Tax revenues continue to fall; schools warned of cuts

The news just keeps getting better and better. State officials are forecasting that state tax revenue for the rest of the year will end up even below the estimates which were revised downward in January. The state budget director has notified school districts across the state that, unless the Legislature agrees on measures to close the growing school funding gap, the governor will have no choice but to order substantial cuts to school funding - on the order of $90 to $125 per pupil. [To illustrate, Ann Arbor Public Schools would lose almost $2.1 million, and Monroe Public Schools would lose over $852,000, all from the last three state aid payments of the year.]

State revenues tumbling
The shortfall in revenue earmarked for the state School Aid Fund, which provides the bulk of the funding for Michigan's public schools, is part of a wider decline in tax revenues which support state programs. State tax collections could be between $100 - $300 million below the January projections, according to House Fiscal Agency head Mitchell Bean. The outlook for the School Aid Fund is especially worrying, Bean said, because sales tax revenues are coming in significantly lower than expected. Proceeds from the sales tax fund nearly half the SAF; sales tax collections for March are more than ten percent lower than last year. Even the revenue estimates formed in January, which predicted a shortfall in revenue for the SAF, predicted that October-March sales tax collections would be 1.4% above the same period in the last fiscal year. Instead, fiscal-year-to-date sales tax revenue is down nearly 4% compared to last year. Other components of School Aid Fund revenue that are losing ground include: the real estate transfer tax, which is down over 32% from a year ago; and the state education property tax, which collected more than 20% less in March than it did a year ago.

Governor accused of brinksmanship
The letter to school superintendents from State Budget Directory Bob Emerson warns school districts that he will start the process of cutting school aid on May 1st unless the Legislature acts to close the funding gap. [See copy of letter attached below.] Under current law, the governor has no choice but to cut school funding if money runs short unless the Legislature can agree on a different way to fill the gap. The Legislature has 30 days after notice is given by the budget director to take action. Emerson's letter points out that the Legislature has already agreed to measures which will cover all but $62 million of the $377 million shortfall originally predicted. But when state economists gather in May to forecast revenue, he says, officials now predict they will find a further $100 - $150 million shortfall. Emerson estimates that cuts of as much as $125 per pupil in the amount paid to districts will be necessary, as well as $5 - $8 million in cuts to intermediate districts. Republican lawmakers have accused the Governor of using the letter as a way of whipping up support for tax increases, which they oppose. Republican spokesmen said that the burden was now on the Democrats in the House to take action, and to consider the plan the Senate passed earlier which included no new taxes but cut only $34 per pupil. The Senate plan is embodied in SB 221, which is now before the House Appropriations Committee. Both the Governor and Democratic leaders in the House are on record opposing the school aid cuts made in the bill; they all envision some form of new revenue to support schools, but have so far been unable to settle on one proposal. In any case, the Senate's plan was designed to meet the deficit as originally forecast in January and does not account for the further shortfalls the budget office predicts for the rest of the year.

A wake-up call
Representatives of school board officials and administrators are very worried by possible cuts of the magnitude of those mentioned in the budget director's letter. They say this should be a wake-up call for the Legislature, and have already been pressing for action in the capitol, as Emerson urged them to do in his letter. School districts would see the cuts come out of their June, July and August monthly state payments. Most districts would have no choice but to borrow money or use their reserves to cover the loss, as most of their expenses could not be changed with such late notice. Especially worried are those districts which could lose all funding for the remainder of the year once the cuts, called "prorations" were made. The state does not make payments in September, so strapped school districts would have to wait until the end of October for their next payment.