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Measuring Nonschool Municipal
Fiscal Disparities in Connecticut
Bo Zhao
Senior Economist
New England Public Policy Center
Federal Reserve Bank of Boston
Presented at the Lincoln Institute of Land Policy
Economic Perspectives on State and Local Taxes
December 4, 2015
Disclaimer
2
The views expressed here are those of the
presenter and do not necessarily represent the
views of the Federal Reserve Bank of Boston or
the Federal Reserve System.
Importance of Addressing Fiscal Disparities
 Fiscal disparities exist because of differences across
localities in taxable resources (especially property tax
bases) and service costs.
 These differences largely fall outside the direct control
of local officials.
 Fiscal disparities are therefore widely regarded as
inequitable.
 Past research experience:
 Measured nonschool municipal disparities in Massachusetts
 Developed a new equalizing formula to distribute nonschool
aid
3
Why Study Connecticut?
 There are vast socioeconomic differences across the
CT 169 cities and towns.
 The state legislature requested a study on CT
nonschool municipal fiscal disparities in late 2014.
 Presented to CT General Assembly's Legislative
Program Review and Investigations Committee in May
2015
 Presented to CT State and Local Tax Study Panel in
September 2015
 The research framework and methodology can be
applied to other New England states.
4
Preview of Main Findings
 Connecticut municipalities differ significantly in
revenue-raising capacity for nonschool purposes,
driven by differences in their property tax bases.
 They also vary in the cost of providing nonschool
services.
 As a result, there are large disparities across
Connecticut municipalities in their ability to provide
nonschool services to their residents, employers, and
visitors.
 State nonschool grant programs play a limited role in
reducing nonschool fiscal disparities in Connecticut.
5
Municipal Budget and Fiscal Disparities
 A municipality’s budget is affected by
 Fiscal choices: tax rates, service levels, management
quality, operating efficiencies, etc.
 Factors that are outside the direct control of local
officials: taxable resources, cost pressures from
employers and commuters, etc.
 This study measures nonschool fiscal disparities
caused by differences across municipalities in
factors outside the direct control of local officials.
6
The “Cost-Capacity Gap” Framework
 We calculate the gap between taxable
resources (“capacity”) and the costs of
providing public services (“cost”).
 Both capacity and cost are measured using
factors that are outside the direct control of
local officials.
 A larger gap indicates a worse underlying
fiscal condition.
7
Measuring Municipal Capacity
 The property tax is virtually the only own-source revenue
available for localities in Connecticut.
 We measure capacity by computing how much revenue
each municipality would be able to raise from the property
tax at a “standard” tax rate.
 We set the “standard” tax rate so as to make the statewide
municipal capacity equal the statewide local nonschool
spending.
 Municipal capacity is directly proportional to each
municipality’s taxable property value (excluding
exemptions).
8
Municipal Capacity by Municipality Type (FY 2007-2011)
Wealthy Wealthier-
Property
Rural
Suburban Urban
Periphery
Less-
Wealthy-
Property
Rural
Urban
Core
Per capita
equalized
property
tax base
611 242 192 145 118 73
Per capita
municipal
capacity
4,989 1,979 1,572 1,181 965 596
Municipal Cost
 We do not use actual spending as “municipal
cost,” because actual spending is impacted by
management quality, efficiency, and choices about
service levels.
 Municipal cost is defined as how much each
municipality must spend to provide a given level of
nonschool services, given its socioeconomic
characteristics that are outside the direct control
of local officials.
 We use statistical analysis to identify cost factors
and use them to calculate the cost measure.
10
Cost Factors
 Unemployment rate
 Population density
 Private-sector wage level
 Town maintenance road mileage
 Per capita jobs
11
Municipal Cost by Municipality Type (FY 2007-2011)
Wealthy Wealthier-
Property
Rural
Suburban Urban
Periphery
Less-
Wealthy-
Property
Rural
Urban Core
Unemployment
rate
5.89 5.95 6.11 8.37 7.36 13.78
Population density 1.07 0.38 0.82 2.21 0.34 6.48
Private-sector
wage index
115.29 92.42 98.79 100.13 92.34 98.33
Local road miles
per 000 pop
5.64 10.23 6.51 3.44 8.43 2.03
Per capita total
jobs
0.47 0.37 0.42 0.48 0.33 0.50
Per capita
municipal cost
1,398 1,230 1,280 1,387 1,244 1,659
Municipal Gap
 Municipal gap = municipal cost – municipal capacity
 Statewide municipal gap is zero.
 A positive gap represents a municipality lacking
sufficient revenue-raising capacity to provide
common nonschool services. The larger the gap, the
worse the nonschool fiscal condition.
 A negative gap represents a municipality having
more revenue-raising capacity than needed for
providing common nonschool services.
13
14
15
State Nonschool Grants
 The state provides municipalities with some
nonschool grants, which are relatively small
compared with the state restricted education
grant.
 They include Colleges & Hospitals PILOT, State
Property PILOT, etc.
 These nonschool grants do not have an explicit
equalization goal, although some formulas
consider some socioeconomic factors.
16
17
Conclusion
 There are significant nonschool fiscal
disparities among Connecticut municipalities.
 These disparities are mostly driven by the
uneven distribution of the property tax base
across the state, while cost differences also
play a role.
 State nonschool grant programs play a limited
role in reducing nonschool fiscal disparities in
Connecticut.
