School Funding in Michigan: Common Myths

Michigan’s state-run school system is the largest and most expensive government service taxpayers support. It employs more than 350,000 people who work in one of the more than 4,100 different entities. The total amount this system expends each year adds up to more than $20 billion. Given the enormity and complexity of the system, it’s no surprise that a number of myths exist about how public schools are funded.

Intro

The number of students in public schools — and the dollars tied to them — are on the decline as families leave Michigan in search of employment. Compounding the problems for school boards and administrators are rising costs, most of which are tied up in labor. There is a lot at stake for school employees, students, parents and taxpayers, so it’s not surprising that the money-related debates become fertile ground for school funding myths to take root.

The funding mechanism for Michigan’s public schools is excruciatingly complex. It includes money from local, state and federal sources, some of which arrives via a state-controlled distribution formula, and some from local property taxes, special “categorical” programs, borrowing or grants. Matters that might seem simple — like how much money different districts receive, how the amounts differ between them and where the money comes from — are in fact hard to decipher.

For example, there are numerous misconceptions surrounding the “foundation allowance,” the largest single component of school funding. Since the state Legislature controls the exact amount each year, the political battles surrounding it get the most attention, leading many to believe that this is schools’ only revenue source. Legislative control also gives the perception that the “foundation allowance” is a grant from the state to each district. In reality, it’s a complicated formula that includes both local and state revenue sources.

Some myths are perpetuated by groups that perennially call for “equal” and “stable” funding. That drumbeat fosters the impression that current funding is neither. Strictly speaking, funding is not equal — and never will be. Not all communities or student populations are the same, and funding levels cannot be separated from how well (or poorly) the state is doing as a whole. Michigan’s public schools, however, are more equally funded today than they’ve ever been, and the mechanisms to collect and distribute the money have proven remarkably stable, especially compared to nearly any other public- or private-sector institution.

Other myths abound. When voters approved Proposal A in 1994, the largest single revenue source for the system became a statewide 6 percent sales tax, rather than local property taxes. When a district’s revenues don’t keep up with rising costs, reliance on the sales tax is often blamed. Yet even after the shift, the sales tax still contributes only about 20 percent of total public school revenues.

Similarly, the role of the lottery is often misunderstood. In its marketing, the Michigan Lottery loudly trumpets its contribution to education, but this money amounts to less than 4 percent of the complete school revenue pie. An upsurge in federal revenues since 2002 has reduced the relative proportions of both the sales tax and the lottery ingredients of that pie.

Myths about revenues and expenses are often perpetuated by self-interested special interests groups. Rather than embrace reforms that would help educate children more effectively and efficiently, school employee unions routinely block reform and instead demand more money.

In fact, as a group, school employees have been remarkably insulated from the “lost decade” of Michigan’s ongoing recession. That doesn’t stop the Michigan Education Association union from making claims that concessions by its members have saved taxpayers $1 billion over the last three years. In fact, employee compensation was higher in 2008 (the most recent year for which data is available) than in 2006. Relative to the incomes of the population that supports them, the average Michigan teacher’s salary has been the highest in the nation from 2003 to 2009.

Even some assumptions that seem intuitive are mythical, such as the idea that smaller classes produce better results. At best, the research on this is mixed. The quality of the teacher at the head of a classroom matters much more than the number of students in it. Moreover, Michigan has more school employees per student than ever before, yet objective achievement measures haven’t budged.

The following is no myth: The outsized political power of the state’s largest school employee union has contributed to a vicious cycle of ever-increasing costs. This could lead to an unprecedented prospect for Michigan residents — in the near future we may not be able to afford the public school establishment as it is currently constituted.

Michigan residents face critical decisions on how best to allocate scarce resources to provide learning opportunities for our children. But we can’t make sound decisions without dispelling the myths that surround school funding.

#1 The School Foundation Allowance Myth

Michigan’s method for funding public education changed significantly when voters approved Proposal A in 1994.[1] The nearly 400 pages of laws directing the state’s school funding mechanism can be complex and convoluted. A key component of the system is the per-student “foundation allowance,” and two common myths pertain to it.[2]

First, each year, the Legislature establishes a “basic” foundation allowance ($7,151 per student in the 2009-2010 school year), which many incorrectly assume is a state grant to each district. It’s not a grant, but one part of a complicated formula that limits per-pupil funding disparities across districts.

Second, because each school district uses the number generated for it under the foundation allowance formula to estimate its annual operating revenue, many believe the figure represents the total amount per student that each school will have to spend for the year.

