Revolution and Evolution: Michigan’s Proposal A School Finance Reform, A Retrospective Analysis

1. Revolution and Evolution: Michigan’s Proposal A School Finance Reform, A Retrospective Analysis Michael F. Addonizio Douglas C. Drake September 29, 2005

2. Proposal A Goals • Reduce, but not eliminate per pupil gaps • Reduce & cap property tax for operations • Reduce local share of operations costs • Increase state funds and state share • Provide greater stability in funding

3. Measuring A’s Success • Clear reduction in per pupil gaps • Property taxes clearly reduced & limited • Major change in state / local share • Clear shift to state financing • Improved stability less clear and may depend on perspective

4. The Issue of Per Pupil Gaps • Overall dramatic reduction in gap, but not elimination • Basic foundation of $6700 (2005) higher than maximum guarantee in 1995 • Statistical measures of equity all show dramatic improvements (Table 4)

6. Revenue Growth and Adequacy • When looked at from perspective of total state and local revenues: • Revenues Before and After comfortably above inflation in most years • Period of comparison seems to make a lot of difference v structure of change

9. Strong Growth in Total Revenues • Total revenue growth beat inflation most years • 15 years Before A • Average annual nominal growth: 6.4% • Average annual real growth: 1.6 % • Standard deviation 3.0% • 9 years Before A • Average annual nominal growth: 6.4% • Average annual real growth: 2.6% • Standard deviation: 1.7 % • 9 years after A • Average annual nominal growth: 5.1% • Average annual real growth: 2.3% • Standard deviation: 3.1%

10. Significant Increase In State Funds • Proposal A tax increases largely effective 5-1-94 • Added state revenues in FY 1993-94, and FY 1994-95—the first year of Proposal A implementation

12. Improved Finances for Most Traditional Districts • Significant and dramatic increases in fund balances for most traditional districts • Sources a combination of extra-formula foundation increases, pension re-financing, “Durant” settlement, enrollment growth and district management practices

16. Enrollment Patterns Now Most Critical Finance Issue • Growing enrollment usually results in good fiscal health • Declining enrollment often results in fiscal problems • Majority of districts and pupils now in decline status • Very few districts are steady growers • See Appendix Q for district detail

17. Enrollment Patterns, cont • Declining enrollment not just an urban issue • Significant declines in rural and small city /towns/older suburbs

20. Property Tax Reductions • Millage cuts and homestead exemption produced dramatic cuts in property taxes for homeowners, less for business • Average mills cut from 56.64 on all property to: HOMESTEADS: 30.22 - 46.5 % NON-HOMESTEAD 51.00 - 10.0 % • Millage cut: $5.1 BILLION in 2003, and $35.6 Billion cumulatively through 2003 • Assessment cap: $3.1 BILLION in 2003 and $13.1 Billion cumulatively through 2003

21. Property Taxes Limited • The assessment cap critical • Also limitations on local school options for operations • Only two ISDs with “enhancement” mills • Very few enhancement elections held • ¾ vote requirement for Legislature to change millage limits makes significant increases very unlikely

24. Some thoughts on the Net Impact • Dramatic property tax cut, as promised • Rhetoric about loss of homes to property tax has disappeared • Dramatic reduction of financing equity gap for operations • Debate now shifting to questions of adequacy • Stability a relative issue • No fear of loss of major portion of operating millages…BUT…

25. From Equity to Adequacy • After years of unexpectedly large foundation increases, years of flat to slightly reduced foundations • Did over-optimism of late 90’s create unrealistic expectations? • Enactment of numerous tax exemptions that reduced growth potential of SAF • Replacement funds, largely tobacco are long-term decliners

26. From Equity to Adequacy 2 • Michigan has never addressed school finance in the context of identifying actual costs • Focus on all-encompassing “solutions” that tend to be one-time fixes: • Earmarking more income tax in 1997 • Calls for more new taxes and no GF grant • Assertions that old system was better • IT WAS GONE, WITH NO GOING BACK

27. Challenges • Capital funding • Declining enrollment from population decline and shifts • Impact of charters and choice on traditional district enrollment • Tax policy and erosion in the revenue base • Impacts of personnel and fringe costs-productivity gap

28. Capital Funding for K-12 • Proposal A made up-front decision to NOT attempt capital funding reform • Assumption that dramatic cut in property taxes would make it easier for some districts to obtain financing until such time as a solution could be developed • Data on increased bonding and debt millages clearly indicates that happened • Now the next challenge

29. The Challenge of Declining Enrollment • Declining enrollment-in a traditional district or a charter school-virtually guarantees financial difficulty-very quickly • It’s much harder to manage down than to manage growth—see Appendix Q • Strong consideration needs to be given to change pupil count to a one year lag

30. Tax Policy Changes Impact SAF Revenues • Legislation did hold SAF harmless from recent income tax rate cuts (by pushing burden completely on GFGP) • Legislation has not held SAF harmless from dozens of base exemptions and other changes that have added up to hundreds of millions of reduced income • SAF does not have the same tax base it had in 1994

31. The Challenges of Cost Savings • Education essentially has been a one on one business for a long time • Where will the productivity come from to bring costs down? • If productivity improvements aren’t possible, what impact will lower or slower growing salaries and benefits have on attracting the best and brightest to teaching?

32. Conclusions • “The sum of all these circumstances poses a fundamental and daunting challenge to all Michiganders. As the national and world economies continue to shift from muscle power to brain power, our ability to balance limited financial resources and growing educational requirements and needs over the next few years will play a large role in determining our future.”