Mackinac Center for Public Policy i The Mackinac Center for Public Policy is dedicated to improving the understanding of economic principles and public policy among private citizens and public officials. A nonprofit and nonpartisan research and education institute, the Mackinac Center has grown to be one of the largest state-based think tanks in the country since its founding in 1987. Additional information about the Mackinac Center and its mission to improve the quality of life in Michigan through sound public policy can be found at www.mackinac.org. Committed to its independence, the Mackinac Center for Public Policy neither seeks nor accepts any government funding. The Center enjoys the support of foundations, individuals and businesses that share a concern for Michigan’s future and recognize the important role of sound ideas. The Center is a nonprofit, tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. For more information on programs and publications of the Mackinac Center for Public Policy, please contact: Mackinac Center for Public Policy 140 West Main Street P.O. Box 568 Midland, Michigan 48640 989-631-0900 Fax 989-631-0964 Mackinac.org [email protected] How School Funding Works In Michigan Introduction How School Funding Works Discussions about school funding can create more confusion than clarity. Each state has its own intricacies and peculiarities. Michigan is no exception. Funding flows down from different sources, often based on different formulas and intended for different purposes. There’s no one unified system that controls school funding — rather, schools rely on a number of systems layered on top of each to supply them with resources. This publication presents a brief overview of some of the key components of Michigan’s school funding system, if it can be called that. The goal is to provide a general understanding of how tax dollars reach schools and what they are intended for. Each chapter focuses on a different funding component, including the foundation allowance, state funding through categorical grants, the financing and role of intermediate school districts, special education funding, revenue for building construction and maintenance, and, finally, how federal funds work. While the Michigan Legislature debates how much funds to devote to schools every year and certain components may change over time, a lot of the key elements mostly stay the same. So, even though the figures might change from year to year, the concepts described in what follows will remain useful into the future. Chapters 1. The Foundation Allowance 2. Categorical Grants 3. Funding for Intermediate School Districts 4. Funding for Special Education School Districts 5. Financing for School Facilities 6. Federal Revenues Conclusion: After Adding It All Up, Does Money Actually Matter? Mackinac Center for Public Policy 1 How School Funding Works In Michigan 1 The Foundation Allowance Michigan’s school finance system has not been foundation allowance is only about 60 percent larger designed for the sake of simplicity. One of the most than the minimum received by most districts. common points of misunderstanding relates to the About three-fourths of districts and all charter state’s use of a “foundation allowance,” which is a schools received the minimum foundation allowance revenue stream that comprises the bulk of operating of $7,511 per pupil in 2017. That amount is nearly money for the state’s 540 conventional school $3,000 more than the lowest-funded districts districts and 300 public charter schools. received before Proposal A, adjusted to today’s The foundation allowance was created after voters dollars. Meanwhile, today’s largest foundation approved Proposal A in 1994. Previously, most allowance of $12,064 is over $4,000 less than the education dollars derived from local property largest foundation allowance in 1994, if increases had taxes. But this produced large geographically based kept pace with inflation. funding disparities: districts containing valuable Two student counts — one in October and one property could raise lots of money for their schools, in February — are used to determine the actual those with less valuable property not as much. amount the state must pay each district through the Proposal A changed all of this. Instead of letting foundation allowance. A district’s final enrollment is local property values determine funding levels for calculated by adding 90 percent of the October count districts, the foundation allowance is allocated to 10 percent of the previous year’s February count. based on the number of enrolled students, with districts receiving a set amount for each student. Although the Legislature sets its level and the The foundation allowance is the minimum amount foundation allowance is considered “state funding,” of money per student that the state Legislature it is actually financed through a mix of state and guarantees each district will receive. As such, local revenues. The local revenue comes from a the disparities in the value of local property tax on all “nonhomestead property” in a district — among districts has no impact on this portion commercial and industrial property or houses that of school funding. are not a person’s primary residence. Most every school district levies the maximum allowable rate Proposal A was not designed to bring perfect funding of 18 mills on nonhomestead property to fund a equity for all school districts, however. Rather, the portion of their foundation allowance revenue. plan was to gradually reduce disparities by providing lower-funded districts with larger increases so they The remaining state-based revenue needed for the could eventually catch up with their higher-funded foundation allowance comes from the School Aid peers. And over the last two decades, the foundation Fund, which is financed by numerous state taxes. The allowance gap has closed significantly. The highest- sales and income taxes and the State Education Tax funded district in 1994 received a foundation — 6 mills levied on all property, including primary allowance 3.7 times greater than the lowest-funded residences — make up the bulk of the revenue for the district. Today, the highest-funded district’s School Aid Fund. Lottery revenues also contribute, 2 Mackinac Center for Public Policy How School Funding Works In Michigan Graphic 1: Michigan’s Shrinking Foundation Allowance Gap (in 2016 dollars) Source: Michigan Senate Fiscal Agency $20,000 $18,000 $16,164 $16,000 $14,000 $12,064 $12,000 $10,000 $8,000 Maximum $7,511 $6,000 Maximum $4,337 $4,000 Minimum $2,000 Minimum $0 1993-94 2016-17 but make up only 7 percent of these revenues. Other all public charter schools, because they cannot