In reality, the school aid grant each district receives from the state — different for every district and also determined by the formula — only represents one portion of each district’s total annual operating revenue. (The total amount distributed by the state under this formula in 2009-2010 was $5,730 per pupil.)[3]

The rest of each school district’s annual operating revenue comes from an 18-mill property tax on the district’s non-homestead property (i.e., commercial, industrial, etc.).[4] The amount this raises in a particular district varies, and the amount is also included in the foundation grant formula. The combined revenue from this tax and the state school aid grant represents the total amount the school will have to spend for operations under the Proposal A funding mechanism.

Schools also get operations funding that is totally unrelated to that mechanism (such as “categorical” grants described below), and other non-operational revenue from millages levied to pay debt service on long-term capital investments like new school buildings. In 2009 the average school district revenue from all sources for all purposes was $13,074 per pupil — significantly more than the foundation allowance.[5]

The above is a highly simplified description of how the Proposal A foundation grant system works. The reality is much more complicated. For example, the “basic” foundation allowance is actually a cap, or the maximum amount of state school aid grant money to any district when all the other factors in the Proposal A formula are calculated. Most districts get less than the “basic.”

Because the formula includes several other factors, including how much the district raised and spent prior to Proposal A’s passage in 1994, there is another figure, called the “maximum foundation grant” ($8,489 in 2009-2010). Although the “basic” and the “maximum” figures are different, they still represent the same thing: caps on a school’s maximum state school aid grant under the foundation allowance formula.[6]

In addition, and easier to understand, schools get other money from the state that is not determined under the foundation grant formula. In 2009-2010, the Legislature approved 40 different types of supplementary “categorical grants.”[7] These are distributed based on myriad factors (“categories”), including districts’ special education and “at-risk” student populations, location, enrollment trends and local tax base.[8]

Other revenues come from the federal government and are distributed through targeted grants. Most of these are prescribed by the federal No Child Left Behind Act and the Individuals with Disabilities Education Act. Money from 19 different federal programs is apportioned by the Michigan Legislature, but schools also may qualify for separate funding directly from Washington, D.C., through a host of other grant programs.[9]

In addition to the 18-mill non-homestead property tax discussed above, there are also separate “local” revenues from millages levied by regular and intermediate school districts.[10] Most of the former go to pay for capital expenditures (buildings and land), with the ISD levying taxes for special and vocational education, plus general operating expenditures.

The Michigan Department of Education reports that total public school revenues in 2008 were comprised of 54 percent state sources, 37 percent local sources and 8 percent federal sources.[11]

When all of these revenue streams are included, total per-pupil revenues are substantially higher than the amount allotted through the foundation allowance or state categorical grants. As mentioned, total per-pupil revenue in 2009 was $13,074, well above those “basic” and “maximum” foundation allowances.

As can be seen, the foundation allowance is just one part of the complex school funding system in Michigan. Not surprisingly, it’s easy for taxpayers — and even school officials and legislators — to misunderstand how it works.

#2 The School Employee Concession Myth

With Michigan’s economy in decline and families departing the state in increasing numbers, tax revenues that pay for our public schools are also falling.[12] Because employee compensation costs consume around 80 percent of most school districts’ operating budgets and also include unsustainable retirement benefit provisions, the Legislature is considering proposals to reduce these expenses.[13]

Notwithstanding fiscal and economic realities, the Michigan Education Association, the state’s largest school employee union, has pulled out all the stops in its efforts to shut down any reforms in this area. One of the union’s tools is a claim that school employees have already made “$1 billion worth” of concessions over the last three years.

The data, however, fails to show any significant reduction in public school labor costs.

Typical of the union’s claims was a 2009 Detroit News column written by MEA President Iris Salters, stating that school employees saved taxpayers $200 million in salary concessions and another $700 million in health insurance reductions over the last three years.[14] The MEA has repeated this claim a number of times, including in recent radio and television advertisements.[15] Only the televised ads cite the source for the claim, referencing the Michigan Department of Education Financial Information Database.

Those “$1 billion in savings,” however, are not found in this data. Instead, it shows that Michigan public schools spent $13.758 billion on school employee compensation in 2006. In 2008 (the latest year available), the number had increased by $39 million to $13.797 billion.[16]

To be sure, the increase was not generated by the two specific items mentioned by the MEA — employee salaries and health insurance — but neither did changes in these two areas come anywhere near to saving $1 billion. Total payments for employee salaries and health insurance stayed level during this period.[17]

In contrast, the unsustainable defined-benefit pension system and post-retirement health care benefits were key contributors to the overall compensation expense increase.

