1. School Finance 101 Presented by Thomas E. White Michigan School Business Officials October 2004

2. 2 The Michigan Budget Total State Budget = $39.1 billion State’s 2 Major Funds  General = $8.7 billion  School Aid = $12.5 billion State Funds Restricted for Other Purposes  Transportation  Federal Revenues

3. 3 State of Michigan: FY2004-05 General Fund/General Purpose Revenue Sources $7,822.8 million House Fiscal Agency Revenue Source And Distribution March 2004

4. 4 State of Michigan: FY 2004-05 School Aid Fund Revenue Sources $12,312.9 million House Fiscal Agency Revenue Source And Distribution March 2004

5. 5 General Fund Budget 83% of General Fund Spending in 4 Areas  Higher Education = $1.8 billion  Community Health (Mental Health, Public Health, Medicaid) = $2.5 billion  Corrections = $1.7 billion  FIA (Family Services, Juvenile Justice, Public Assistance) = $1.1 billion All Other General Fund Programs = $1.5 billion

6. 6 School Aid State Provides About 80% of Total State & Local Revenues to Local Districts Almost All the Revenue Base Earmarked Specifically for Schools Sales Tax is Principal Revenue Source (41%)

7. 7 Five Years of Budget Problems Declining General Fund Revenues Slow Growth – School Aid Fund Revenues Situation Cyclical or Structural? Prospects for Improvement?

8. 8 Perspective on Revenues Actual General Fund Revenues in FY03, FY04 & FY05 Below FY95 10 Years of Higher Costs & Increased Needs Go Unfunded Some Programs Crowding Out Others

9. 9 FY2004 Review – General Fund Budgets Cut $1.7 billion  General Fund = $1,335 million  School Aid = $361 million One-time Resources & Savings = $807 million Fees & Other Revenues = $453 million Other Changes = $155 million Tax Increases Off the Table More Cuts Coming

10. 10 FY2004 School Aid Review School Aid Down Year to Year = $128 million First Decline Since Proposal A Retirement Percentage Going to 14.87% from 12.99% - Reserves used to postpone increase Can More Cuts Be Avoided?

11. 11 How Weak is the Economy? Michigan’s Recent Statistics  46 th in Personal Income Growth  48 th in Unemployment Rate  49 th in Employment Growth (Decline for Michigan)  49 th in Index of Economic Momentum (Population, Personal Income, Employment)

12. 12 Internal Causes of the Problem Spending Growth Outpacing Revenue Increases  Medicaid – Double digit growth  Corrections  Some programs crowded out of budget Tax Cuts Eroding the Revenue Base Failure to Implement Permanent Budget Balancing Changes

13. 13 General Fund & School Aid Operating Deficits

14. 14 Summary of One-time Resources (in millions) Rainy Day Fund $1,363 FY2000 School Aid Fund Surplus984 FY2000 General Fund Surplus212 Medicaid Benefits Trust Fund561 Advance State Education Tax Collection Date 455 Tobacco Settlement/Merit Award Revenues317 Temporary Federal Fiscal Assistance655 Bond for Pay-as-you-go Capital Projects211 Revenue Sharing Accounting Change181 Refinance Bonds209 Employee Wage Concessions110 Other759 Total$6,017

15. 15 Summary of Other Budget Cuts Higher Education Cut 14% in 2 Years = $297 million Revenue Sharing Cut 15% in 3 Years = $293 million State Workforce Down 8,500 in 3 Years (14%) = Smallest workforce since 1974

16. 16 State Government Employment Trends

17. 17 Cumulative Effect of SBT and Income Tax Cuts ($167) ($298) ($403) ($448) ($487) ($532) ($247) ($354) ($448) ($605) ($713) ($872) FY 1999-00 FY 2000-01 FY 2001-02 FY 2002-03 FY 2003-04* FY 2004-05* ($1,500) ($1,000) ($500) $0 $500 Millions SBTIncome *Estimates

18. 18 Proposal A – What Did it Do? Senate Fiscal Agency Report Says  28 districts are better off  553 districts are worse

19. 19 What About Taxpayers? Michigan was 14 th in Tax Burden in 1993 Michigan was 20 th in Tax Burden in 2000 Property Taxes are 6.1% Above National Average Sales & Use Taxes are 0.8% Below National Average

20. 20 What About Taxpayers? Senate Fiscal Agency “Overall, the state and local tax burden fell to 0.5 percent above the US average using taxes as a percentage of personal income.”

21. 21 Good Things from Proposal A Reduced Spending Gap 1993  Lowest 10 districts averaged $3,476/pupil  Highest 10 districts averaged $9,726/pupil  179% difference 2000  Lowest 10 districts averaged $6,700/pupil (+92%)  Highest 10 districts averaged $11,389/pupil (+17%)  70% difference

22. 22 Good Things from Proposal A Less Reliance on Millages Average Local School Operating Millage  1993 – 33.9 mills  2000 – 8.4 mills

23. 23 Proposal A’s Impact on Foundation Allowance Foundation Allowance has not Increased in 3 Years Summary of K-12 Budget Cuts Since 2002  Lost $127 million in prorated foundation allowances & categoricals in 2002-03  Lost $111 million in reduced/eliminated categoricals in 2003-04  Lost $131 million in prorated foundation allowances in 2003-04

24. 24 How Schools Have Responded to Cuts January 2003 – May 2004  272 districts (52%) laid off 2,700 employees  393 districts (75%) did not fill open positions  277 districts (52%) had increased class size  434 districts (83%) reduced supply budgets  52% deferred maintenance on existing facilities  36% froze salaries/benefits for some employees

25. 25 How Schools Have Responded to Cuts Districts Expect to Balance 2004-05 Budgets  216 will lay off 5,400 employees  330 (77%) will not fill open positions  226 (52%) will increase class size  256 (48%) will defer $25 million in renovations & repairs  90 (21%) will reduce school days  154 (36%) will reduce staff hours  217 (50%) will delay purchasing textbooks  340 (79%) will spend from savings

26. 26 How to Evaluate a School Funding System Predictability Equity Adequacy Stability

27. 27 What’s Wrong with Current System State Controls Revenues BUT Schools Have Responsibilities State Cut School Revenues by $550 Million A YEAR Does Not Address Infrastructure Needs Does Not Adequately Address Declining Enrollment Districts

28. 28 What’s Wrong with Current System Increasing “Uncontrollable” Costs Passed On to Schools – e.g. retirement Rules Keep Changing – e.g. 20j Not Keeping Pace with Inflation Adequate?

29. 29 What to Do Tell Your Story Get Involved Politically Stay Involved Locally Be Persistent  A marathon; not a sprint