The Basis for Hold-Harmless Millages

Note that the calculations for the Lamphere Public Schools in Graphic 16 show the state contributing $3,031.86 to the district's foundation allowance and the district (theoretically) contributing $5,176.14 in nonhomestead property tax revenues.[cxi] Combined, these two figures would generate per-general-pupil operating revenues of $8,208 for Lamphere Public Schools.

Yet the district's foundation allowance for fiscal 2007 is $10,645. This $2,437 per-general-pupil difference results from Proposal A, which allows Lamphere to levy a hold-harmless millage to help make up the difference (the specific statutory language was quoted earlier under "'Hold-Harmless' Millage", under "Local Property Taxes by Type").

The district's fiscal 2007 hold-harmless millage is 14.5000 mills for homestead properties, which had a total taxable value of $283,845,570 in January 2007. The revenue from this millage is $4,115,760.77, or about $1,761.29 per general-education pupil. Added to the state portion ($3,031.86) and the local nonhomestead portion ($5,176.14), the district's total per-general-pupil operating revenue is about $9,969.29. The gap between Lamphere's district foundation allowance and what the district actually received per-general-pupil based on January 2007 figures under the foundation allowance formula is approximately $675.71.

Annual Adjustments to the Foundation Allowance

In fiscal 2007, there were 186 different foundation allowance amounts, ranging from the basic foundation allowance of $7,085 to $15,772. At the start of a fiscal year, each district's foundation allowance is adjusted by the same dollar amount: the Legislature's dollar adjustment (if any) in the basic foundation allowance for the new fiscal year.

For example, the Legislature increased the basic foundation allowance by $175 in fiscal 2006 and by $210 in fiscal 2007. As Graphic 17 shows for the Ypsilanti School District and the Sault Ste. Marie Area Schools, each school district in Michigan received equivalent foundation allowance increases during each of those two years.

Graphic 17: Two District Foundation Allowance Increases

Graphic 17 - click to enlarge

The '20j Supplement' for Hold-Harmless Districts

In addition to hold-harmless millage revenue, hold-harmless districts are able to maintain their level of spending in part through a state payment calculated under section 20j[cxii] of the State School Aid Act. This supplment is often referred to as a "hold-harmless payment."

Section 20j specifies three possible calculations.[cxiii] Which calculation the state uses for a hold-harmless district's payment is based on the relative size of the district's foundation allowance, the district's per-general-pupil local operating revenue, and the increase in the district's foundation allowance compared to the basic foundation allowance since 1999. All three of these possible calculations involve a variable we will call the district's "dollar adjustment difference" — that is, the difference between the basic foundation allowance adjustment since 1999 and the district's foundation allowance adjustment since 1999.

As an example, consider Novi. The Novi district's foundation allowance has increased by approximately $1,143[cxiv] since 1999, while the basic foundation allowance has increased by $1,423 during the same interval. Novi's dollar adjustment difference is

Novi Dollar Adjustment Difference2007 = $1,423 − $1,143 = $280. [cxv]

Case 1. The first calculation is applied to districts whose per-general-pupil local operating revenue is less than or equal to the sum of the dollar adjustment difference and the district's current foundation allowance. If a district fits this criterion and does not fit the criteria for Case 2 below, its 20j supplement is equal to the dollar adjustment difference multiplied by the number of general education FTE students.

Take the Lamphere Public Schools as an example. The per-general-pupil local tax revenue from that district's levy for operating purposes on nonhomestead property (18.000 mills) and homestead property (14.5000 mills) is $6,937.43.[168] Lamphere's dollar adjustment difference is Lamphere Dollar Adjustment

Difference2007 = $1,423 − $1,246 = $177.

When this is added to the district's foundation allowance for 2007 ($10,645), the sum is $10,822 per pupil. This is greater than the district's local property tax revenue per general-education pupil, and Lamphere does not qualify under Case 2 (see below), which requires that the district's local property tax revenue per general-education pupil be greater than the district's foundation allowance. Thus, for fiscal 2007, the state makes a hold-harmless payment to Lamphere based on its dollar adjustment difference multiplied by its general education FTE membership:

Lamphere 20j Supplement2007 = $177 x 2,336.79 = $413,611.83.

Case 2. The second calculation is applied to districts whose foundation allowance is less than their per-general-pupil local property tax revenue and whose per-general-pupil local property tax revenue is less than or equal to the sum of the district's foundation allowance and its dollar adjustment difference. The difference between this sum and the district's per-general-pupil local operating property tax revenue multiplied by the general education FTE membership is the state's 20j supplement payment to the district.

