Administration at the Business Administration at the University of Tennessee which University of Tennessee which conducts research on national and conducts research on national and state economic trends for UT state economic trends for UT Knoxville, state agencies, and public Knoxville, state agencies, and public and private organizations.and private organizations.

CBER website: CBER website: http://cber.bus.utk.edu/

Where do the numbers come Where do the numbers come from?from?

The 3-year averages of property tax spent The 3-year averages of property tax spent on education and local option sales tax on education and local option sales tax spent on education come from the spent on education come from the DOE’s DOE’s Annual Statistical ReportAnnual Statistical Report which is which is produced from school system’s annual produced from school system’s annual financial reports. financial reports.

The 3-year average of county equalized The 3-year average of county equalized assessed property come from the assessed property come from the Comptroller’s Tax Aggregate ReportComptroller’s Tax Aggregate Report. .

IDBs come from the IDBs come from the ComptrollerComptroller.. The 3-year average of county sales tax base The 3-year average of county sales tax base

comes from the comes from the Department of RevenueDepartment of Revenue..

What are IDBs?What are IDBs?

Industrial Development Bonds:Industrial Development Bonds: Upon the Upon the approval of the city/county issuer, it may be possible approval of the city/county issuer, it may be possible to exempt/abate most of the real and/or personal to exempt/abate most of the real and/or personal property tax of new real estate improvements and property tax of new real estate improvements and new machinery financed by a Chapter 100 bond. To new machinery financed by a Chapter 100 bond. To enact this procedure, the city/county must own the enact this procedure, the city/county must own the assets financed by the bonds and an eligible assets financed by the bonds and an eligible company would lease the assets from the company would lease the assets from the city/county for the term of the bonds. The amount city/county for the term of the bonds. The amount and term of abatement/exemption depends on a and term of abatement/exemption depends on a negotiation with the city/county issuer, as they have negotiation with the city/county issuer, as they have the discretion to abate any portion of the property the discretion to abate any portion of the property taxes. In effect, the property tax is exempt by virtue taxes. In effect, the property tax is exempt by virtue of public ownership, however, the city/county may of public ownership, however, the city/county may require that a portion of the payments otherwise due require that a portion of the payments otherwise due will be paid in the form of a payment in lieu of tax. will be paid in the form of a payment in lieu of tax.

IDBs continued…

When a company’s property tax is abated it When a company’s property tax is abated it does not pay its full rate on real property does not pay its full rate on real property (land and buildings) and/or its personal (land and buildings) and/or its personal property (machinery, equipment and property (machinery, equipment and inventory). Abatements range from 5 to 20 inventory). Abatements range from 5 to 20 years, and may be partial, full, or phased. years, and may be partial, full, or phased. In some cases, companies make payments In some cases, companies make payments in lieu of taxes (PILOTS) or fees in lieu of in lieu of taxes (PILOTS) or fees in lieu of taxes (FILOTS) during the period that their taxes (FILOTS) during the period that their property taxes are abated to partly offset property taxes are abated to partly offset for lost tax revenues.for lost tax revenues.

CBER Calculation ExampleCBER Calculation Example

Meigs CountyMeigs County

Property Tax Base (3-year average): $174,291,854Property Tax Base (3-year average): $174,291,854

Sales Tax Base (3-year average): Sales Tax Base (3-year average): $26,267,910$26,267,910

Fiscal Capacity Fiscal Capacity = ($ 174,291,854 = ($ 174,291,854 xx 1.30%) + ($ 26,267,910 1.30%) + ($ 26,267,910 xx 1.57%)1.57%)

= $411,581+ $2,273,367= $411,581+ $2,273,367

= $2,684,948= $2,684,948

= $ 2,684,948 /$2,461,000,000 (total state fiscal = $ 2,684,948 /$2,461,000,000 (total state fiscal capacity)capacity)

Fiscal Capacity IndexFiscal Capacity Index = .109%= .109%

These can affect fiscal capacity index.These can affect fiscal capacity index.

Capacity Used in BEP 07-08Capacity Used in BEP 07-08

50% of TACIR Model & 50% of CBER 50% of TACIR Model & 50% of CBER ModelModel

(TACIR Capacity Index x .50) + (CBER Capacity Index x .50)(TACIR Capacity Index x .50) + (CBER Capacity Index x .50)

Unless……………CBER increased 30% or more over TACIR……Unless……………CBER increased 30% or more over TACIR……

My CBER Increased 30% or My CBER Increased 30% or more?more?

During the transition from TACIR to During the transition from TACIR to CBER if a county’s capacity increased CBER if a county’s capacity increased 30% or more, a county’s capacity 30% or more, a county’s capacity was held at a 30% increase. was held at a 30% increase.

What does that mean?What does that mean?

Meigs CountyMeigs County 07-08 TACIR: 0.06%07-08 TACIR: 0.06% 07-08 CBER: 0.11% 07-08 CBER: 0.11% Which is a 77.3% increase, so the 0.06%Which is a 77.3% increase, so the 0.06%

(TACIR) is held at a 30% increase.(TACIR) is held at a 30% increase. 0.06% held at a 30% increase = 0.08%0.06% held at a 30% increase = 0.08% 07-08 CBER: 0.08% is used in 50/50 07-08 CBER: 0.08% is used in 50/50

capacity calculation.capacity calculation.

Capacity Used in BEP 07-08Capacity Used in BEP 07-08

50% of TACIR Model & 50% of CBER 50% of TACIR Model & 50% of CBER ModelModel

(TACIR Capacity Index x .50) + (CBER Capacity Index (TACIR Capacity Index x .50) + (CBER Capacity Index x .50)x .50)

(0.06% x .5) + (0.08% x .5)(0.06% x .5) + (0.08% x .5)

0.07%0.07%

How does my capacity How does my capacity relate to my local share?relate to my local share?

Equalization: the fiscal capacity Equalization: the fiscal capacity index is then applied to the BEP index is then applied to the BEP generated dollars, using the same generated dollars, using the same methodology as has been in place methodology as has been in place since 1992, to adjust the 70%since 1992, to adjust the 70%(instructional), 75%(classroom), and (instructional), 75%(classroom), and 50%(non-classroom) state shares.50%(non-classroom) state shares.

How is my equalized local How is my equalized local share calculated?share calculated?

Equalized Local Share Equalized Local Share

[[Fiscal Capacity Index Fiscal Capacity Index xx Local Share (30%, 25%, or 50%) Local Share (30%, 25%, or 50%)]]

[[County Generated Funds by Component County Generated Funds by Component ÷ ÷ State Generated Funds by State Generated Funds by

ComponentComponent]]

Equalized Local Share Equalized Local Share ExampleExample

Meigs County Equalized Instructional Meigs County Equalized Instructional ShareShare

(0.07% x 30%) ÷ ($5,703,000 ÷ $2,996,806,000) (0.07% x 30%) ÷ ($5,703,000 ÷ $2,996,806,000)

0.021% ÷ 0.1903026%0.021% ÷ 0.1903026%

Eq. Local Share: 11.16%Eq. Local Share: 11.16%

Eq. State Share: (1 – 11.16%) = 88.84% Eq. State Share: (1 – 11.16%) = 88.84%

Questions?Questions?