Sinking fund legislation could balloon local property tax millages

(Note: The following is an updated version of a Sept. 2, 2002 commentary by Mackinac Center legislative analyst Jack McHugh.)

Taxpayers were relieved in 1994 when Proposal A ended the constant stream of local millage elections. The result was lower property taxes and, at the same time, significant increases for school operations. But in 12 years of chafing under these limitations, public school officials never stopped looking for ways around them.

One clever way is House Bill 4575, sponsored by Rep. Barb Vander Veen, a term-limited Republican from Allendale (an identical bill, HB 4611, is sponsored by Sen. Gretchen Whitmer, an East Lansing Democrat). The legislation would let school districts levy "sinking fund" taxes for the same purposes as regular school bonds. In her 2002 election campaign, Gov. Jennifer Granholm endorsed the idea, so if the bill is passed it’s almost certain she would sign it.

The House actually passed an identical bill during a late-night session in December 2001, but most members had been told it was merely a "technical" change in the law. The bill is anything but that. When the truth became known, the Senate never considered the bill, though versions of it have been introduced in every legislative session since.

How does HB 4575 accomplish its end run around Proposal A? Traditionally, sinking funds were a way to set aside money to repay principal on a debt and for future capital projects — like buying real estate or building and repairing buildings. Unlike school bonds, which can be used for everything from furniture to school buses, the legal uses of sinking fund taxes are limited. Nevertheless, school districts are relying on them more and more, as seen by the fact that the number collecting sinking fund taxes has grown from 91 in 2001 to 126 last year (out of a total of 554 districts). If the uses for sinking funds are expanded, that number can be expected to grow even larger.

The Vander Veen bill doesn’t explicitly repeal any of Proposal A’s operating millage caps. Therefore, it doesn’t alert the public to its likely outcome. Technically, it just lets sinking funds be used for the same purposes as school bonds. Schools are limited in how many mills they can levy for regular bonds and still qualify for favorable interest rates — but if sinking funds could be used for the same purposes, it would create a whole new 5-mill property tax opportunity.

Sinking funds currently allow school officials to maintain a fund of property-tax-generated dollars available for the permissible uses, the scope of which would greatly expand under this legislation. Schools could dip into the pot whenever they like, a luxury not afforded by regular bonds.

If HB 4575 passes, a school board could offer higher salaries or benefits from its annual state foundation grant, since other expenses funded by these grants in the past might be covered by new sinking fund tax dollars — a potential shell game. School board members friendly to employee unions could seek ways to substitute sinking fund proceeds for these expenses, thereby conserving state money to boost payrolls without accompanying productivity increases.

This effort to raise taxes comes at a time when hundreds of millions of dollars in potential savings are already available. Following Ohio’s example by exempting schools from "prevailing wage" rules would save at least $150 million every year. Public school employees’ health insurance — a market dominated by the Michigan Education Association’s costly "MESSA" plan — is ripe for huge savings. And millions more could be saved, as many districts have shown, through competitive contracting of support services from food to busing.

If HB 4575 were to become law, homeowners could potentially be socked with billions in additional property taxes. This bill is clearly a taxpayer unfriendly "tweaking" of Proposal A; it would diminish the system that has lowered Michigan property taxes, brought more money to our schools and injected a measure of competition into the school system.

Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.