For example, consider "Gitchee Gumee," a hypothetical school district with 1,000 FTE general education students. The district's foundation allowance is $8,700 and its local operating property tax revenue per general pupil is $8,865.77 — i.e, greater than the district's foundation allowance. The district's dollar adjustment difference is $170, which means the district's foundation allowance plus the district's dollar adjustment difference is $8,870 — i.e., greater than the district's $8,865.77 in per-general-pupil local school operating property tax revenue.[cxvi] Thus, "Gitchee Gumee's" 20j payment for 2007 is

"Gitchee Gumee" 20j Supplement2007 = ($8,870 − $8,865.77) x 1,000 = $4,230.

Case 3. The third 20j calculation involves districts whose local operating revenue per general-education pupil is greater than the sum of the district's foundation allowance and the district's dollar adjustment difference. Districts that meet this criterion receive no payment under section 20j.

Consider the Harbor Springs School District. In fiscal 2007, Harbor Springs' per-general-pupil local school operating property tax revenue — $8,865.77 in fiscal 2007 — is greater than its $8,573 foundation allowance plus its $289 dollar adjustment difference (a total of $8,862). Harbor Springs therefore does not receive a 20j payment in fiscal 2007.

Foundation Allowance Adjustments

The adjustments discussed below appear in section 20 of the State School Aid Act (MCL § 388.1620) and are being made to the foundation allowances of conventional local public school districts in fiscal 2007. Also discussed is a section 20 adjustment — the former "section 32e" supplement — that remains relevant because it is used when calculating other education grants to certain school districts.[cxvii]

Former 'Section 32e' Money. Subsection 19 of section 20 of the State School Aid Act requires that a supplement be paid to districts that once received state education money under section 32e.[cxviii] The amount of money that was once disbursed under section 32e is still used in some calculations of certain other state payments made to conventional local school districts.[cxix]

The districts that received funding under section 32e had schools that met the following criteria in 2002:[169]

  • operated first grade through third grade;

  • operated by a district offering kindergarten through 12th grade;

  • received funds under section 31a for at-risk students; and

  • had 50 percent of their students eligible for free lunch under federal education programs.

The districts may or may not meet these conditions any longer, but the current law stipulates that the only test for receiving an adjustment under subsection 19 of section 20 is whether the district received funding under section 32e in 2002. The per-pupil adjustment amount is fixed at its 2002 level, but is based on the total state aid membership for the current fiscal year.[cxx] The additional money a district receives under this section must be used for one of three possible objectives:

  1. The purpose specified by the former section 32e, which was intended to make the average class size in kindergarten through third grades not more than 17 students, with no more than 19 students in any one class in these grades.[170]

  2. "Early intervention" programs for kindergarten through third-grade students designed to lessen the need for special education services[171] or to implement "schoolwide systems of academic and behavioral supports."[172]

  3. Class-size reduction purposes using alternative methods as approved by the state Department of Education, but only if the district applies for this use of the additional funds and only if the district achieves adequate yearly progress status in language arts and mathematics at all relevant grade levels and in all relevant subgroups under the federal No Child Left Behind Act.[cxxi][173]

Of all Michigan local public school districts, 26 receive the former 32e adjustment.

Nonresident Student Adjustment Under Sections 105 and 105c. Sections 105 and 105c of the State School Aid Act stipulate certain conditions under which a student assigned to one school district may attend a school in another district without the permission of the student’s resident district. The receiving district can enroll students from school districts in the same intermediate school district[174] or from school districts in a bordering intermediate school district.[175] This program is commonly referred to as “schools of choice.”

[cxxi]

The state pays a district a foundation allowance for each out-of-district student the district enrolls. The nonresident student brings with him or her a foundation allowance that is the lesser of the assigned district and receiving district’s two foundation allowances.[176] This modification of the foundation allowance amount based the two districts’ allowances is sometimes called a “20‑sub‑5” (20(5)) adjustment after the provision’s location in the State School Aid Act.

In the Wakefield-Marenisco School District, for example, 13.83 general education FTE students in January 2007 came from three other districts under sections 105 and 105c. As Graphic 18 shows, the district’s revenue from these nonresident students was $97,985.55. That amount is based on the resident districts’ foundation allowances, since the resident districts’ allowances are lower than Wakefield-Marenisco’s allowance of $7,645.

