First look: Snyder FY16-17 school aid budget

It's February, and as most of you know that means it's Budget time in Lansing. (You were thinking hearts and chocolate?)

Governor Rick Snyder presented his recommended budget last week to a packed room. The focus, not surprisingly, was on the water crisis in Flint and the restructuring of Detroit Public Schools. But the budget determines what kind of education can be offered to every child in the state, and the important bits are often in the details. At first glance, parent advocates have reason to be modestly pleased, though the reality is not as pretty as the picture painted on the cover. What happens in the end, however, depends on what comes out after the document has been reflected in the legislative funhouse mirrors - which may or may not resemble the original.

A little bit more
The governor's executive budget recommendation is headlined by a modest increase in per-pupil funding. Districts at the current minimum level of $7,391 - which includes some 60% of all students - would receive $120 more per pupil for their general operating needs. Districts at or above the state maximum (currently $778 higher or $8,169) would get an increase of $60 per pupil.

For most students, then, that means a funding increase of 1.6% - just a tad more than the projected inflation rate of 1.2%. But a goodly number of students will get a smaller relative increase: 0.7% or less, lagging inflation.

Put another way, the small number of districts which were at the bare minimum spending level when Proposal A took effect in 1994 are still doing better than when they started, adjusted for inflation, but they have not recovered the levels they saw in 2010-11. Districts which started out at the "basic" level of funding ($5,000 in 1994) have lost some ground and are below where they started in 1994, adjusting for inflation, wiping out the gains from the first decade of this century. Districts at the higher end have done even worse: if they received what was the state maximum in 1994 ($6,500), they have lost ground against inflation nearly every year since then and the draft budget would let them buy about 17% less now than they were able to 22 years ago.

The budget summaries provided by the Administration highlight the fact that this per-pupil increase costs $150 million. What it does not highlight is that about $140 million of that is paid for with savings this year and next from lower student count numbers. Overall state spending on school aid (which includes large earmarked provisions for special education, at risk children, and so forth) will increase about 1.4% in the Governor's budget, with the amount coming from the School Aid Fund itself actually shrinking a little compared to the current year. This decline is being balanced by an increase in funds from the state General Fund budget from $46 million to $230 million.

The generosity with General Fund dollars is not quite what it appears, however. While K-12 schools and preschool programs will see a declining amount of School Aid Fund money, funds from the SAF to community colleges and state universities will increase by some $35.6 million. While colleges and universities also receive increases in their GF funding, the net overall contribution from the general budget is actually smaller than the amount quoted for K-12 education.

Why the fiscal shell game? Well, colleges and universities only recently started receiving money from the School Aid Fund; that became a permanent feature starting with Gov. Snyder's first budget in 2011. Although the state constitution allows this, it's clear that the architects of Proposal A in 1994 assumed that the School Aid Fund revenues would go entirely to K-12 schools. With these funding shifts in the proposed budget, the Snyder Administration is digging colleges and universities deeper into the SAF, and making K-12 education relatively more dependent on discretionary transfers from the General Fund, which change greatly from year to year. It also makes the state look rather more generous if you only pay attention to the K-12 portion of the budget.

Wall Street's impact on our kids
Costs of the state-run school employee retirement system (MPSERS) continue to have a major impact on the budget. Unfortunately, unlike some other states, Michigan does not cover these costs from other funding sources, but instead uses money from the school aid budget. The cost of funding the retirement system has risen astronomically in recent years, and not because benefits are getting richer. As districts shed teachers and other staff in downsizing, and as more services are privatized, there are fewer employees paying into the system while the number of retirees is growing. And as anyone who invests their own savings can attest, the performance of the financial markets since the recession has not been stellar. MPSERS invests their funds in the market for long-term growth, but any declines in the market value of its portfolio have to be made up by school districts and the state to make sure the system can meet its future obligations.

As a result, contributions equal to about 36% of payroll have to be made by the state and school district employers (employees also make their own contributions). Ten years ago, this rate stood at a little over 16%. Four years ago, state law capped the contribution of school districts to around 21%, covering the rest as a lump sum out of the school aid budget before money is distributed to districts. (As a result, some of the burden is shared with schools that do not participate in MPSERS, like most charter schools.) This state portion amounts to nearly $1 billion in the governor's budget, with a further $100 million being distributed directly to districts to offset some of their retirement obligation. As the budget documents note, this equals about $660 per pupil on average - the cost of not covering our retirement obligations with separate funds. Even after the state pays its share, school districts must still cover their 21% from their per-pupil funding - at an estimated $1,200 per pupil that simply makes the round trip to Lansing.

