Revolution, Evolution, and Decline: Michigan K-12 School Finance Since Proposal A of 1994 School Funding Workshop State Board of Education Lansing February 17, 2010 Michael Addonizio, Wayne State University

Constitution of Michigan of 1963 Article VIII – Education Sec. 1 –Religion, morality and knowledge being necessary to good government and the happiness of mankind, schools and the means of education shall forever be encouraged. Sec. 2 –The legislature shall maintain and support a system of free public elementary and secondary schools as defined by law. Every school district shall provide for the education of its pupils without discrimination as to religion, creed, race, color or national origin.

State Policy Choices: Revenues The “Big 3”: –Property tax –Sales tax –Income tax Other Sources: Business taxes Excise taxes (e.g., tobacco, alcohol, etc.) Lotteries

Constitution of Michigan of 1963 Article IX – Finance and Taxation Sec 3 …A law that increases the statutory limits in effect as of Feb. 1, 1994 on the maximum amount of ad valorem property taxes that may be levied for school district operating purposes requires the approval of ¾ of the members elected to and serving in the Senate and in the House of Representatives. Sec. 7 - No income tax graduated as to rate or base shall be imposed by the state or any of its subdivisions.

FY School Revenue

FY School Revenue

Federal Revenue No Child Left Behind = $753.0 million Special Education = $424.7 million Free and Reduced Lunch = $332.5 million Other Federal Revenue = $51.8 million

Local Operating Revenue 18 Mills Non-Homestead = $2,189.8 million Special Education Mills = $1,045.4 million Vocational Education Mills = $203.7 million ISD Operating Mills = $62.8 million

School Aid Fund (SAF) SAF provides nearly all state K-12 funding. Designated taxes earmarked for deposit into SAF for school operations. MI Constitution requires that SAF be used exclusively for schools, higher education, and school employee retirement benefits. SAF received approximately $11.4 billion for FY

FY SAF Revenue

SAF Revenue History

State Policy Choices: Distribution Guaranteed Tax Base (GTB) formula –Local voters select tax rate and spending level –State guarantees a minimum per pupil revenue yield per mill of tax effort Foundation Formula State sets tax and spending level

Michigan K-12 Finance, circa 1993, GTB Local Property Tax Covers 2/3 of Operating Revenues 122 Districts within 4 Mills of Constitutional Limit Rich Schools, Poor Schools Onaway with $3, mills Ypsilanti with $5, mills Bloomfield Hills w/ mills

Proposal A Goals Reduce, but not eliminate per pupil gaps Reduce & limit property tax for operations Reduce local share of operations costs Increase state funds and state share Provide greater stability in funding

Foundation Growth, Pre-A Foundation Base through

YearMinimumBasicMaximum (hold harmless) $4,200$5,000$6, ,5065,1536, ,8165,3086, ,1245,4626, ,1705,4626, ,700 7, ,000 7, ,500 8, ,626 8, ,626 8, ,700 8, ,875 8, ,085 8, ,2048, ,3168,816 Foundation Levels

Per-Pupil Foundation Levels

School Aid FY $165 reduction in foundation ($263 million) 20% cut in ISD operations aid ($16.3 million) $32.8 million reduction in categorical aid Governor vetoed Sec. 20J payments, reducing aid to 39 districts by $51.5 million Additional $127 foundation cut withdrawn, along with $8.8 million cut in ISD aid

State K-12 Membership History

K-12 Membership History, updated

State and Local Revenue for School Operations, through

Measuring A’s Success Clear reduction in per pupil gaps Property taxes clearly reduced & limited Major change in state / local share Clear shift to state financing Revenue stability has suffered for many districts

Improved Finances for Many Traditional Districts thru FY 04 Significant and dramatic increases in fund balances for most traditional districts Sources a combination of foundation increases, pension re-financing, “Durant” settlement, enrollment growth and district management practices Increases now eroding for many districts

Total Fund Balance as Percent of Current Operating Expenditures – Traditional Districts and Public School Academies

Enrollment Patterns Have Become a Critical Finance Issue Growing enrollment usually results in good fiscal health Declining enrollment often results in fiscal problems Majority of districts and pupils now in decline status Very, very few districts are steady growers

Enrollment Patterns, cont. Declining enrollment not just an urban issue Significant declines in rural and small city /towns/older suburbs 80% of all traditional districts now face declining enrollments

Property Taxes Limited The assessment cap critical Also limitations on local school options for operations –Only two ISDs with “enhancement” mills –Very few enhancement elections held Overall limitation from ¾ vote requirement to change millage limits

From Equity to Adequacy After years of unexpectedly large foundation increases, years of flat to reduced foundations Did over-optimism of late 90’s create unrealistic expectations? Enactment of numerous tax exemptions that reduced growth potential of SAF Replacement funds, largely tobacco taxes, are long-term decliners Total revenue declines with enrollment

Challenges Capital funding Declining enrollment from population decline and shifts Impact of charters and choice on traditional district enrollment Tax policy and erosion in the revenue base Impacts of personnel and fringe costs- productivity gap

Capital Funding for K-12 Proposal A made up-front decision to NOT attempt capital funding reform Assumption that dramatic cut in property taxes would make it easier for some districts to obtain financing until such time as a solution could be developed Data on increased bonding and debt millages clearly indicates that happened Now the next challenge

The Challenge of Declining Enrollment Declining enrollment-in a traditional district or a charter school-virtually guarantees financial difficulty-very quickly It’s much harder to manage down than to manage growth Strong consideration needs to be given to change pupil count to a one year lag

Tax Policy Changes Impact SAF Revenues Legislation did hold SAF harmless from recent income tax rate cuts (by pushing burden completely on GFGP) Legislation has not held SAF harmless from dozens of base exemptions and other changes that have added up to hundreds of millions of reduced income SAF does not have the same tax base it had in 1994

U.S. and Michigan Unemployment Rates,

History of Michigan Jobs

History of Deficit Districts

MPSERS School Contribution Rates FY through FY

MPSERS Costs per Pupil, FY through FY

New Challenges Increasing mandatory school attendance age from 16 to 18 Universal, high-quality early education Importance of non-school human services Rational tax policy: –Fairness –Stability –Efficiency –Adequacy