Proposal A On October 1, 1994 Michigan officially ushered in its new school finance program.

Basic Foundation Allowance F Basic foundation allowance of $5,000. F All districts below $4,200 in spending raised to $4,200 immediately. F Districts between $4,200 to $6,500 per pupil, revenue increases are limited on a sliding scale to between $250 and $160 per pupil.

Five years after it was approved by voters, Proposal A has: F Injected large amounts of money into less-affluent schools, many of them small, rural with previously low local millage rates. F Slowed revenue growth for wealthier districts. Many districts accustomed to double-digit increases have been limited to less than inflationary increases. F Made enrollment, not property taxes, the major factor in how much money schools receive. The more students in a district, the more money it gets.

F Closed the gap about to $1,500 per pupil among 85 percent of state’s 555 districts. F That gap won’t close completely under Proposal A formula, nor was it ever intended to.

Impact of the New Distribution Plan F Double digit per pupil increases at the low end of the revenue distribution curve F Less than inflationary increases for districts at the high end of the revenue profile. F Major beneficiaries of this new foundation plan are districts located primarily in rural areas with operational millages less than the state average of 34 mills.

Subsequent Years F Foundation allowance adjusted annually by two indices: a) a revenue index, and b) a pupil membership index. F Range in revenue between high revenue and low revenue districts shrinks from 3:1 to a 2.5:1 in the first year and gradually down to a 2:1 range.

Local districts receive the difference between the districts foundation guarantee and the per pupil yield from the 18 mills non-Homestead local property tax.

Foundation Allowance: Revenue Examples

Per Pupil Foundation Allowance Increases: K12 Districts NOTE: Detroit CPI-Urban Consumers increased an estimated 14% in this time period.

At-Risk Equity Adjustment F $274 million is set aside for at-risk funding. F At-risk money is based on a per-pupil amount equal to 11.5 percent of the districts foundation allowance. F Grows by same % foundation allowance.

F The basis for distributing the funds is tied to income eligibility criteria for free lunch and amounts to an additional $650 to $750 per eligible pupil for the majority of school districts.

F Equity adjustment provides balance to the more favorable treatment given the low-mill, outstate rural areas who were the major beneficiaries of the basic foundation allowance. F Funds used primarily to supplement, not supplant, existing at-risk programs!

Categoricals F Most categorical programs (earmarked entitlements for special needs) rolled into the foundation allowance. F Retained categoricals are those mandated by Federal law Bilingual Education and Special Education. Exceptions: math/science centers, gifted and talented, early childhood and vocational/technical training.

Retirement and Social Security F Responsibility for the payments of FICA and retirement shifted totally to schools. F Amount of funding state toward these obligations in FY included in the foundation grant to local school districts. F Districts now pay the increased costs associated with FICA and retirement.

Revenue Sources

The State Education Tax F State now levies a State Education Tax in the amount of 6 mills on all property. This tax is collected locally. F Local treasurers remit the tax to their county treasurer, and the county treasurer forwards the tax to the state. F School districts are no longer entitled to any allocated millage.

Local Millage Levies F 18 Mills on Non-Homestead Property F Plan requires that all school districts, with the approval of the electors, levy 18 mills locally on non-homestead property. Millage previously approved by the electors, for which the authorization is not expired, would be considered to be approved until such time that it expires.

Supplemental Property Tax (Hold Harmless Millage) F Districts with a foundation allowance exceeding $6,500 may levy, with the approval of the school electors, a supplemental property tax hold harmless millage. F Tax cannot exceed prior year revenue per pupil adjusted annually by the index growth of the Foundation allowance.

Michigan School Aid Fund Revenues: Immediately Before and After Reform ($ in Millions)

Fig. 1: Local/State Funding Mix Statewide Totals Includes Effect of Homestead Credits

Enhancement Millage F A local district may levy, with voter approval, up to three additional mills for program enhancement in , , and F These mills are not equalized.

F Beginning in , replaced with regional enhancement millage. An ISD, with approval of the majority of constituent voters, may levy up to three mills to enhance local school district operations. F The total dollars raised across the ISD are distributed to all constituent local districts on an equal, per-pupil basis a form of tax- base sharing.

Sinking Fund Millage F With voter approval, a school district may levy a tax of up to 5 mills for a period of 20 years for the purpose of creating a sinking fund. These monies may be used only for the purchase of real estate for and construction of repair of school buildings.

