Michigan citizens might expect their education tax dollars to fund teacher salaries, school buildings, and classroom materials, but they may be surprised to learn that a large and growing amount now goes just to pay for public school debt.

A recent Detroit Free Press article reports that Michigan schools are posting a troubling amount of public school indebtedness, with schools owing more than $8 billion. According to recent U.S. Census data, Michigan ranks seventh in the nation in public school expenditures per pupil, and fourth highest in the nation in public school indebtedness.

This record-high level of debt comes at a time when schools enjoy large overall funding increases: Since the passage of Proposal A in 1994, state education funding is up over 50 percent. Yet Michigan schools continue to borrow money at an average of two and a half times the rate of debt retirement.

How schools are funded

Michigan schools are funded by several means. Under the current system, districts are allocated a basic foundation allowance by the state of Michigan on a per-pupil basis. This primary source of funding is used for all general operating expenses and relies on statewide sales and other use taxes, and less on property taxes. In addition to the basic foundation allowance, districts are able to ask taxpayers for approval of millages for the direct support of building construction, building repair, and technology enhancements. Bond revenue cannot, however, legally be used for regular maintenance or operating expenses.

The changes in school funding mandated by Proposal A have drastically reduced property taxes-by as much as 82 percent in some cases-while eliminating the ability of most schools to seek additional funding for operating expenses through local property taxes. Before Proposal A, some schools received $3,300 per pupil, while others received $10,400. Because of Proposal A, all Michigan districts will receive at least $6,500 in 2001-02.

Increasing debt

Though Proposal A has helped poorer districts achieve a higher level of equity in funding, wealthier districts are no longer free to seek unlimited increases in funds as they once were. As a result, some schools have turned to the issuance of both short- and long-term debt in order to compensate for the change.

Although some Michigan districts owe nothing, others owe up to about 40 percent of district property value. The average district indebtedness in Michigan is 6.2 percent of the total value of taxable property. Such discrepancies reflect, among other things, differences in administrative decisions relating to money management practices.

According to the Detroit Free Press, in the Detroit metropolitan area alone several districts have debt exceeding $100 million, with average debt per student sometimes exceeding $30,000. In Grand Rapids, schools are facing a budget deficit of $18 million that, left unresolved, could create a major debt problem. This deficit exists in spite of the fact that from the 1993-94 academic year to that of 2001-02 total revenues rose from approximately $153 million to $187 million. With fewer students and greater revenue, Grand Rapids public schools face a deficit despite a more than $2,000 per-pupil increase in funding.

Getting a handle on school debt

Despite some school districts assuming large amounts of debt, other districts have taken a different approach, exercising fiscal restraint and incorporating innovative ways to stay within their operating budgets. According to the Free Press, Trenton Public Schools has chosen to make incremental improvements to its facilities using funds left over from its operation expenses instead of financing them through voter-approved tax increases.

Observers have warned about the problem of excessive debt and school funding.

"Maintaining trust with voters is imperative at a time when support for the concept of public education seems to be waning," Michael Arens, a professional engineer involved in public construction projects, wrote in a 1998 Mackinac Center for Public Policy report on school debt.

"Michigan's public schools owe it to parents, taxpayers, and students to issue and manage debt with the utmost responsibility," noted Arens.

According to Arens, public school debt is a costly proposition for Michigan taxpayers, and the cost of borrowing detracts directly from funds available for use in the classroom. He recommends that districts develop written debt policies to guide responsible public borrowing. The policies would include features such as a prohibition against using debt to "capitalize" operating expenses.

"The capitalization of expenses-that is, the shifting of operational costs, facility maintenance, and repair onto long-term debt-is a classic pitfall of government finance," Arens wrote. "The practice should be expressly prohibited."

Schools might also avoid the need for debt through taking advantage of public schools-of-choice laws. By attracting more students to their schools and increasing enrollment, districts will gain more per-pupil funding.

Facing record levels of debt at a time when school funding is at an all-time high, Michigan school districts are faced with a quandary: continue to take on more debt, or seriously reconsider spending habits and practices. While bond proposals fail in many areas across the state and Michigan citizens become increasingly wary of new tax proposals, schools will be forced to take a harder look at their budgets and find creative ways to meet their financial challenges.

More information on school debt policies is available at www.mackinac.org/363.