Dueling Facts about K–12 Funding

This is an election year, so we will continue to hear conflicting stories about how public schools in Michigan are funded. On both sides, the facts are largely correct, yet the conclusions — spending has gone up or has gone down — are opposite. How can this be? Whom are we to believe?

The kind of sound bites we will be incessantly exposed to during a campaign season cannot adequately capture the full story of school funding. Nor can I, in a single blog post. But I will explain some of the reasons the facts and conclusions seem to contradict one another. The bottom line is that, while state spending has increased, the amount of that spending available to traditional public school districts (which I will call “districts” for brevity) for operations has not, when one controls for inflation. The reasons include
(1) tax cuts significantly reduced revenue for school aid;
(2) existing school aid money has been diverted to other uses;
(3) nominal increases in funding were not equitably distributed;
(4) nominal increases were absorbed by mandated retirement contributions;
(5) overall funding has not kept pace with inflation;
(6) Proposal A and the Headlee Amendment constraints will delay recovery of property tax bases for many years; and
(7) funding has not kept pace with the concentration of needier students left in public districts by choice and charters.

For all these reasons, traditional school districts have greater needs and less inflation-adjusted revenue available to actually educate children than since before the Great Recession began. If you consult the Senate Fiscal Agency’s ten-year history [www.senate.michigan.gov/sfa/Departments/DataCharts/DCk12_FoundationHistory.pdf‎] of per-pupil Foundation Allowances for every district and charter in the state, you will see that they are now below what they were in 2006–07, before the recession began. This is why an unprecedented number of districts are in deficit or flirting with deficits.

When Funding “Increases” Equal Decreases

The simple math used to demonstrate “increases” is misleading. In his January 2014 State of the State address, Governor Snyder asserted that state spending on K–12 education (not counting preschool or adult education) has increased $660 per pupil from 2010–11 to the 2013–14 current school year. This is true (although the actual math says it was $666). Total state spending was divided by the official fall student count to produce the figure.

Why is this misleading? People assume that increased state spending translates into more money for school operations — that is, more money in the classroom. It has not, in the aggregate. (It may have for some districts but not others; we are talking statewide averages here.) Nearly all of the increased funding went to the Michigan Public School Employees Retirement System (MPSERS). Due to legislative changes beginning in 2007, newer teachers will never have the kind of traditional pension once enjoyed by their colleagues, but the unfunded liability for current retirees and older teachers is still considerable and grew enormously when invested monies lost value during the recession. This MPSERS liability tends to soak up any alleged increases in funding. This year, for example, the state budgeted a modest increase in the per-pupil Foundation Allowance. Charter schools, almost none of which participate in MPSERS, enjoyed this increase. Traditional schools sent all of it — and usually a bit more — right back to MPSERS. The “increase” translated into an operational decrease in funding for them.

It is difficult to overstate the effect that the rising MPSERS liability has had on traditional public school districts. Remember: they were required by law to participate in MPSERS. Every employee, from kitchen workers to bus drivers to custodians to substitute teachers, had to be part of the system. Yet the state sets benefit levels and districts have no control over the costs. For example, the state offered financial incentives for older teachers to retire — allegedly “saving money” for the schools, which could replace them with younger teachers at lower pay rates. But those incentives permanently increased the retirement pay — and the MPSERS liability — for those retirees. That immediately translated into increased diversion of operating funds to retirement costs. Declining numbers of employees contributing to the system (due to lay-offs, diversion of teachers to charters, cyber schools, and the Educational Achievement Authority; changes to the system for newer employees; and privatization of non-instructional district employees) has exacerbated the revenue constraints — even as participants contribute substantially more to their own and to existing retirees’ pensions and post-retirement health care.

The state annually mandates the percentage of payroll that districts must contribute to MPSERS. Legislation that reformed this system capped the district/employer contribution to MPSERS at 25.8 percent of payroll. That is, for every $100 of salary to the employee, another $25.80 is owed to MPSERS. This has been the driving force behind privatization of all but regular teaching jobs. Most districts now contract with a third party to provide substitute teachers, for example. If the subs are not district employees, then this surcharge is not owed. The same savings can be found through contracting out for non-teaching jobs. (That also means, of course, that the contract employees have lost significant benefits.)

The cap on contributions means that the state pays any amount over it needed to fund the system; in fact, the state has made additional contributions in some years toward the accumulated unfunded liability that was exacerbated by the effect of the Great Recession on MPSERS invested assets. These contributions all come from the State School Aid Fund, though, which means that less dedicated funding has been available for school operations.

In addition to the MPSERS drain, many of the increases in funding on Snyder’s watch have not been rolled into the Foundation Allowance and are or will be disappearing. These include various “performance-based” awards, as well as this year’s one-time “equity” payment for the lowest-funded districts — which presumably can go back to the previous level of inequity next year. All of these disappearing pots of money are experienced as funding cuts on the ground.

