A surplus for schools? Don't hold your breath

The latest projections show that revenue to the state School Aid Fund, which supports K-12 education in Michigan, will increase 2.7% next year, compared to a 4.3% drop this year. But will local public schools get a funding increase? There will be a lot of politics at work between now and the start of school next fall, and little can be taken for granted. While Governor Snyder is likely to use any school aid surplus to make one-time “pay for performance” payments, there is significantly less money available to do that this year.

Things are looking (slightly) up
Two weeks ago, the top economists in state government held their semi-annual meeting to estimate state tax revenue, as required by law. Representatives from the Treasury and the House and Senate Fiscal Agencies concluded that things were looking up: they project unemployment in Michigan will continue to creep down while the number of jobs slowly recovers through 2014. Inflation will stay relatively low, but real state personal income (a measure of all the income generated by individuals and businesses) will grow modestly faster than inflation.

The economists’ predictions for tax revenues were likewise looking up, with their latest estimates up modestly from their last forecasts in May 2011. State General Fund revenue, which pays for programs besides K-12 education, is forecast to rise 2.5% this fiscal year (ending in September), stay flat next year and rise again in fiscal 2014.

More for business, less for schools
Other things being equal, the School Aid Fund would have seen a $230 million increase during the current fiscal year. However, because of the business tax changes enacted for this year, the SAF is losing over $700 million in revenue it would otherwise have collected and been able to spend on public schools. As a result, SAF revenue is expected to be some $480 million — or 4.3% — lower than in 2010-11. In the subsequent two years, the economists predicted that school aid revenue would grow from this reduced level by 2.7% in FY2013 and 2.8% in FY2014.

According to Senate Fiscal Agency calculations, the modest revenue recovery this year and next will generate a surplus of about $300 million in the School Aid Fund next year. This figure assumes, however, that the one-time payments of $200 per pupil made this year are not repeated next year and that the school aid funding earmarked to universities and community colleges does not increase. Payments to colleges and universities out of the school aid fund amounted to nearly $400 million this year. The one-time funding given to school districts (half to help with pension payments and half contingent on certain policy changes) would cost $456 million if repeated this year, outstripping the theoretical surplus.

These huge shifts are being driven largely by the tax measures enacted last spring. On the one hand, elimination of most tax credits to individuals and new pension taxes increased the expected revenue, mostly to the general fund budget. On the other hand, the replacement of the Michigan Business Tax with the Corporate Income Tax reduced revenue to both the GF budget and the School Aid Fund. On the whole, the tax changes reduced GF revenue by over $210 million this year and reduced SAF revenue by nearly $720 million. Not only is the CIT much smaller than the MBT, but a portion of the MBT was earmarked for the school aid fund while none of the CIT is.

A guarantee that isn’t
Language in the school aid act requires the economists to calculate a so-called “school aid index,” which depends both on the change in revenue to the school aid fund and the estimated change in the student population. This year, that formula indicates that public schools should receive an additional $209 per pupil. The law would otherwise require that schools receive those funds, but school funding has never been left to the formula. The legislature has the power to override that calculation, and they have done so nearly every year.

Given the language in last year’s budget that the legislature intended to keep K-12 school funding flat this year, we expect that there will be no permanent increases in the per-pupil foundation allowance for any district. While there may be some unexpected “surplus,” it will be smaller than last year’s, which was used to make the “one-time” payments. The governor has made it clear that he wants to use any extra money to entice school districts to make changes he believes will improve education in Michigan. The measures required this year, which included online dashboards and a mandate to explore privatization of some services, were easy for most districts to meet but are likely to have little long term impact on education. Finally, while school officials hope that School Aid Fund money will no longer be used for colleges and universities, that seems unlikely: General Fund revenue is forecast to be flat next year, leaving no room for absorbing more higher education spending. Absent a strong stand by the legislature, or a successful constitutional amendment, use of the School Aid Fund for higher education will become a permanent feature of school funding.