Skip to Content

Frequently Asked Questions About Fiscal Capacity

What is fiscal capacity?
Tennessee’s fiscal capacity model was developed at TACIR and adopted by the State Board of Education to fulfill the requirement of the Education Improvement Act to equalize state education funding through the Basic Education Program (BEP) formula. The model is used to help determine how much local governments have to contribute to the BEP for each school system. 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 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 BEP. It is used to determine each county’s share of the total that all counties must contribute. To do that, the amount from the fiscal capacity model is multiplied by the number of public school students in each county, and the totals for each county are added to a statewide total. Then each county’s amount is divided by the statewide total to produce a percentage. That percentage is called the 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.

State law splits responsibility for funding the BEP formula between the state and local governments. Local governments are responsible for 25% of classroom support (teaching assistants and things like textbooks and supplies), 30% of instructional costs (teachers, principals, librarians, guidance counselors and their associated salaries and benefits), and 50% of non-classroom costs (superintendents and other central office personnel, capital outlay, maintenance and operations, and transportation). Those statutory percentages are multiplied by the total cost of each part of the BEP for all school systems to determine how much local governments collectively have to contribute to the formula. Each county’s fiscal capacity “index” is then multiplied by that total to determine the dollar amount that county has to contribute to its own BEP, and the state makes up the difference.

What factors are used to determine fiscal capacity?
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.

What is the method for determining fiscal capacity?
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.

How current is the fiscal capacity?
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.

Will the fiscal capacity of each county change each year?
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.

Is the fiscal capacity index the same thing as my local BEP match rate?
No. In fact, the individual local match rates are calculated after the dollar amount each county area must contribute to the BEP is determined. Although the individual match rates are interesting and useful for comparing how much each county has to pay, they are not used to determine that amount; they are derived from it.

Can fiscal capacity per pupil change without affecting the index?
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.

How does the Fiscal Capacity Index influence the local share of each county for funding the Basic Education Program?
The index is the portion of total local share of the BEP for which each county is responsible. If county A has an index of 3.45%, then county A is responsible for 3.45% of the total local share (in dollars) of the BEP. The total local share depends on the total cost of the BEP and the local match rate set in statute. If a county’s index goes up or down, that county’s share of the BEP changes. Changes in the fiscal capacity index have much less effect on funding than do changes in the overall local match rate set in statute or changes in the total cost of the BEP.