To get a more accurate picture of school employee compensation changes, it is necessary to examine a longer time period. From 2000 to 2008, total compensation for school employees increased by $90 million after adjusting for inflation. The number of students and full-time school employees, however, declined during this same time. When the gross amounts are adjusted to reflect those declines, they show taxpayers shouldering $280 more per pupil in total compensation at the end of this period.[18]

In absolute terms, inflation-adjusted school employee compensation increases have been relatively modest. Compared to the economic devastation and income loss suffered by the rest of the state over the past decade, however, those increases assume a different character.

From 2000 to 2008, the per capita personal income of Michigan’s population plummeted by nearly 5 percent after adjusting for inflation.[19] Total private-sector earnings from 2000 to 2008 — which includes both employee compensation and profits earned by businesses — fell a whopping 12.8 percent in the state, according to the Bureau of Economic Analysis. Not surprisingly, the government’s ability to afford those generous school compensation packages also diminished, with total state tax revenues down 7 percent from 2000 to 2008 after adjusting for inflation.[20]

School employees earning more than the rest of the taxpaying population is nothing new in Michigan. In 1996, the Citizen’s Research Council of Michigan reported that, in proportion to the per capita personal income of taxpayers that support their salaries and benefits, Michigan teachers had the highest pay in the nation.[21]

The most recent data available show that Michigan again ranks number one in the country by this measure, and has done so since the 2003-2004 school year.

Michigan’s economy and the economic well-being of its population have declined dramatically over the last decade. Contrary to union claims, however, there has been no “shared sacrifice” by school employees. If anything, compared to the rest of us, their relative well-being in economic terms has likely never been better.

#3 The Underfunded Myth

A common claim by Michigan’s public school establishment and its political allies is that, despite spending $20 billion annually on education, our schools are “underfunded.”[22] Comparisons to other states and to historical funding levels show that the claim is unsubstantiated and misleading.

The underfunding myth rests on an assumption that there exists some known “price” for a public school education that taxpayers are failing to meet. In fact, no such figure exists. All we have are the amounts actually spent on schools and the knowledge that they have consistently increased each year for at least the last five decades.

According the National Center for Education Statistics, the per-student operating cost of Michigan’s public schools nearly quadrupled from 1960 to 2007, from $2,991 in 1960 to $11,337 in 2007, as measured in 2007 dollars.[23] Therefore, insinuations by the school establishment that its funding has undergone some dramatic declines in recent years should be taken with a large grain of salt. (These per-pupil operational expenses do not include school buildings and other capital spending.)

In addition, Michigan taxpayers transfer a greater proportion of their income to public schools than all but two states. Figures from the Bureau of Economic Analysis (and reported by the National Education Association) show that some $52 out of every $1,000 in state personal income is consumed by our public school establishment. Wyoming residents pay $56 per $1,000, and the national average is around $42 per $1,000. Residents in Nevada pay the least, $28 per $1,000 of personal income.[24]

There are other ways of comparing public school price and value. Some types of tax-supported schools cost much less to operate than others. Michigan’s public charter schools cost on average $2,200 less per pupil in 2007 than conventional schools.[25] Put another way, public charter schools provide essentially the same service at a 25 percent “discount.” Rather than accepting the “underfunded” myth, perhaps taxpayers should complain about being overcharged.

The tone of many media reports about school money issues contributes to the underfunded myth. One reason is that school funding is allocated on a per-pupil basis. When a district’s enrollment drops, the local headlines often read, “School funding down ...” and give a dollar amount that represents the lost students. The article may or may not explain why schools should not get funding for students it is no longer obligated to educate, and is very unlikely to note that the alternative is to allocate a greater share of scarce resources to districts with fewer students.

In addition, many media reports focus on the state School Aid Fund, which the Legislature controls. Since Michigan’s economy and tax base have shrunk over the last decade, the amount of state revenue flowing into this particular funding source has declined as well. However, that decline has been offset by a huge increase in the amount of federal money being funneled through the School Aid Fund. These revenues grew from $122 million in 2000 to more than $2 billion in 2009.[26]

Also, the number of students statewide has declined 6 percent over the last decade. After adjusting for inflation, districts on average get $450 more School Aid Fund revenue per student than they did in 2000.

Other reasons for what may seem to be perpetual school money troubles are merely circumstantial.[27]

Finally, union contracts dictate that school districts notify employees of potential layoffs prior to the end of the school year.[28] As a result, many more “just in case” pink slips are issued than the actual number of layoffs. Not surprisingly, the warnings get more attention than their later non-execution. In fact, the actual student-to-employee ratio has steadily declined over the last decade.

