Revolution and Evolution: Michigan

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Revolution and Evolution Michigans Proposal A
School Finance Reform, A Retrospective Analysis

• Michael F. Addonizio
• Douglas C. Drake
• September 29, 2005

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Proposal A Goals

• Reduce, but not eliminate per pupil gaps
• Reduce cap property tax for operations
• Reduce local share of operations costs
• Increase state funds and state share
• Provide greater stability in funding

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Measuring As Success

• Clear reduction in per pupil gaps
• Property taxes clearly reduced limited
• Major change in state / local share
• Clear shift to state financing
• Improved stability less clear and may depend on
  perspective

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The Issue of Per Pupil Gaps

• Overall dramatic reduction in gap, but not
  elimination
• Basic foundation of 6700 (2005) higher than
  maximum guarantee in 1995
• Statistical measures of equity all show dramatic
  improvements (Table 4)

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Revenue Growth and Adequacy

• When looked at from perspective of total state
  and local revenues
• Revenues Before and After comfortably above
  inflation in most years
• Period of comparison seems to make a lot of
  difference v structure of change

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Strong Growth in Total Revenues

• Total revenue growth beat inflation most years
• 15 years Before A
• Average annual nominal growth 6.4
• Average annual real growth 1.6
• Standard deviation 3.0
• 9 years Before A
• Average annual nominal growth 6.4
• Average annual real growth 2.6
• Standard deviation 1.7
• 9 years after A
• Average annual nominal growth 5.1
• Average annual real growth 2.3
• Standard deviation 3.1

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Significant Increase In State Funds

• Proposal A tax increases largely effective 5-1-94
• Added state revenues in FY 1993-94, and FY
  1994-95the first year of Proposal A
  implementation

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Improved Finances for Most Traditional Districts

• Significant and dramatic increases in fund
  balances for most traditional districts
• Sources a combination of extra-formula foundation
  increases, pension re-financing, Durant
  settlement, enrollment growth and district
  management practices

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Enrollment Patterns Now Most Critical Finance
Issue

• Growing enrollment usually results in good fiscal
  health
• Declining enrollment often results in fiscal
  problems
• Majority of districts and pupils now in decline
  status
• Very few districts are steady growers
• See Appendix Q for district detail

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Enrollment Patterns, cont

• Declining enrollment not just an urban issue
• Significant declines in rural and small city
  /towns/older suburbs

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Property Tax Reductions

• Millage cuts and homestead exemption produced
  dramatic cuts in property taxes for homeowners,
  less for business
• Average mills cut from 56.64 on all property to
• HOMESTEADS 30.22 - 46.5
• NON-HOMESTEAD 51.00 - 10.0
• Millage cut 5.1 BILLION in 2003, and 35.6
  Billion cumulatively through 2003
• Assessment cap 3.1 BILLION in 2003 and 13.1
  Billion cumulatively through 2003

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Property Taxes Limited

• The assessment cap critical
• Also limitations on local school options for
  operations
• Only two ISDs with enhancement mills
• Very few enhancement elections held
• ¾ vote requirement for Legislature to change
  millage limits makes significant increases very
  unlikely

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Some thoughts on the Net Impact

• Dramatic property tax cut, as promised
• Rhetoric about loss of homes to property tax has
  disappeared
• Dramatic reduction of financing equity gap for
  operations
• Debate now shifting to questions of adequacy
• Stability a relative issue
• No fear of loss of major portion of operating
  millagesBUT

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From Equity to Adequacy

• After years of unexpectedly large foundation
  increases, years of flat to slightly reduced
  foundations
• Did over-optimism of late 90s create unrealistic
  expectations?
• Enactment of numerous tax exemptions that reduced
  growth potential of SAF
• Replacement funds, largely tobacco are long-term
  decliners

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From Equity to Adequacy 2

• Michigan has never addressed school finance in
  the context of identifying actual costs
• Focus on all-encompassing solutions that tend
  to be one-time fixes
• Earmarking more income tax in 1997
• Calls for more new taxes and no GF grant
• Assertions that old system was better
• IT WAS GONE, WITH NO GOING BACK

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Challenges

• Capital funding
• Declining enrollment from population decline and
  shifts
• Impact of charters and choice on traditional
  district enrollment
• Tax policy and erosion in the revenue base
• Impacts of personnel and fringe
  costs-productivity gap

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Capital Funding for K-12

• Proposal A made up-front decision to NOT attempt
  capital funding reform
• Assumption that dramatic cut in property taxes
  would make it easier for some districts to obtain
  financing until such time as a solution could be
  developed
• Data on increased bonding and debt millages
  clearly indicates that happened
• Now the next challenge

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The Challenge of Declining Enrollment

• Declining enrollment-in a traditional district or
  a charter school-virtually guarantees financial
  difficulty-very quickly
• Its much harder to manage down than to manage
  growthsee Appendix Q
• Strong consideration needs to be given to change
  pupil count to a one year lag

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Tax Policy Changes Impact SAF Revenues

• Legislation did hold SAF harmless from recent
  income tax rate cuts (by pushing burden
  completely on GFGP)
• Legislation has not held SAF harmless from dozens
  of base exemptions and other changes that have
  added up to hundreds of millions of reduced
  income
• SAF does not have the same tax base it had in 1994

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The Challenges of Cost Savings

• Education essentially has been a one on one
  business for a long time
• Where will the productivity come from to bring
  costs down?
• If productivity improvements arent possible,
  what impact will lower or slower growing salaries
  and benefits have on attracting the best and
  brightest to teaching?

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Conclusions

• The sum of all these circumstances poses a
  fundamental and daunting challenge to all
  Michiganders. As the national and world
  economies continue to shift from muscle power to
  brain power, our ability to balance limited
  financial resources and growing educational
  requirements and needs over the next few years
  will play a large role in determining our future.