Don't worry - DPS won't cost a thing!
Another highlighted feature of the budget is how it handles the projected $72 million cost each year of the proposed restructuring of Detroit Public Schools. The plan hinges on splitting the district in two, leaving the "old" district to collect the local 18 mills in property taxes to pay down debt while the "new" district gets all its funding from the state. Under normal circumstances, that cost would be borne by the School Aid Fund, and thus by all school districts. Gov. Snyder instead proposes to divert a portion of the tobacco settlement revenue to pay for this - a quick fix that the legislature has used itself several times to get around funding shortfalls.

Son of 20j
Under the rules set by Proposal A, districts can receive whatever funding increase the legislature sets - except for "hold harmless" districts, which were outside the state funding formula when it was set up in 1994. These districts can not receive increases greater than the rate of inflation. Some years ago, a compromise allowed this limit to be bypassed so that all districts could receive the full increase, whatever it was - the language was inserted as Section 20j of the School Aid Act. In a game of chicken over the budget in 2009, then-Governor Jennifer Granholm vetoed that section, hoping to win compromises from Republican Senators whose districts would lose as a result. It didn't work, and the money paid under that provision disappeared immediately.

School funding increases have not often exceeded inflation, but they are projected to this year. The 0.7% increase offered to districts at the state maximum (which would be smaller for districts above that level) would still exceed the estimated inflation rate of 0.1% from last year (the law uses the previous year's rate). As a result, the governor includes language in the budget which would once again allow all districts to get the full amount of the increase, though it would still be paid through the "2x" formula which gives lower-funded districts twice the increase of that given to those at the high end. As with the old Section 20j, however, this money is not permanently built into the foundation allowance and could disappear in later years, lowering per-pupil funding to where it would have been otherwise.

And now for a little background
It's important to view the budget in context. Here are some facts we can glean from the January revenue estimation conference, in which the state government's top economists make the forecasts that form the basis for the budget.

Total revenue to the School Aid Fund - which, remember, is now shared with community colleges and state universities - is still expected to be 3.3% higher for the current budget year (ending September 2016) than it was in the previous year. However, the forecast for revenue this year is now $111.3 million less than it was when they last did this, in May. Total SAF revenue is now projected to grow 2.9% next year (2016-17), but that estimate is also lower than the previous one, by $112.6 million. (SAF revenue comes mostly from the state sales tax, a portion of the income tax, and the 6 mill State Education Property Tax levied on all property in Michigan.)

State law still requires the economists to calculate how much the base per pupil funding should change given inflation and changes in the number of pupils, though the legislature is free to ignore this, and always has. The "School Aid Index" for next year indicates that funding should rise by 3.6%. That's not what districts get from the Governor's proposal: those at the minimum (over 60% of all students) will see a 1.6% increase. At the upper end (the new "basic" or state maximum, which is about $780 higher), districts will see a 0.7% increase.

You might think that these extremely modest increases are so low because Michigan's economy is not growing much. But it's more complicated than that. In fact, the Michigan economy is forecast to grow 4.6% this year. Under the Headlee Amendment to the state constitution, total state tax revenues are limited to being 9.49% of state "personal income" (which is economist jargon for "state GDP" or the total state economy). But in the last ten years or so, the state's economy has been growing much faster than tax revenues (even during the recession). According to the state economists, tax collections will be $9.6 BILLION (yes, with a "b") under that legal limit for FY 2016-17 - the lowest level since the provision was enacted in 1979 - and even lower the year after. In other words, we raising about $10 billion less in taxes than the level which fiscally conservative lawmakers thought 30 years ago was appropriate to run our state government. That's not because of the economy; it's because of choices we have made about how to fund public services - or not to. Funding for schools has followed the same pattern: for more than a decade, we have been spending a smaller and smaller share of our state economic product on K-12 education - in good times and bad. Is this really how we get excellent schools?