The real reason for school money troubles is not “underfunding,” but a failure to contain employee costs, which comprise about 80 percent of operational budgets. As long as school boards continue to agree to contracts that grant school employees, particularly teachers, automatic pay increases and lavish benefits packages that outpace comparable private-sector averages and the ability of taxpayers to support, schools will never have “adequate” funding.[29]

The beneficiaries of those unsustainable benefits have a strong incentive to promote the “underfunded” myth, but taxpayers should exercise a healthy measure of skepticism. On the whole, Michigan schools have more resources available than ever before, and receive a larger portion of state and local tax revenues than almost any other state.

#4 The Unstable Funding Myth

The Michigan Education Association and other groups seeking more money for public schools frequently claim that the current funding system is “unstable.”[30] Several factors may make it appear so, but the reality is that school revenues have proven remarkably stable.

Michigan is not unique in this; over the past century, school funding nationwide has advanced in one direction — up.  James Guthrie and Arthur Peng of Vanderbilt University’s Peabody Center for Education Policy analyzed this trend and found its source in state constitutional provisions, decentralized administration, employee unions and other special interests, and the existence of multiple revenue streams.[31]

All these factors are at work in Michigan, starting with the state constitution, which proclaims that education “shall forever be encouraged.”[32] Probably the most influential factor in recent decades is school employee unions, which have succeeded in making Michigan’s teachers the highest paid in the nation relative to the population that supports them. In both local school board and legislative elections, the unions marshal tremendous manpower and financial resources for candidates who promote their members’ interests, and against those who don’t.[33]

Schools here are also highly decentralized, though most operational funding for 551 local districts and 57 intermediate school districts is determined by the state’s “foundation allowance” system, under which a large proportion of revenue comes from state sources instead of local property taxes. Local school officials sometimes express frustration at the system’s limits on their power to increase millage rates, but it has provided a remarkably steady revenue stream over time.

In the 1994-1995 academic year, all schools received at least $5,912 per pupil (measured in 2009 dollars) through the state’s funding system. By 2009-2010, that minimum had grown to $7,151. The annualized increase had been even higher when funding reached an all-time high of $7,751 (in 2009 dollars) in 2001-2002. An inflation-adjusted 7 percent decline since then is one of the factors that can make funding seem “unstable.” But in real, inflation-adjusted terms, the minimum per-student funding level from this source is still up 21 percent since the inception of this system (and other sources — primarily federal money — have helped many districts make up the difference since that peak funding year).[34]

Prior to 1994, 80 percent of school revenues came from local property taxes.[35] In a 2004 report, the Senate Fiscal Agency noted the new funding system’s elimination of one source of instability: “(T)he reliance on the often unpredictable nature of millage elections to determine the districts (sic) operating revenue ... has been virtually eliminated and a more stable source of revenue exists.”[36]

That source is an annual state government infusion of some $11 billion. More than half this amount comes from earmarked income and sales tax receipts; the rest comes from a 6-mill statewide education property tax, lottery revenue, business taxes, tobacco taxes and several other taxes.

While local property tax revenues traditionally were viewed as very stable, they are expected to decline significantly over the next several years and probably won’t rebound for a decade.[37] The vast majority of school districts have benefited from the broad base of the taxes that support the state’s contribution to their funding.

Other aspects of the school funding system create a perception of instability. For instance, a large portion of a district’s funds are tied to enrollment, and conventional districts have experienced a 9.3 percent decline in enrollment over the last seven years.[38]

Furthermore, the fact that local districts must finalize their budgets by a June 30 deadline while the state Legislature isn’t required to set its portion of school funding until Oct. 1 generates more uncertainty. Even worse, “rosy scenario” legislative overestimates of state tax revenues have forced modest 1 to 3 percent midyear school aid cuts several times in recent years. Fortunately, schools have fund balances to make up the difference, and many have been able to use that money to prevent midyear layoffs or program cuts.

Finally, union contracts that lock in rising labor costs limit districts’ ability to cope with midyear cuts, declining enrollments and various hard-to-project cost increases. Rather than attempting to get stubborn unions to yield concessions, districts find it easier to lay off staff and cut programs, furthering the illusion of instability.

Revenue that is 100 percent predictable and stable is an impossible dream, for schools or anyone else. Under any possible system, school funding is ultimately tied to the economic well-being of the state. Local school officials should focus on managing what they can control — expenses — and refrain from contributing to the myth that they’re “victims” of unstable funding.