School Bonds F Law now restricts bonding for upgrades in computer software and computer support personnel, and also bonding for maintenance projects. Schools cannot bond for a period beyond the useful life of an asset.

Assessment Caps F The Michigan Constitution has been amended to limit assessment increases to 5 percent or inflation, whichever is less, until the property is transferred at which time the assessed valuation is set at market value.

Other Major Tax Components

Strengths of Proposal A

F Significant property tax relief for homeowners and businesses. F Reduced reliance on property tax for funding schools. F By reducing reliance on the property tax and capping assessment growth, greater equity is assured.

F $270 million for at-risk students, recognizing the additional cost associated with educating students from impoverished backgrounds. F Brings Michigan’s tax structure more in line with surrounding states.

F Schools, for the most part, are out of the millage business. F Created a more attractive business climate in Michigan, particularly for encouraging the return of business to urban areas.

Proposal A: At a Crossroads

The Most Worrisome Aspects of Proposal A F Can the sales tax and other earmarked revenue guarantee the long-term stability for supporting schools that the property tax once provided? F Schools traded local control of revenues for a system driven by state funding in the belief they would receive adequate funding with at least inflationary increases from year to year.

F When Michigan voters approved Proposal A, they assumed that the issue of school funding had been finally addressed. They still presume the increase in the sales tax guarantees school districts the money they need to operate.

F Lansing lawmakers who negotiated Proposal A believed that sufficient revenues would be dedicated to cover the cost of funding schools. F Schools believed they would be out of the annual budget process with all its uncertainties, delays and political conflicts associated with being subjected to the annual appropriations process.

F Since the passage of Proposal A, there have been over 20 tax cuts, some which have reduce the school aid fund. F The net result for FY 99 over FY 98 alone has been a smaller increase in school aid revenue. F Specifically, the school aid fund has grown only 2.0% rather than 2.3% increase anticipated without tax cuts.

F This reduction in revenue growth will continue in future years as the effect of these tax cuts compounds, along with the implementation of other tax cuts puts into place between 1994 and 1998, but not as yet implemented.

F There has also been a reduction in GF-GP revenue. The net result for FY 99 over FY 98 alone has been a 2.1% growth in GF-GP, rather than the 4.0% growth anticipated without the tax cuts. F School districts rely on the general fund for nearly $400 million each year. A reduction in general fund revenue growth reduces the total funds available to schools, as well as other state departments.

Achieving Equitable Funding for Infrastructure F Michigan’s public school buildings are in great need of replacement and renovation. F Good public schools rely on an equitable and adequate funding system for both operations and infrastructure. F Proposal A has begun to address funding inequities in the operations of school districts, but not for infrastructure.

F Michigan public school buildings are funded almost entirely through locally raised revenues - typically through debt millage. F The generation of revenue is based on property wealth within a school district. The more State Equalized Value (SEV) a district has the more easily it can raise revenues, i.e. the higher the SEV, the fewer mills necessary to raise any given amount.

F School districts experience the same equity problems with capital needs as they has with operational needs. For example, one mill in the Buckley School District raises only $31 thousand per year, whereas in Utica, it raises $3.3 million. When Hamtramck Public Schools requested preliminary qualification of a $51 million bond, the State Treasurer pointed out that the district’s balance to the state would increase into perpetuity.

F With the extreme in equality in the tax base used to support infrastructure investment, change is needed.

Reasons for the Growing Demand for Infrastructure Investment F Enrollment growth F Urban crowding F Replacing/renovating existing facilities –Health and safety –Age and obsolescence –Curriculum changes, including technology improvements

F The state’s assistance in this area is the School Bond Loan Program. However, a district with a low taxable yield could find itself never able to pay off bonded indebtedness for a substantial bond issue.

F According to a US General Office (GAO) study, the State of Michigan is ranked fifth from the bottom of the 37 states included in their study for the amount of assistance that is provided to local districts for infrastructure needs.

F The GAO study also cites Michigan as one of two states which has never described and quantified the infrastructure needs of its schools.

State Funding Options to Assist Michigan’s K-12 Infrastructure Spending F Mill equalization F Dedicating a state revenue source to K-12 capital spending F Regional infrastructure mills F State revolving loan fund used to lower the interest rate for some school districts F State infrastructure granted based on need F Restructuring the School Bond Loan Program - including below market interest rates and subsidy for needy schools F Statewide general obligation bond issue for school capital