Diversions from and Reductions in the State School Aid Fund

The state’s School Aid Fund (SAF) collects earmarked revenues from many sources. The state has historically supplemented the SAF with appropriations from its General Fund, as well. But, in recent years, the SAF has taken major hits from two directions: deliberate reductions in its revenue streams and diversion of its funds to new uses.

About 80 percent of the fund’s dedicated revenue comes from the statewide education property tax, plus portions of the sales and income taxes. The rest comes from lottery profits and several smaller taxes, including real-estate transfer, tobacco, and liquor taxes. Gov. Snyder and the Michigan Legislature eliminated the Michigan Business Tax, which had contributed more than $700 million a year to the SAF. They are also phasing out the Personal Property Tax on most business equipment, for a cut in the State Education Tax and in local school taxes estimated by the Senate Fiscal Agency as another $19.9 million in 2014, $20M in 2015, $44.7M in 2016, and $45M in 2017. Revenue for only partial replacement of the Personal Property Tax has been identified, and the SFA warns that the requirement on the Legislature to make even those appropriations is not considered legally binding.

As the recession deepened, Governor Granholm made an emergency, one-time allocation from the SAF to higher education, which had always been funded through the state's General Fund. Governor Snyder chose to make that a permanent diversion and to double the amount. Thus, some $400 million per year is now unavailable to K–12 schools because it goes instead to colleges and universities.

Expanded preschool programs, which most educators would agree are necessary, took another $65 million from the SAF this year. The governor proposes to double that amount next year, making $140 million per year not available for K–12 needs.

Unaddressed But Increased Needs

The governor’s calculations alleging increased funding do not factor in inflation. Districts must contend with inflationary increases in costs for utilities (especially this winter!), technology, books, materials, buses and fuel, professional services, and so forth. Most district employees have experienced pay cuts and benefit cost-sharing increases since the recession hit, and none have yet regained that take-home pay. Teachers at the lower rungs of the longevity ladder have also been hard hit by freezes in the “step increases” that normally raise their pay as they gain experience. But a desire to fairly compensate their employees is hardly the only reason districts are clamoring for funding increases.

Unfunded mandates are an ongoing problem. New teacher evaluation requirements and the adoption of the Common Core State Standards (CCSS) both involve considerable expenses not reimbursed by either federal or state funding. Districts have already invested years of planning in them, and the CCSS requires software and a huge number of computing platforms for its on-line assessment tests. There are also large costs associated with compliance with the Affordable Care Act, in addition to expected annual premium increases for health coverage.

Simultaneously, the need for and cost of purely educational services rises as district student populations change. At-risk students are increasingly concentrated in poorer districts, as other students are diverted to charters and to wealthier districts through “choice.” The state does offer additional at-risk funding, although the level of such supplemental funding does not approach that needed to adequately address the needs. Duncombe & Yinger (2005), in the Economics of Education Review, estimated that economically disadvantaged students would cost 100% more to properly educate. State law offers 11.5 percent more. State appropriations are inadequate, however, so the actual supplement was less than 7 percent last year, according to the Michigan Department of Education.

Special Education is similarly underfunded. Under the Individuals with Disabilities Education Act (IDEA), the federal government mandated an “appropriate” education in the “least restrictive environment” for students with specific learning disabilities, speech or language impairments, intellectual disabilities, autism, or emotional disturbances. It has never, however, come close to meeting its commitment to fund 40 percent of the difference between the cost of educating a disabled student and a general student. Under the sequester, the federal share fell to 14.9 percent, forcing additional costs to come from per-pupil funding for other students. So the districts, which educate a much higher percentage of students with disabilities than do charters, are at a great economic disadvantage in meeting all their students’ needs.

The funding burden is exacerbated in Michigan, which mandates special education through age 26. Keep in mind that 72 percent of Michigan charter school students are elementary (K–5) school students (CREDO, 2013), so this burden would be minimized for them even if they did not serve a much lower proportion of each grade cohort of special education students.

The Bottom Line

The overall-funding-divided-by-pupil-count calculation used to trumpet “increased” education funding is both technically true and deeply fraudulent. This simple average significantly misrepresents how much funding can actually be used to support and improve teaching and learning and vital school operations. Moreover, averages mask significant differences in the actual per-pupil funding received by individual districts or available to them for operations. Unprecedented numbers of districts are in deficit, on the edge of such trouble, or rapidly burning through any fund balances they once used to cushion annual funding volatility. Of all the factors I review above that contribute to this problem, the MPSERS drain is the most severe. Most other states appropriate employee pension contributions separately from direct K–12 spending. When the U.S. Department of Education corrects its data for our diversion of funding to pension costs, it ranks Michigan as 26th in per-pupil spending — a dramatic decline in our ranking since the pre–Proposal A period.

If you believe the “increased funding” line and really think that school districts are crying wolf, I encourage you to speak with your community’s parents, teachers, school staff, and school boards to learn the truth they live with daily.

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.