More than you ever wanted to know about school funding

Yes, I know, it’s boring, and complicated, and — to many — seemingly irrelevant to their lives. But we are all paying for K–12 schools, so we are all stakeholders. Here are a few things you may not know about how this works in Michigan. I will absolutely have to generalize and over-simplify, as the system is extremely complex. One of the most complete explications of it was published by the Mackinac Center in 2007, and it is 195 pages long. You can get or peruse A Michigan School Money Primer (Olson & LaFaive) at their website.

First, let’s define some terms. I will only be talking about current operating expenditures (COE) — what it takes to run school districts on a day-to-day basis. Most districts will also have some level of bond funding, the equivalent of long-term mortgages that pays to build schools and cannot be used for operating expenses such as textbooks or salaries. Some also have small levies called (I have no idea why) “sinking funds.” This levy can be used for very limited “building and site” purposes, such as renovation, roof replacement, or land purchase. It cannot be used for the purchase of computers or school buses, or for operational purposes like salaries and benefits.

How Michigan is different

We were one of the first states to move away from reliance on local property taxes as a funding source, in order to make the system fairer. It used to be that a district with a power plant, shopping mall, corporate headquarters, or airport, for example, could raise tons of money with a low tax rate, because those large revenue generators paid so much. Sparsely populated rural areas, on the other hand, could not raise enough money no matter how high the tax rate. Now, since the passage of Proposal A in 1994, homeowners pay a much smaller statewide property tax (see note at bottom), and everyone pays a higher sales tax, so that revenue can be collected and disbursed by the state on a more equitable basis.

The theory was that the quality of a child’s education would be less dependent upon where he lives. In practice, progress toward greater equity stalled after a few years, although the lowest-funded districts are certainly better off than before. By my calculations (comparing only K–12 districts or charters with more than 130 — 10 per grade level — students, so as to set aside the small island districts where costs will necessarily be much higher per student), things may even be worse now. The ten highest-spending (COE) districts in 1993–94 spent 234% as much per child as the ten lowest-spending districts. By 2008–09, they spent 238% as much per child. The disparity should be shrinking again after this past year, when the “Section 20j” money that allowed the wealthiest districts to spend more every year was cut from the State School Aid Act. But those figures (Bulletins 1014) are not yet available.

Where does K–12 revenue come from?

The State School Aid Fund has at least ten different sources. About 43% comes from a portion of sales/use taxes; about 16% from a portion of income taxes; about 15% from the statewide six-mill property tax; about 11% from federal funding (more when we get “stimulus” money); about 5% from state lottery proceeds; and smaller amounts from taxes on tobacco, real estate transfers, casinos, liquor, etc. A small but significant portion comes as a “subsidy” from the state’s General Fund, competing directly with every other spending priority.

But the School Aid Fund provides only part of the total revenue for K–12 schools. Since the adoption of Proposal A in 1994, all funding sources are supposed to guarantee a certain level of funding per student, which varies a bit by district. Districts are no longer allowed to ask voters to approve increases in their operating millage. Funding is doled out on a per-pupil basis: if you gain students, you get more money; if you lose students you get less. Local property taxes (typically 18 mills on business and non-homestead property) are complemented by by a state allocation: when local funding rises, state funding declines, and vice versa.

Before Proposal A, some two-thirds of K–12 funding came from local property taxes and about 29% from state resources. By 2001, these proportions had more than reversed: 78% from/through the state and 17% from local property taxes. Remember: the state share includes the statewide school tax on your home. Instead of going directly to your local district, it is now sent to, and slowly funneled back by, the state. School property taxes are, for the most part, paid in the summer. Those (the six-mill State Education Tax) that are funneled through the state, however, do not begin to come back to local districts until October — long after school has started for the year. State Aid, in fact, is paid in 11 installments, from October through August. That means that three payments (more than 27% of the total) are not made until is school is out for the year. Two of them (18%) are made after the legally specified fiscal year for schools is over on June 30.

Cash flow follies

Holding onto this money helps the state with its cash flow, but at the expense of the local districts. Unless they have general fund balances (that is, uncommitted “savings”) of at least 10% of their operating budget, they will have to borrow money to pay their staff and other expenses (such as buying textbooks before school opens) in anticipation of later receiving that money from the state. In 2008–09, Van Buren Public Schools (VBPS), had to borrow $4.5M in a tax anticipation note — and pay interest on that amount. In 2009–10, it had to borrow $5M.

Another serious cash flow problem has arisen for the first time this summer. The State Aid Formula assumes that districts levy the full 18 mills allowed on non-homestead property; if they do not, their per-child funding will be reduced. Similarly, the State Aid Formula assumes that districts are actually paid the taxes that they are owed. When taxpayers do not pay these taxes, they are considered delinquent and can only be paid to the county treasurer.

Typically, county governments “front” school districts the delinquent taxes in the spring, until they are actually collected through late payments or liens or foreclosures. This year, because of the huge volume of unpaid taxes, Wayne County, at least, has been unable to do that. If the taxes are not paid to local districts by the end of August, they cannot legally be booked in the 2009–10 budget. What this means is that, if local districts do not have fund balances large enough to cover the missing delinquent taxes, they will be retroactively in deficit — which is not legally allowed. VBPS does not have a fund balance large enough to cover the more than $1M in delinquent taxes that the state assumes it has been paid. It is likely that many of the county’s dozens of districts will also be thrown retroactively into deficit. Nor can Wayne County be the only one with this problem. By law, this should trigger state supervision: each such district must submit a deficit elimination plan to the Michigan Department of Education.

What a mess.

[Historical note: Van Buren Public Schools levies a total of 2.98 mills for the new high school bond and 1.13 mills for a sinking fund for major repairs and upgrades to other schools. All property owners pay the six-mill State Education Tax and non-homestead properties also pay an 18-mill tax for operating purposes. Local municipal authorities collect these taxes, with the six being sent to the state and the 18 to the local districts. Before Proposal A, for comparison, VBPS residents had voted to pay a total of 47 mills of local school taxes on all property.]

CORRECTION posted 23 Aug 10: I should have noted some of the changes made when the Michigan Business Tax replaced the Single Business Tax in 2007. As part of that rearrangement of business taxes, industrial “personal property” (equipment, machinery, fixtures, etc.) is no longer subject to the six-mill State Education Tax or to the 18-mill local school operating tax; commercial personal property was made exempt from the first 12 of those 18 mills. In effect, state and local taxes for schools were reduced, and the state promised to replace that revenue to guarantee a per-pupil level of overall funding. I told you it was complicated!