School funding disparity

November 1, 2016

 The debate over which school districts have more money, and therefore, which students are better prepared for college and the world beyond, has been raging for decades. It was supposed to have been settled in 1994, when Michigan enacted new legislation to end the funding of local school districts completely from property tax revenues, instead transferring the funding to the state, through legislation called Proposal A, which set up a per pupil amount for both wealthier districts and poorer districts. The goal, over the last 22 years, was to erase the deficit between the two, creating greater equality in the state for all students. 

That goal has largely been reached, with the difference in the per pupil amount, called the foundation formula, only a few hundred dollars a student apart, rather than thousands of dollars apart, as it was years ago. Yet, disparities in the quality of education continue to exist, including in some districts which receive higher per pupil amounts. Why? The real culprit, education experts on all sides of the discussion concur, is enrollment and its decline, and the inability of districts to recover from that spiral.

The goal of Proposal A, which took effect in 1994, was two-fold: to cut and cap local property tax burdens, and to gradually reduce the disparities in school funding between local districts across Michigan. It also eliminated 64 percent, or $6.4 billion of the $10 billion of total K-12 school funding, beginning with the 1994-1995 school year. 

Prior to the enactment of Proposal A, Michigan had a long history of leaving education in the hands of local communities, from funding to major decisions regarding curriculum. Schools in Michigan were completely funded by setting millage rates for property taxes, which provided most of the funding for local school districts. But by the early 1990s, taxpayers across the state were fed up with high taxes, and demanded property tax relief. Approximately a dozen ballot proposals to improve the system had failed over several years, and residents continued to be upset about high taxes, with school districts across the state having varied funding levels based on their communities' level of affluence and willingness to support education.

Under Governor John Engler, the state legislature passed and Engler signed into law Proposal A in July 1993, which eliminated all property tax paid for schools, transferring control to the state. Voters followed up in March 1994 by approving the new system for funding schools, with 69 percent of voters approving, leading to three key changes. First, Proposal A eliminated using local property taxes as the source of school funding, creating a new state education tax. From that day forward, school districts received their funding as per pupil payments from the state.

Second, the state sales tax increased from four cents to six cents on the dollar. It was designed that the extra two cents would go to the school aid fund, which is the state budget for schools.

The last goal was to raise the state's lowest funded districts to receive a basic level of education funding, and in doing that, to close the gap between the highest and lowest funded districts. A new state education tax was created – six mills which is assessed on the state equalized value of all property. Non-homestead properties, which are businesses, rental properties and vacation properties, were now assessed an additional 18 mills to go to schools. When real estate is sold, a transfer tax of .075 percent on the sales price was created to add to the state school aid fund. Unlike previous property taxes, Proposal A capped by how much property tax can go up – at five percent or the rate of inflation, whichever is less.

“Pre-Proposal A, school funding was largely a local investment, and for homeowners, it was mostly as must pain as they were willing to bear,” said Gary Naeyaert, executive director of Great Lakes Education Project (GLEP), a bi-partisan, non-profit advocacy organization supporting quality choices in public education supported by Michigan billionaire Dick DeVos. “K-12 education was 70 percent funded by locals, and 30 percent by the state, and in a state that has such a long history of home rule, that was considered logical and reasonable and normal for 150 years. 

“Gov. Engler was not alone, but he led the charge on addressing this K-12 refunding, to get away from the heavy reliance on property taxes to fund education, when property taxes were going through the roof,” Naeyaert stated. “It was very threatening for seniors who were living on fixed incomes, and younger people, who couldn't move into communities. It led to a seismic shift in how we funded education. Under the current scenario, local contributions are 20 percent, and the state contributions are 80 percent.”

“Now, local districts have very limited control over their operational budgets. The state has full control. Locals can't go to the voters for more money for operations. They do have complete control over money for capital improvements, for facilities, funding for the use of technology and building improvements,” said David Arsen, professor of educational administration at Michigan State University. “Michigan is one of the few states that does not provide for facilities. Proposal A left that out. But Proposal A shifted control from local communities and school districts to the state, and there have been new actors involved in making the decisions. It led to a decrease in property taxes, and an increase, from four percent to six percent, in the sales tax.”