18
Contact Information
Bo Zhao
Senior Economist
Federal Reserve Bank of Boston
600 Atlantic Avenue T-8
Boston, MA 02210
(617) 973-3061
Bo.zhao@bos.frb.org
19

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Measuring Nonschool Municipal Fiscal Disparities in Connecticut

  • 1. Measuring Nonschool Municipal Fiscal Disparities in Connecticut Bo Zhao Senior Economist New England Public Policy Center Federal Reserve Bank of Boston Presented at the Lincoln Institute of Land Policy Economic Perspectives on State and Local Taxes December 4, 2015
  • 2. Disclaimer 2 The views expressed here are those of the presenter and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System.
  • 3. Importance of Addressing Fiscal Disparities  Fiscal disparities exist because of differences across localities in taxable resources (especially property tax bases) and service costs.  These differences largely fall outside the direct control of local officials.  Fiscal disparities are therefore widely regarded as inequitable.  Past research experience:  Measured nonschool municipal disparities in Massachusetts  Developed a new equalizing formula to distribute nonschool aid 3
  • 4. Why Study Connecticut?  There are vast socioeconomic differences across the CT 169 cities and towns.  The state legislature requested a study on CT nonschool municipal fiscal disparities in late 2014.  Presented to CT General Assembly's Legislative Program Review and Investigations Committee in May 2015  Presented to CT State and Local Tax Study Panel in September 2015  The research framework and methodology can be applied to other New England states. 4
  • 5. Preview of Main Findings  Connecticut municipalities differ significantly in revenue-raising capacity for nonschool purposes, driven by differences in their property tax bases.  They also vary in the cost of providing nonschool services.  As a result, there are large disparities across Connecticut municipalities in their ability to provide nonschool services to their residents, employers, and visitors.  State nonschool grant programs play a limited role in reducing nonschool fiscal disparities in Connecticut. 5
  • 6. Municipal Budget and Fiscal Disparities  A municipality’s budget is affected by  Fiscal choices: tax rates, service levels, management quality, operating efficiencies, etc.  Factors that are outside the direct control of local officials: taxable resources, cost pressures from employers and commuters, etc.  This study measures nonschool fiscal disparities caused by differences across municipalities in factors outside the direct control of local officials. 6
  • 7. The “Cost-Capacity Gap” Framework  We calculate the gap between taxable resources (“capacity”) and the costs of providing public services (“cost”).  Both capacity and cost are measured using factors that are outside the direct control of local officials.  A larger gap indicates a worse underlying fiscal condition. 7
  • 8. Measuring Municipal Capacity  The property tax is virtually the only own-source revenue available for localities in Connecticut.  We measure capacity by computing how much revenue each municipality would be able to raise from the property tax at a “standard” tax rate.  We set the “standard” tax rate so as to make the statewide municipal capacity equal the statewide local nonschool spending.  Municipal capacity is directly proportional to each municipality’s taxable property value (excluding exemptions). 8
  • 9. Municipal Capacity by Municipality Type (FY 2007-2011) Wealthy Wealthier- Property Rural Suburban Urban Periphery Less- Wealthy- Property Rural Urban Core Per capita equalized property tax base 611 242 192 145 118 73 Per capita municipal capacity 4,989 1,979 1,572 1,181 965 596
  • 10. Municipal Cost  We do not use actual spending as “municipal cost,” because actual spending is impacted by management quality, efficiency, and choices about service levels.  Municipal cost is defined as how much each municipality must spend to provide a given level of nonschool services, given its socioeconomic characteristics that are outside the direct control of local officials.  We use statistical analysis to identify cost factors and use them to calculate the cost measure. 10
  • 11. Cost Factors  Unemployment rate  Population density  Private-sector wage level  Town maintenance road mileage  Per capita jobs 11
  • 12. Municipal Cost by Municipality Type (FY 2007-2011) Wealthy Wealthier- Property Rural Suburban Urban Periphery Less- Wealthy- Property Rural Urban Core Unemployment rate 5.89 5.95 6.11 8.37 7.36 13.78 Population density 1.07 0.38 0.82 2.21 0.34 6.48 Private-sector wage index 115.29 92.42 98.79 100.13 92.34 98.33 Local road miles per 000 pop 5.64 10.23 6.51 3.44 8.43 2.03 Per capita total jobs 0.47 0.37 0.42 0.48 0.33 0.50 Per capita municipal cost 1,398 1,230 1,280 1,387 1,244 1,659
  • 13. Municipal Gap  Municipal gap = municipal cost – municipal capacity  Statewide municipal gap is zero.  A positive gap represents a municipality lacking sufficient revenue-raising capacity to provide common nonschool services. The larger the gap, the worse the nonschool fiscal condition.  A negative gap represents a municipality having more revenue-raising capacity than needed for providing common nonschool services. 13
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  • 16. State Nonschool Grants  The state provides municipalities with some nonschool grants, which are relatively small compared with the state restricted education grant.  They include Colleges & Hospitals PILOT, State Property PILOT, etc.  These nonschool grants do not have an explicit equalization goal, although some formulas consider some socioeconomic factors. 16
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  • 18. Conclusion  There are significant nonschool fiscal disparities among Connecticut municipalities.  These disparities are mostly driven by the uneven distribution of the property tax base across the state, while cost differences also play a role.  State nonschool grant programs play a limited role in reducing nonschool fiscal disparities in Connecticut. 18
  • 19. Contact Information Bo Zhao Senior Economist Federal Reserve Bank of Boston 600 Atlantic Avenue T-8 Boston, MA 02210 (617) 973-3061 Bo.zhao@bos.frb.org 19