On Wakefield-Marenisco’s state aid financial status report, however, the 20(5) adjustment is reported as -$7,744.80. In effect, the state aid financial status report assumes that the district receives its own foundation allowance for all of the students the district enrolls, but then reduces this calculation by $7,744.80 to acknowledge that the “schools-of-choice” students’ foundation allowances are subject to the adjustments required in sections 105 and 105c.[177]

Graphic 18: Sections 105 and 105c Foundation Allowance Adjustment Wakefield-Marenisco School District[178]

Graphic 18 - click to enlarge

Nonresident Student Adjustment Not Under Sections 105 and 105c. In some intermediate school districts, conventional school districts enter into collaborative agreements regarding interdistrict pupil transfers without using sections 105 and 105c. In such cases, the foundation allowance that the enrolling district receives is that of the district to which the student was assigned. Consider, for instance, the Mona Shores School District. Based on January 2007 data, Mona Shores is receiving money for 378.31 full-time-equivalent students who were originally assigned to various other districts, but who attend Mona Shores under a collaborative agreement like that described above. This movement of students necessitates a financial modification known as a “nonresident student adjustment.”

Graphic 19 shows these students’ originally assigned districts at the far left. Because these students are not entering Mona Shores under the section 105 and 105c school choice options, Mona Shores receives the foundation allowance of the resident district, even though all the districts listed have higher allowances than Mona Shores does. The total foundation allowance assigned by the state to the students who attended Mona Shores under the nonresidential student arrangement in fiscal 2007 would be $2,801,912.29 based on January 2007 figures. This number is the “Adjusted” figure in Graphic 19, meaning that it is based on the resident district’s foundation allowance, not on Mona Shores’ own allowance, which is the basis for the “Unadjusted” figures at the far right. For comparison, the total allowances that Mona Shores would have received had it been paid an unadjusted amount — i.e., based on its own foundation allowance for 2007, $7,085 — would have been $2,680,326.35. That is $121,585.94 less than the adjusted amount, and this $121,585.94 figure appears on Mona Shores’ January 2007 state aid financial status report as the “20(5) Adjust.” (Note that the adjustment for nonresident students who transfer under sections 105 and 105c is also called a “20(5)” adjustment, since nonresident student calculations for both 105/105c and non-105/105c transfers are described in that subsection.)

Graphic 19: Other Nonresident Foundation Allowance Adjustment Example: Mona Shores Public Schools[179]

Graphic 19 - click to enlarge

Charter Schools

Charter schools receive a district foundation allowance, just as conventional local school districts do. However, a charter school’s foundation allowance is equal to the lesser of the foundation allowance of the surrounding conventional school district and the basic foundation allowance plus $300.[180] In fiscal 2007, the basic foundation allowance is $7,085, meaning that no charter school is receiving a foundation allowance of more than $7,385 in fiscal 2007.

For example, University Preparatory Academy is located in the Detroit City School District. Detroit’s foundation allowance is $7,469, which is more than $7,385 ($300 above the 2007 basic foundation allowance of $7,085). Thus, University Preparatory Academy has a foundation allowance of $7,385, which is the lesser of the two amounts.

The Hillsdale Preparatory School, another charter school, presents a different situation. This school is located in the Hillsdale Community Public Schools, which is receiving the basic foundation allowance of $7,085 in fiscal 2007. Since the Hillsdale Preparatory School’s foundation allowance is the lesser of the HCPS foundation allowance and $7,385, the Hillsdale Preparatory School’s foundation allowance is $7,085 — the HCPS amount — in fiscal 2007.

Annual adjustments to the foundation allowances for charter schools will generally be the same as the annual adjustments for conventional school districts. A charter school’s foundation allowance would rise less quickly when the surrounding district gets an additional adjustment that raises its foundation allowance above the basic foundation allowance plus $300. In any event, the governing formula for a charter school’s foundation allowance in any one year is the lesser of the surrounding district’s foundation allowance and the basic foundation allowance plus $300.


[cxi] The Lamphere district did, in fact, levy its maximum possible nonhomestead property tax of 18 mills in fiscal 2007.

[cxii] “Section 20j” is shorthand for MCL § 388.1620j. (The first five digits of the MCL citation are understood from the reference to the State School Aid Act, which begins at MCL § 388.1601.)

[cxiii] For each of these three calculations, see MCL § 388.1620j(3).