Districts can also hold millage elections for improvements to buildings, for technology and security, and other items that are not for operations of the district, such as salaries, transportation and pensions. Proposal A also shifted the burden of legacy costs, in the form of pensions and other benefits, to the local districts from the state, adding to the operational costs for local school districts.

Naeyaert said a primary problem at the time was the funding disparities between school districts across the state, which he said ranged at the time from $3,500 to $10,000 per pupil. “Several people felt it was unjust, immoral and not right,” he asserted. 

“It's important to acknowledge there's been an attempt to decrease the funding gap between the highest and lowest funded districts,” said Craig Thiel, senior research associate for Citizens Research Council of Michigan in Lansing. “The policy that has been implemented has been to bring the bottom district up to narrow the gap. Most often, if there are extra funds (in the state budget), they have made a point to provide them to low-funded districts to narrow that gap. There are years where the increases (to all school districts) is equal, wherever you are on the spectrum, so there is no difference to the gap. Most recently, in the current year, the lowest funded districts got $120 extra per pupil – the grant went up by $120 – and those at the top went up by $60.”

Thiel explained that in an effort to narrow the funding gap, the original funding formula has been a two-times formula, where the districts at the bottom receive twice the amount than the districts at the top.

“In terms of revenue it narrowed the gap,” Arsen said. “Before, the gap was three to one. Proposal A has progressively narrowed that gap. Now, 80 percent of Michigan students receive funding within $500 of each other.”

Originally, in 1994, the gap between rich and poor schools, and the foundation allowance – otherwise known as the per pupil amount – they received was $2,300. Currently, for the 2015-2016 school year, the gap is down to $718. 

“The average base amount for most school districts is $7,391,” said state Rep. Mike McCready (R-Birmingham, Bloomfield Township, Bloomfield Hills), who is on the state House of Representatives Education Committee. 

Included in that base are a majority of the state's public districts as well as all charter schools. Charter schools cannot levy additional millages.

There are some districts – including Bloomfield Hills and Birmingham – which continue to receive significantly more funding. They are known as “hold harmless” districts. Hold harmless districts are wealthier districts that were allowed by law to levy additional millages to achieve their prescribed foundation allowance, to collect more money per pupil when Proposal A was set up, allowing them to offer programs not available in lesser funded districts, such as fine arts, sports and other enrichments. 

“All districts complain about funding, because the cost of education is hotly debated,” McCready said, noting Birmingham and Bloomfield offer “costly programs like various arts programs and sports which are important to a child's exposure to the world market. They offer Mandarin. Where else do they get that? Our children are well-prepared by their education for what else is out there.”

Naeyaert said at the time Proposal A was set up, there were several districts investing more than other districts, “so they were grandfathered in to charge an operating millage above the $6,500 to continue at their level of funding. That's why the appearance is that Bloomfield Hills is getting $12,000. They're only getting the base amount from the state. The difference is made up from a local operating millage.”

For the current year, Birmingham receives $11,924 per student; Bloomfield Hills receives $12,004; Rochester, $8,076; Avondale, $8,169; Troy, $8,955; Southfield, $10,971; Royal Oak, $8,758; and Novi, $8,479. They are all what are called “hold harmless” districts, which McCready said is at 56 districts across the state. Arsen noted that 85 percent of the state's hold harmless districts are in the Detroit suburbs. Notable exceptions are Ann Arbor Schools, E. Grand Rapids, and Harbor Springs.

“They (Harbor Springs) get a lot of money. They have a lot of tax revenue (from vacation homes) to work with, but they may have only 100 kids in a graduating class,” noted McCready. A few miles away, in Pellston, is a different story, without that expensive vacation home tax base.

While the gap between the highest and lowest funded districts has been narrowed, Arsen said it did nothing to shift the positioning of district. “Bloomfield Hills was at the top in 1994, and it still is. No one jumped the order. Those that were at the tail-end, they're always at the tail-end,” he said. “The only difference is the bottom was brought up. More than two-thirds of the lower-funded districts were brought up, if you're ranking just by revenues. Before 1994, districts weren't getting any money from the state. Now, everyone gets money from the state through foundation grants. And it's been that way for 22 years. Most of the compression (between the gap) took place in the first decade. But all growth has slowed. And growth per pupil has not kept up with inflation. In the last 10 years, that has been true for all Michigan schools.”

