Money, Money, Money: K-12 budget bills move to conference

House and Senate conferees will be able to negotiate virtually the entire K-12 budget from scratch, while passage of the Governor’s tax package narrows options and the revenue conference offers limited hope.

Over the next days, the members of the House and Senate conference committee on their respective versions of the School Aid budget will be hammering out a compromise, with virtually everything on the table – at least in theory. At the same time, passage last week of the Governor’s tax package – which eliminated the Michigan Business Tax and replaced it with the much smaller Corporate income tax and also increased personal income taxes on many filers – has effectively closed, for now, any options of increasing the revenue stream to school aid.

Finally, the May revenue estimation conference offered a glimmer of hope, indicating that revenues for the current fiscal year (2011) would be $132.4 million higher in the school aid fund and nearly $429 million higher in the SAF and General Fund combined. However, a potential $500 million overall surplus for next fiscal year largely evaporates with the tax package just passed, hitting the school aid fund especially hard.

School aid budgets go to conference committee

This year, the House-Senate conference committee will have unprecedented leeway to re-negotiate the school aid budget. Normally, only one house would pass a version of the budget bill, and the conference committee can only negotiate “items of difference” between the houses. This year, each house passed its own version of the bill and essentially rejected the other house’s version, making the entire budget an item of difference.

Both the Senate and House versions of the School Aid budget make significant cuts to K-12 funding for FY2012, though the House version is closer to the Governor’s original proposal in magnitude. Overall, the Senate bill (SB 183 as amended) cuts K-12 by about $734 million, while the House version (HB 4325 as amended) cuts over $908 million; the Governor’s original proposal cut some $961 million from K-12 overall. (The Senate pays for its lower cuts to K-12 by reducing the transfer of state university funding to the school aid fund, and pays for that in turn by making cuts in the human services, community health and corrections budgets.)

The largest changes are in the foundation allowance paid to school districts on a per-pupil basis. Both bills make permanent the $170 per pupil cut passed last year but offset by one-time Federal funds. The Governor had proposed an additional $300 per pupil cut to the foundation allowance; the Senate reduced that amount to $170, for a total “statutory” foundation allowance cut of $340 per pupil ($568 million). In contrast, the House applied a flat 3.5% cut to all districts, meaning that higher-funded districts would see a larger dollar cut than lower-spending districts. The House bill would result in per pupil cuts of between $426 and $467 (compared with the Governor’s proposal of $470).

Other major changes include the Senate’s language to pay half the foundation allowance for half-day kindergarten students (they currently receive the full allowance). That cut would vary by district, but reduces spending by $175 million; the House does not implement this until the following year. The Senate also included $200 million in funding for an incentive grant program to encourage districts to follow “best practices” in terms of reducing costs and consolidating services; the House also included a similar provision, but with no funding attached for FY2012.

The Senate bill, like the Governor’s proposal, eliminates many targeted “categorical” programs and grants to specific districts, removing some $87 million in spending. The Senate bill also changes the “blend” for student count day from 75% September plus 25% previous February to 905/10%. This change cuts funding by $15 million, because traditional public schools tend to have more students in February than in September, as children transfer from other schools.

The House bill followed the Governor’s proposal more closely with regard to categoricals and other targeted funds. For instance, Senate proposed maintaining state aid to libraries at current levels and increasing School Readiness grants by $6 million, while the House included neither of these. On the whole, the House bill cuts $16.2 million more from such categoricals, for a net total of around $103 million in cuts.

Revenue estimation conference finds good news, bad news

The report of the top state economists, which estimates the amount of tax revenue the state will receive over the next two years, gave some limited hope to school advocates. The consensus of the three agencies – the House and Senate Fiscal Agencies and the Department of the Treasury – is the figure the Legislature must use, by law, to draft a balanced budget.

In their report, released Monday, the officials estimate that overall tax revenue for the State government for the current fiscal year will be some $429 million higher than their estimates in January (which was being used in the budget process so far). Of that total, most will accrue to the state’s General Fund and only $132 million will go to the School Aid Fund. This “extra” revenue for the current year, which has been anticipated in recent weeks, immediately started a political brawl over how to use it.

Senate Minority Leader Gretchen Whitmer (D-East Lansing) insists that she has an agreement with Majority Leader Randy Richardville (R-Monroe) to use these funds to reduce the K-12 per pupil cut to $245 from the Senate’s current $340. Governor Snyder, in turn, anticipated some of the money would be used for school aid, but did not embrace the numbers described by Sen. Whitmer.

In the meantime, the chairs of the House and Senate Appropriations Committees differ in how they would like to use the funds: Sen. Roger Kahn (R-Saginaw) wants to use this money, and a remaining balance from last year, to reduce cuts to school aid and help transition teacher pensions from a defined benefit to a defined contribution system. His opposite number, Rep. Chuck Moss (R-Birmingham) insists that “one time” money should not be used for programming but rather stashed in the Budget Stabilization Fund (currently all but empty) and to reduce the unfunded liabilities in the state teacher pension system. These conflicting priorities will be driving the negotiations in the conference committee.

Finally, the consensus revenue estimate makes clear the impact of the Governor’s tax packaged, now set to become law. Without those changes, FY2012 revenue is now projected to be nearly $500 million more than previous estimates, $142 million of that in the School Aid Fund. However, the tax changes shift the balance dramatically: the new projections for FY2012 include a $512 million bump for the General Fund but a $548 million drop in revenue to the School Aid Fund, a 4.2% drop from this year. In the following year, though revenue for both parts of the state budget would increase, the School Aid Fund would see some $662 million less revenue than it would have without the tax changes. These decreases come as the SAF is being used to help pay for state universities and community colleges as well as K-12 education.

Governor Snyder has promised increased transfers from the General Fund to the School Aid Fund to make up for this shortfall. However, similar transfers just after Proposal A was passed slowly fell over the years until General Fund contributions to the SAF were close to zero.