When an “increase in school funding” is a decrease

I read with great interest the headline saying that Governor’s Snyder’s proposed budget includes “a two percent increase in funding for K–12 public schools.” If only that were true. Somehow, though, the details turn into a major decrease in funding for my local district. Allow me to explain this magic trick.

A little background

Since Proposal A reformed our school funding system in 1994, a per-pupil “foundation allowance” had comprised the major funding guarantee for both conventional and chartered public schools. This guarantee combined local revenue (from taxes on commercial and industrial property) and state revenue (from taxes on homestead properties, plus dedicated sources such as a percentage of sales taxes and lottery proceeds, as well as General Fund supplementation). As local revenue goes down, state revenue goes up to maintain the same guarantee — and vice versa. This made for a somewhat reliable amount that schools and districts could use for planning purposes — which is vital when we are required by law to adopt a budget by June 30 for the following year.

Under Gov. Snyder, an increasing amount of funding has been diverted from the foundation guarantee to various categorical or incentive-based grants. The foundation guarantee itself has been cut dramatically — and the budget proposal includes reduced appropriations for the required portion in each of the next two years, on top of significant previous reductions. Instead, slight increases in appropriations are planned for the “discretionary” portion — which is how the state chooses to describe any increase beyond the 1994–95 foundation allowance. Only some districts qualify for only some of this discretionary and non-foundation funding, and the amount changes significantly from year to year.

For the 2012–13 school year, for example, several kinds of non-guaranteed revenue were available:

• Best Practices Incentive: districts meeting six out of eight prescribed best practices criteria qualified for $52 per pupil. Next year, those meeting seven of eight criteria will get $16 per pupil; most of those criteria have added requirements, as well. So, if you qualified for this incentive this year, as we did, your funding will decrease next year, whether or not you can meet the higher bar. In 2014–15, this incentive funding is eliminated, which translates into yet another decrease.

• Another discretionary category provided partial reimbursement of transitional costs associated with consolidation of two or more districts, as is happening on our western border. That entire category is to be repealed.

• Another section gave districts grants to help pay for technology infrastructure, given that state achievement tests will be required to be administered via computer soon. No new such grants are allowed for in the proposed budget.

• “Performance grants” of $30 per elementary/middle school student and $40 per high school student were awarded for specified growth in achievement on state-mandated tests. While this funding is scheduled for continuation, the total amount will be the same, so there will be proration (that is, another decrease) in per-pupil awards if the number of districts qualifying increases.

• A section providing parent involvement (PIE) funding, which was capped and had its allowable uses limited this year, will be eliminated altogether.

• Categorical funding was provided for “class-size reduction,” but the appropriations covered only about one-third of the promised amount. Now this categorical is proposed to be reduced and, the following year, eliminated. Both of those translate into funding decreases.

Back to the Governor’s proposal

For the next school year, the governor is proposing an actual increase in per-pupil funding — a major source of the “two-percent increase” headlines. This increase, however, is only for the lowest-funded districts, raising it from $6,966 to $7,000. Alas, no local districts will benefit from this, since they already receive slightly more than $7,000 per pupil per year. For us, the “two percent increase” translates to zero increase.

But even for the districts that do qualify, this increase will not be added to the foundation allowance. Instead, it will be a one-time “equity payment” that will not be built into the funding base for 2014–15. That means their funding will decrease the following year. I am at a loss to explain how a small, one-year increase addresses the growing inequity in revenues available per child depending upon geography. If inequity is truly an issue — and it most assuredly is! — then why are such attempts to ameliorate it not made permanently?

Current Operating Expenditures Per Pupil (which includes federal funding and, in wealthier districts, “hold-harmless” millages) ranged in 2011 from $5,167 to $25,815, so YES, there is considerable spending disparity depending upon where a child lives. [I excluded a few very small, island districts, where spending ranges above $50,000 per child.] Can you conceive of any reason why some children are “worth” five times as much as others? Offering a few districts up to $36 more per pupil for a single year in the name of “equity,” given the unconscionable lack of parity, is almost insulting.

The Governor also wants to expand funding for the Great Start Readiness preschool program, which has never had enough appropriations to cover all the children who qualified for it. The eligibility requirements are tightened somewhat, but this is a terrific idea, since it helps at-risk preschoolers to catch up with their more advantaged peers before kindergarten. Excellent research shows long-term benefits from such interventions. Pardon me if I worry about how this will be funded, however. Program funding, which is scheduled for substantial increases in each of the next two years, comes from the State School Aid Fund — the source of foundation, discretionary, and categorical funding now. Will this translate into the same — or even less — money for schools overall? Robbing Peter to pay Paul does not really help districts that are already in dire financial straits.

The MPSERS Burden

The folks in Lansing have also tried to relieve the increasing, almost suffocating, burden of the MPSERS (Michigan Public School Employee Retirement System) program. While every employee of traditional districts (but not of charters) is required to participate in this program, its costs have become ever more difficult to bear. Given the variety of circumstances, as new and less generous retirement provisions are phased in, the MPSERS employer contribution rate ranged this year from $20.96% to 24.32%.

Let me give a simplified example of how this works. Suppose your district has a $50M General Fund budget. If 85% of that is employee costs (typical for a “service” industry), that amounts to $42.5M. Suppose that 40% (or $17M) of that expense is for benefit costs (also typical, or even a bit low). That means that the remaining $25.5M is “payroll.” If we assume an average MPSERS rate of 23%, the district must pay nearly $5.9M ($25.5M x 23%) to the retirement system. In other words, 11.6% of the General Fund budget goes to pay for employees who are already retired.

In an effort to cap the MPSERS rate increases, the proposed budget also appropriates more than $1B to the retirement system over the next two years. But more than $802M of that comes from the State School Aid Fund. Again, if the SAF is diverted to other purposes than foundation, discretionary, and categorical funding for school operations, how much will be left for those operations? The Governor and Legislature get to say that they are increasing K–12 funding, but the overall net translates into a decrease in revenue for our classrooms.

I realize that this can sound like ungrateful whining. It has been a very tough recession, after all, and most of us suffered significant losses in both income and net worth. We have all had to make do with less. That includes all of our public school employees, whose net pay is now significantly lower than it had been, while demands for accountability and better performance rise every year.

As a side note, the state budgets almost $9.5M a year for the operations of the Center for Educational Performance and Information (CEPI). This appropriation is to increase almost a quarter million dollars “to pay for economic adjustments.” One has to wonder exactly what that means, and why K–12 districts, which do the actual work that is monitored by CEPI, are not allowed any similar “economic adjustments.”

Michigan State University Professor David Arsen calculated the average total state and local revenue per pupil since 1994 for all local and intermediate school districts and charter schools in Michigan, adjusting for inflation and enrollment. His chart shows a steep decline in per-pupil revenue every year since 2002 — long before the Great Recession hit. The per-pupil figure is now significantly below what it was in 1994, just as the disparity between highest- and lowest-revenue districts has grown.

One can only conclude that Proposal A has been a failure on both equity and adequacy grounds. It is time to try again to enable a pubic school system that allows both our children and our state to thrive. We cannot continue to expect more and more of our schools and teachers (as our children deserve) while providing fewer and fewer resources to get the job done.

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!