David Crim, spokesperson for the Michigan Education Association, disagreed with the success of Michigan’s funding levels. “Michigan's commitment to education funding is inadequate. It is not a coincidence that the high academic performing districts are also the highest funded districts in the state. The study provides solid evidence that Michigan has failed to adequately fund public schools to achieve optimal student performance. The study determined that 'notably successful' districts should have at least an $8,667 per pupil foundation grant. A 'notably successful' district is defined in the study as one that meets above average performance standards. Currently, the lowest funded districts receive approximately $1,200 less per pupil. Like Garrison Keillor, we want all of our students to be above average, but we continue to shortchange them year after year. Each school year that goes by is another year Michigan students are short-changed. We demand excellence from our teachers, we demand high achievement from our students, yet we fail to adequately fund our public schools to give those teachers and students a fair chance to achieve those goals.”

Crim continued, “Leaders in education reform often reference the success of the Massachusetts education system. From 1993 to 2000, K-12 education funding in Massachusetts nearly doubled, increasing from about $2.5 billion annually to nearly $5 billion. Well-constructed education reforms and an equitable fully funded education program as implemented in Massachusetts is a necessary component to reform and improve our educational system.”

Massachusetts has increased their per pupil funding significantly. According to Massachusetts Department of Education, in 2014-2015, per pupil funding ranged from $11,504 to $27,569. “Newark and Washington DC spend $25,000 per pupil. Detroit is receiving $18,000 per child (actually, about $15,000). Inkster, Buena Vista – these insolvent schools were spending a lot per kid. There is absolutely no correlation between per pupil spending and achievement,” GLEP's Naeyaert said. “Money is important because you can't have teachers, staff, buildings, books, without it. But there is very mixed research about whether spending more correlates to any proficiency. We believe illiteracy is the problem. A district will hire more teachers because that's what the unions want, and they lower class size, but they don't see better results. More important is how it's spent than how much is spent.”

Bruce Baker, professor at the graduate school of education at Rutgers University, who has studied Michigan school funding, disagrees.

“One recent major national studied found that infusions of funding to districts serving low-income children have substantive long term impacts. The Mackinac report (a 2015 report released by the Mackinac Center asserting little or no relationship between student achievement and marginal increases to already “high” levels of state spending) attempts to trivialize this study by asserting that the infusions of funding were helping only specific children and the effects relatively at very high cost,” Baker said. “Increasing per pupil spending by 10 percent in all 12 school age years increases the probability of high school graduation by seven percentage points for low income children, and by 2.5 percentage points for non-poor children.”

Baker then translated it into economic terms. “For children from low-income families, increasing per pupil spending by 10 percent in all 12 school age years boosts adult hourly wages by $2.07 in 2000 dollars, or by 13 percent.”

Thiel of Citizens Research Council agrees, “A 2015 student showed that for $1,000 added to the per pupil grant, the pass rate on the MEAP increased 1.5 percentage rate. The question is, why don't we target the money to the lowest performing districts. But adding that is $1 billion, and you just can't do that. But the proof is there. It's just a very expensive proposition.”

Naeyaert said there is a correlation between test scores and dollars spent on funding. “The state of the art research shows money does matter. It costs more to educate a poor child; it costs more to educate a special needs child. Money matters, and Michigan is one of the places that has underscored that. Now we know more from the research how to more effectively spend the money. This is important for the whole state. I think it's wonderful the children in Bloomfield Hills, Rochester, West Bloomfield have the opportunities they have. The opportunities should exist in other places too. They shouldn't have to move here. It should be available to every Michigan child,” he said.

According to Michael D. LaFaive and Jack McHugh of the Mackinac Center for Public Policy, a conservative think tank, Proposal A has achieved some of its goals and fallen short on others. “One unexpected outcome was to facilitate a robust school-of-choice system, which came about when a subsequent law freed children from a ZIP code-enforced school assignment, allowing them to attend a neighboring school district that has space,” they wrote in a report. “Because under the new system money follows individual students to the district their parents choose, or to the charter public school, another subsequent innovation, school have (had) a sharp incentive to raise their game – if a student walks from his local district, the state foundation allowance goes with him or her.”