levy sources include the use tax, tobacco tax and real any taxes of their own, rely entirely on the state to estate transfer tax. fund their foundation allowances. The amount that the state contributes to each district’s There are additional nuances. For example, some foundation allowance varies district to district. It school districts are assigned a foundation allowance works like this: The state calculates how much local that exceeds the minimum. And some districts are revenue a district will get from its nonhomestead tax allowed to levy an additional local tax to supplement and then fills in whatever is required to fully fund their foundation allowance. When Proposal A was its foundation allowance. For example, if a district’s passed in 1994, these districts had relatively higher local revenue provides $5,000 per student, the state funding levels, and the rationale for letting them would contribute $2,511, so the district would remain at these higher levels was to hold them “harmless” from the funding reform. receive a total of $7,511 per student through the foundation allowance. A final important point about the foundation allowance is that it is only one revenue source for Because there’s still wide variation in how much school districts. Most districts receive significant local revenue school districts can raise, the amount amounts of money from other local, state and federal that the state contributes to each district can vary sources. Including these other sources finds that considerably. In fact, in a small number of cases, Michigan schools on average collected $14,307 in school districts can raise enough money to fund their revenue for every full-time student enrolled in 2016. foundation allowance themselves without the state Nevertheless, the foundation allowance is schools’ kicking in any funds. These are sometimes called most important funding mechanism, because it is the “out-of-formula districts.” primary source of revenue schools use for their core Other districts rely heavily on the state to finance operations, such as employing teachers, purchasing their foundation allowance. And, one final wrinkle, instructional materials and keeping the lights on. Mackinac Center for Public Policy 3 How School Funding Works In Michigan 2 Categorical Grants If asked how much funding Michigan schools receive on certain student or district characteristics. on average, a reasonably well-read observer might For instance, a categorical grant worth nearly guess between $7,000 and $8,000 per student. This $380 million is allocated to districts based on the is not entirely off base: news stories commonly number of enrolled students who are deemed “at- report how much districts get through the state’s risk” of academic failure. Other smaller outlays are foundation allowance, which typically falls in that paid out to geographically “isolated” districts, to range. But schools receive a lot more money than provide services to non-English language speakers that, and a good chunk of this additional revenue and to help districts provide free and reduced- comes from the more than 50 “categorical grants,” price lunches to low-income students. created by the Legislature and funded by over The largest single categorical grant is used to hold $3 billion in state tax dollars annually. districts harmless from the growing costs of the A sizable portion of these categorical grants go state’s massively underfunded school employee to local and intermediate school districts based pension system. Just over $1 billion per year is One example of a categorical grant is support for certain districts to purchase “locally-grown fruits and vegetables.” 4 Mackinac Center for Public Policy How School Funding Works In Michigan spent for this purpose. Since most of this spending features bonuses for districts implementing year- is dedicated to “catching up” on the state’s round school or for participating in science and $29.1 billion school pension debt, today’s taxpayers technology-focused student programs. Districts in are paying the costs of yesterday’s classrooms western Michigan are eligible to apply for a grant through this categorical. that supports the purchase of “locally-grown fruits and vegetables.” Categorical grants are used to pay the costs of other school-related debt, too. About $130 million The Legislature also uses these funds to create is paid out annually to service the debt on money incentives for districts to meet certain goals. For the state borrows to help districts make payments instance, districts can receive up to $60 for each on money they’ve borrowed. This is how the state’s student who completes a college dual-enrollment School Bond Loan Fund program works, which course and get grants to cover the costs for low- only benefits the minority of districts that borrow income students taking Advanced Placement and through it. International Baccalaureate tests. Other uses of categorical grants are for very These are just some of the highlights of the various specific purposes and also only aid a small number programs and initiatives that are funded through of districts. These include paying districts extra categorical grants. Other funding flows to districts funds to serve students who have transferred through these grants for things like career and from recently dissolved districts and reimbursing technical training, special education, early literacy districts some of the “transition costs” of merging programs, adult education and more. with another district. Other grants refund districts The state’s foundation allowance represents just the that lose expected property tax revenue from beginning of state taxpayers’ financial commitment designated, tax-free Renaissance Zones or land to public schools. Unlike the foundation allowance, owned by the Michigan Department of Natural categorical grants will come and go, and their Resources. These add up to another $30 million budgeted amounts vary year to year, according in state funding to districts. to legislative priorities. But with a steady upward Additional categorical money is set aside to trend in their use, they form a key part of the operate some of the state programs that service comprehensive picture of how Michigan funds school districts. For instance, a handful of grants public schools. fund Michigan Virtual University, which develops and provides online courses; the Michigan College Access Network, which informs students of postsecondary options; and the Center for Educational Performance and Innovation, which collects, organizes and disseminates financial data about schools. Similarly, the state directs other grants to districts to help them cover the costs of administering