Frequently Asked Questions

Fiscal capacity is the potential ability of local governments to fund education from their own taxable sources, relative to their cost of providing services.  The fiscal capacity formula estimates how much revenue per pupil each county area can afford to raise for education.  This is not the amount the county has to contribute to the Tennessee Investment in Student Achievement (TISA) funding formula.  Rather, revenue per pupil is used to calculate each county’s fiscal capacity index.  To do that, the revenue per pupil is multiplied by the number of public school students in each county, and the totals for each county are summed to a statewide total.  Each county’s revenue per pupil is then divided by the statewide total.  This equals the county’s fiscal capacity index.  Since 2008, the model developed at TACIR has been used in conjunction with an arithmetic tax capacity model produced by the Center for Business and Economic Research (CBER) at the University of Tennessee.

Fiscal capacity is determined at TACIR using three-year averages of the following factors for each of the 95 counties:

• Own-Source Revenue Per Pupil: This is the amount of local money that the school systems in the county report that they spend on education divided by enrollment (average daily membership (ADM)).
• Taxable Sales Per Pupil: The locally taxable sales for the county area divided by ADM. This is a measure of the local ability to raise revenue.
• Equalized Property Assessment Per Pupil: The total assessed property value for the county area, equalized across counties using appraisal-to-sales ratios, and then divided by ADM. This is also a measure of the local ability to raise revenue.
• Equalized Residential and Farm Assessment Divided by Total Equalized Assessment (Tax Burden): This is a proxy for a county’s potential ability to export taxes through business activity. A high residential and farm ratio indicates a low level of business activity and a potential for higher tax burdens on county residents.
• Per Capita Income: Per capita income is included in the fiscal capacity model as a proxy for county residents’ ability to pay for education and for all other local revenue not accounted for by property or sales taxes.
• ADM Divided by Population (Service Burden): This measure is included as a reflection of spending needs. The larger the number of public school students per 100 residents, the greater the fiscal burden for each taxpayer.

The fiscal capacity model is based on a set of averages drawn from actual spending, revenue, income, etc. The method, which is called multiple regression analysis, is used to describe the relationship between own source revenue per pupil and each of the other factors (variables). It takes each variable and simultaneously compares it for all counties to calculate weights (called coefficients) that, when multiplied by the factors for each county, produce the closest estimates of actual local revenue for all 95 counties. Multiple regression analysis is a common statistical method used to understand relationships among factors for a wide range of issues.

Because of the time required to collect and publish official statistics, the data is generally 18 to 24 months old. Moreover, the formula is based on a 3-year “moving” average of the data used. That means that each year the formula is calculated, the most current year is added and the oldest year is dropped. Consequently, the most recent changes in the tax base of any county will not be available for the most current fiscal capacity index.

It is likely that there will be some change each year. However, experience indicates that the changes for most counties are insignificant. The influence of a change in the tax base in a specific county will be combined with similar tax changes in other counties so that no single change stands out. A change in any specific fiscal capacity factor will not necessarily result in a change in fiscal capacity.

The purpose of the fiscal capacity index is equalization—ensuring that the burden of funding schools is roughly equal across the state given different local tax bases and other factors related to the ability to raise money for education.  Equalization helps ensure that Tennessee meets the equal protection requirements of the Tennessee and US Constitutions.

Yes. The capacity per pupil of a specific county can move up or down without necessarily causing a major change in the index. Because the index is a percentage of the statewide total fiscal capacity, it depends on the changes in all 95 counties.

TACIR’s fiscal capacity index is used in conjunction with the CBER model, to determine how much local governments must contribute to K-12 funding calculated using the TISA funding formula.  There are four components within the TISA funding formula—base, weight, direct, and outcome.  Base funding is a fixed dollar amount per student, and weight funding is based on individual needs.  Direct funding gives allocations for students participating in certain high impact, strategic programming.  Outcome funding is allocated based on student outcomes.  Only the base and weight components are equalized.  Local governments are collectively responsible for contributing 30% of the base and weight funding, i.e., the TISA local contribution.  To calculate each county’s local contribution, its fiscal capacity index is multiplied by the TISA local contribution.  For an example calculation, see appendix D in A Users' Guide to Fiscal Capacity in the Tennessee Investment in Student Achievement Funding Formula.

The fiscal capacity index is the percentage of TISA local contribution for which each county is responsible.  If county A has an index of 3.45%, then it is responsible for 3.45% of the TISA local contribution.  If the fiscal capacity index for a county decreases, the other 94 counties are responsible for a greater percentage of the TISA local contribution and vice versa.  In other words, it is zero sum.