While many Michigan districts, such as Detroit, have seen higher per pupil allocations, what has stung them is a continuing statewide decline in enrollment.

“The big factor is enrollment, for the state as a whole. It's down, and that's good, so that money can be spread around. But for individual districts, it is a terrible thing, because it's attached to a student and it travels with the student – and they get less revenue,” MSU's Arsen pointed out. “The districts that are in tailspins, that are in collapse, are ones losing enrollment. Many suburbs are doing OK because they've held onto their enrollment.” But many, including affluent districts, are carefully watching their enrollment numbers, holding their breath with even the smallest dips.

Arsen points out that nowhere does the financial stress of Proposal A, with its emphasis on per pupil dollars, impact a district more than for Detroit Public Schools, where it faces hundreds of millions of dollars – up to half a billion dollars – of debt after decades of enrollment loss and six years of emergency management. 

“It's the whole story of Detroit. They lost half of their enrollment, with half (of the students) going to charters and half leaving the city. That district imploded,” Arsen said. “They lost students so rapidly, on such a massive scale, they couldn't make cuts fast enough. That enrollment was tied to an equal drop in revenue.”

Citizens Research Council's Thiel concurs. “Equally important, or maybe even more important, is what is going on with enrollment. The foundation grant depends on enrollment. It's the foundation grant times enrollment that equals the operating budget. Even in years when the foundation grant goes up, if enrollment goes down, the total operating budget goes down.”

He said there are many forces beyond district controls, from the state's contraction, the Great Recession leading to a population decline. 

“There are economic and demographic causes that are driving down the enrollment numbers on a statewide level,” he said. In addition, he said, the number of type of education providers, “specifically, school choice, the state policy to allow choice and to increase the number of choices, not just in charter schools and public schools, but between districts, has compounded the problem. In the last 20 years, we've made the ability to move between districts practically seamless, and with that, the dollars are completely portable. The dollars are tied to the kid. Concurrently, with that we've allowed new actors – charters, cybercharters, strict discipline academies – the number of these schools have expanded exponentially. The number of kids in the pie has been shrinking, and at the same time, the pie is being sliced into many more pieces.”

Arsen elaborates on how the problem compounds itself. “When a district loses enrollment and revenue, their costs don't decline by an equal amount. Declining enrollment districts, their administrations and their boards, they are facing choices about increasing class sizes, cutting services, or decreasing their fund balances – which puts them on the edge.”

It is not only poor city districts, like Detroit or Pontiac, facing these troubling choices. “Suburban districts are facing these choices across the state,” Arsen said. “Affluent districts as a whole can offset this by accepting non-resident students, so they're better positioned.”

Bloomfield Hills is an open enrollment district of choice, on some school years, while Birmingham and Rochester are not. The question in some closed districts, Arsen and others point out, is “do we really want these students? Will they lower our test scores?”

“Bloomfield Hills has a problem because they have an aging population, and younger families can't afford to move in,” Arsen said. “They also have access to terrific facilities. They can fund them at very low tax rates and they can use their sinking funds. It's a way to raise money locally to pay for infrastructure needs, and it takes the pressure off the operating budget.”

“The math is inescapable. Everyone's piece is getting smaller. The piece equates to the funding you receive,” Thiel said. “That's the real rub, the real challenge. Districts are dealing with real revenue declines of one to three percent each year, and you can never catch your breath, and never rightsize.”

He explained that student contractions in a district are spread across multiple classes and multiple buildings, “so just eliminating one teacher doesn't solve the problem. It takes a few years of three percent declines to drop a fifth grade class, or to close a building.”

“Proposal A occurred 20-some years ago, and we have to look where are now, and the gaps that still exist, how it's worked, and not worked. There are still huge disparities – just look at Detroit Schools. How do we break down debt service and legacy costs? It's all about the foundation allowance. The fact is, I think the system is still broken,” said Gilda Jacobs, president and CEO of Michigan League for Public Policy. “At the end, the conversation is all about the economic future of the state. We have to figure out how to get our graduates to have the education and the skills to get our state going. We have lost students. We need to properly educate our students, or they will not be able to provide the taxes to keep the economy going. 

“It's an economic survival issue. The investments early will have a huge return on investment.” ­

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