the state’s standardized test and for the “collection, maintenance, and reporting of data to the state.” Some categorical grants are handed out on a competitive basis. The 2016-17 state budget Mackinac Center for Public Policy 5 How School Funding Works In Michigan 3 Funding for Intermediate School Districts Created more than 50 years ago, Michigan’s A small number of ISDs levy a “regional enhancement 56 intermediate school districts are an entrenched millage” of three mills or fewer, but it is actually part of the K-12 public education landscape. But few revenue for each of the conventional school districts people really understand what ISDs do, how they within an ISD’s boundaries and distributed on a are funded and what value they provide taxpayers per-student basis. The final type of local property tax and students. ISDs can levy is for debt services — allowing them to finance building, remodeling and furnishing their ISD responsibilities vary and their statutory role facilities. Combined, these five local sources of taxes is broadly defined. Nevertheless, there are some bring in nearly half of ISD revenues. common functions that ISDs perform across the state. Most ISDs, for instance, provide back-office Another significant source of ISD revenue — support for local school districts, deliver or finance amounting to about 30 percent of all their revenues special education services and operate alternative — comes from the state treasury. While some of the and career education programs. Many also dollars are distributed within various state budget facilitate shared services among districts, such as line items, several distinct pieces are set aside for the technological needs, transportation, professional 56 regional educational agencies. development and more. First, the state supplements ISD revenue for ISDs are funded differently than local school special and vocational education in an effort to districts and public charter schools. The primary create more funding parity among ISDs. Using difference is that ISDs do not receive the normal complex formulas, this money benefits ISDs foundation allowance, the main per-pupil that raise the least amount of revenue from their funding mechanism used to distribute revenues local property base. These “equalization” dollars to school districts. Instead, ISDs are funded by a guarantee that all ISDs will receive a minimum combination of local property taxes, a per-pupil amount of revenue to fund these services — at special education foundation allowance, state least 75 percent of what they had received the categorical funds and federal grants. Reported previous year. These payments cost the state ISD revenues totaled $2.77 billion in 2016. almost $50 million annually. ISDs have five different types of local property A large chunk of state revenue for ISDs is a taxes to draw from. To pay for general operations, reimbursement for approved costs for special all ISDs collect funds from a voter-approved education services. This revenue is court-ordered: “operating millage.” There are designated local the Michigan Supreme Court ruled that the state millages for special and vocational education needs to provide a certain portion of the funding services too. The rates for each of these three for the mandates it creates for school districts to millages are capped based on what their rates educate special needs students. ISDs collected were in 1993, before Proposal A took effect. more than $270 million for this purpose in 2016. 6 Mackinac Center for Public Policy How School Funding Works In Michigan Graphic 2: Michigan ISD Revenue Breakdown: 2015-16 Source: National Public Education Finance Survey, 2015-16 data Other $259,752,752 9% Federal tax dollars $514,110,224 Local tax dollars 19% $1,164,596,438 42% State tax dollars $829,127,663 30% The current state budget allocates an additional ISD funding growth has outstripped that of $67.1 million to ISDs for complying with any local school districts and public charter schools. other state requirements and providing “technical Between 2006 and 2016, the number of students assistance to districts.” enrolled in ISD programs has not changed much, increasing by just 2.6 percent. Meanwhile, total ISD The last piece of ISD funding is federal money, operational spending has increased over the same which makes up nearly one-fifth of ISD revenue. period by 39 percent. Today, nearly 10 percent of Some of this money is received by the state and K-12 operating dollars are spent by ISDs. then distributed to ISDs while other amounts As demonstrated, ISD funding is complex, are received directly by ISDs themselves. Federal with revenue coming from a variety of different money often comes in the form of grants for sources and targeted for a variety of different specific purposes, programs or services. Among services. Although they are not often the first them are funds designated to cover special thing that pops into people’s head when they think education costs, to help homeless students or non- of Michigan’s schools, ISDs consume a sizable native English speakers, and to underwrite early chunk of taxpayers’ support for public education childhood or community health programs. in Michigan. Mackinac Center for Public Policy 7 How School Funding Works In Michigan 4 Funding for Special Education A thorough review of how special education reports that local districts spent $2.7 billion in funding works in Michigan reveals the challenge of 2016 providing special education services. This consistently and effectively providing these services. figure does not include certain expenses, including Like many other elements of school finance, special those already covered by federal dollars. education funding is complex — revenues come More than 197,000 Michigan students — about from a variety of sources and are purposed for a 13 percent of total public school enrollment — variety of targeted programs. Altogether though, were classified as having special needs in 2016. spending on these services comprise a large but The need for special services is determined by difficult to measure portion of what Michigan taxpayers spend on public education. a student’s Individualized Education Plan. Most students with identified learning disabilities still The state’s recent $400,000 education finance spend a significant part of their time in a general study, or “adequacy study,” could not completely classroom setting. account for special education spending among districts, and recommended a better tracking School districts receive a foundation allowance system. Although an incomplete figure, the state on behalf of each special needs student they 8 Mackinac Center for Public Policy