Budget update: Let's make a deal [with update]

Updated Wed. 5/25/11
The school aid budget was reported out of conference committee today, and sailed rapidly through the Senate. The “compromise” bill reduces the cut to K-12, but does not plow the funds into the foundation allowance.

Last week, the Governor and majority leaders of the Legislature announced a budget agreement that reduced cuts to public schools. They were able to do this because of the projected $430 million increase in State revenues for the current year. These are considered “one-time” funds, however, because a potential surplus for next year will be eaten up by the business tax cut recently passed by the Legislature.

Since legislative leaders and the Snyder administration consider these as non-recurring funds, they do not want to spend the money on “programming.” As a result, the extra funds will not be put into the foundation allowance for districts, but will be allocated indirectly:

• Of the added $300 per pupil cut to K-12 schools requested by the Governor, $100 per pupil will still be cut. (That’s in addition to the $170 per pupil cut that would have taken effect this year were it not for Federal assistance.) In fact, the official foundation allowance of all districts will be reduced by the full $470, with some of that amount made up with the grants below.

• The other $200 per pupil will not be added to districts’ foundation allowances. Instead, an amount equivalent to $100 per pupil will be used to reduce districts’ required payments to the state teacher pension system (MPSERS). The final $100 per pupil will be distributed to districts that engage in certain financial “best practices.”

According to the conference committee report, a district must meet four of five “best practices” to qualify for this one-time grant. A district must demonstrate that it;

• requires school employees to pay at least 10 percent of their health care costs;
• show that the district is working to consolidate services;
• solicit a competitive bid for at least one non-instructional service (more than $50,000);
• create a public “dashboard” that shows information on district finances, test scores, and graduation and dropout rates;
• have the district be the policyholder on its health insurance (which could make it harder for districts to use MESSA, an affiliate of the MEA, for health coverage).

If a district does not meet four of the five criteria, it will face the further $100 cut. The legislature also inserted language to make clear that this grant would not extend beyond the 2011-12 fiscal year. The payments to reduce pension costs are similarly limited to one year, and will be distributed to districts in proportion to their share of the statewide payroll.

In other changes, many targeted “categorical” grants are eliminated in this budget, including what had been $20 million in assistance to districts with declining enrollment. Others are phased out over the next year. Districts will still receive the full foundation allowance for half-day kindergarten students for one more year, but language in the bill states the legislature’s intention to eliminate that provision in the following fiscal year. Finally, in a move which will inject yet more uncertainty into local district budgeting, the fall student count day is moved into the first week of October from late September while the pupil count formula will now weight the fall count by 90% and the February count by only 10% (from 75%/25%). This will save the state some $15 million because traditional local school districts have a higher enrollment in the winter than they do early in the school year.

The conference report sailed through the Senate, which suspended rules which would have required the chamber to wait a day before acting on the bill. Five Republican Senators voted no on the bill, which still passed by a 21-16 margin. The Republican caucus joined together for the two-thirds vote to give the bill immediate effect (without which it would not take effect in time for the next fiscal year). The bill is now before the House, which is likely to pass the measure without difficulty.

In general, districts are welcoming the reduced cuts, though they are concerned about how the “best practices” standards will be enforced. The good news is limited, however, because the School Aid Fund is likely to have much reduced revenues next year as a result of the elimination of the Michigan Business Tax (a portion of which had been earmarked for schools).

MIPFS and other advocates for public schools are concerned about this budget “deal” because of the problems it does not solve:

• The “compromise” still includes a $270 per pupil cut to public schools that would not be necessary if the tax cut for business had been more moderate and funds for colleges and universities weren’t being siphoned from the School Aid Fund. And this reduced cut is a best case scenario, assuming that a district meets the “best practices” test.
• Because of the reduced revenue to the School Aid Fund in FY 2013 (the first full year of the Snyder tax cuts) and in future years, K-12 spending will depend on sizable transfers from the state’s General Fund. However, similar transfers in the early years of Proposal A were slowly eroded by financial pressures until the GF contribution was very minimal.
• The budget plan does not address the need to provide a stable and adequate revenue stream for public education.
• The budget makes a clear choice to prioritize tax cuts above investing in education. This is essentially a huge bet by the Snyder administration that tax cuts will drive economic recovery and growth. The evidence to support this, however, is fairly thin, while the evidence showing the effectiveness of investing in human capital and education is quite substantial.

The long-term reduction in revenue to the School Aid Fund that results from the current tax and budget plan – and the need to share it with colleges and universities – almost ensures battles over K-12 funding in the coming years.