[cxiv] We say “approximately” here because the state’s calculations of the district’s foundation allowance adjustment since 1999 appear to include fractions of a dollar that used to be part of Novi’s (and many other districts’) district foundation allowance in 1995 (see MCL § 388.1620(3)(c)).

[cxv] Novi’s exact dollar adjustment difference for 2007 is $280.58.

[cxvi] Because the sum of the district’s foundation allowance and dollar adjustment difference is greater than the district’s local operating revenue per general pupil, the district meets the criteria of Case 1. But because the district also meets the second criterion in Case 2 — i.e., the district’s per-general-pupil local operating revenue is greater than the district’s foundation allowance — the district’s payment is calculated under Case 2.

[cxvii] We do not discuss in this primer foundation allowance adjustments that were made in past fiscal years but that are not scheduled to be made again. For instance, in 2003, the state made an “equity payment” on a per-pupil basis to districts whose foundation allowance was less than $6,500. A similar payment was made in 2007, but those “equity payments” are not automatic annual adjustments. A second example of an adjustment that is no longer made is a 2003 increase of $250 per pupil for districts whose district boundaries contained industrial facilities that met specific criteria and received tax reductions (MCL § 388.1620(18)). The provision applied to one district, Gibraltar (“School Aid Act Compiled and Appendices,” C-2), which received a $450 foundation allowance increase in 2003, while the basic foundation allowance increase was $200. These adjustments are permanent in the sense that once they have raised the district’s foundation allowance, the adjusted allowance remains the basis upon which the next fiscal year’s foundation allowance is calculated.

[cxviii] Section 32e was subjected to a gubernatorial veto (and thus removed from the State School Aid Act) on Sept. 28, 2001. The repealed law, MCL § 388.1632e (see Historical and Statutory Notes for 1997 Main Volume, MCLA § 388.1622b), was later replaced by the section under review here, MCL § 388.1620(19).

[cxix] For example, the payment made in 2007 to districts with a foundation allowance of less than $7,360 (MCL § 388.1622c) is based on districts’ foundation allowances including the former 32e per-pupil foundation allowance increase. By contrast, foundation allowances paid to districts accepting nonresident students under MCL § 388.1705 and 1705c are calculated without the former 32e adjustment: See Footnote cxxiii.

[cxx] MCL § 388.1620(19) states that a district’s total adjustment under subsection 19 is the product of the district’s current membership and the district’s per-pupil payment in 2002 given its 2002 resident membership — that is, excluding cross-district transfer students (discussed below).

[cxxi] The No Child Left Behind Act is the federal law governing the distribution of much of the federal education revenue from the U.S. Department of Education to state governments. The act is discussed in more detail in “Distribution of Money from Federal Sources,” Page 90. 8583

[cxxii] A third type of student transfer involves a student’s attendance at classes offered by an eligible postsecondary institution during his or her secondary schooling. Such a transfer may be effected under the Postsecondary Enrollment Options Act (MCL § 388.511 through MCL § 388.524). This transfer technically does not involve a state “adjustment” to the district’s foundation allowance, but rather requires the student’s district to pay the institution the lesser of the cost of the student’s education or a prorated portion of the student’s foundation allowance (MCL §§ 388.1621b(2), 388.1621b(3)).

[cxxiii] Note that the “Adjusted” figures are based on the resident district’s foundation allowance before it is adjusted under section 20(19), which is discussed above as “former section 32e” money. If a foundation allowance included the former section 32e adjustment, the Muskegon Heights school district’s foundation allowance would be $7,741, rather than the $7,575 listed in Graphic 19. Not all districts receive a former section 32e adjustment, but Muskegon City, Muskegon Heights and Orchard View do.

[cxxiv] A brief note is in order about the pupil counts in Graphic 19. The Michigan Department of Education uses FTE student count data from the state government’s Center for Educational Performance and Information, but the CEPI’s FTE counts differ from the numbers listed in the graphic because the blend percentages have not been applied to CEPI’s numbers. For instance, CEPI indicates that the number of FTE general education students who reside in Muskegon Heights but transferred to the Mona Shores district was 104.75 in fall 2007. If we multiply 104.75 by 0.75, we get 78.5625, which is the (unrounded) number listed in column (f) of the “Muskegon Heights” row of Graphic 19. Similarly, CEPI lists the Muskegon Heights FTE count for the same categories in spring 2006 as 100.88. If we multiply this figure by 0.25, we get 25.22, which is the number listed in column (e) of the “Muskegon Heights” row.