Budget talks begin; school reserves questioned

1 March -- Talks on the state budget deficit for this year and next, including what to do about the hole in the School Aid Fund, have begun in earnest now that Governor Granholm's budget proposals have been introduced as bills in the legislature. (For details on the budget proposals, see our summary on this page.) The Governor and Senate Majority Leader Mike Bishop (R-Rochester) have had their first face-to-face meeting about the budget after an earlier exchange of letters.

In the meantime, there are reports that House Democrats may be developing an alternative to the Governor's proposal because of worries that the proposed 2% tax on services does not have enough support from Democratic members. Leaders of the two houses are also reported to be setting up a bi-partisan joint committee to hash out a compromise on budget and tax issues. Stay tuned!

Helping to muddy the waters with regard to education funding, State Rep. Jack Brandenburg (R-Harrison Twp.) released a report he requested showing that local and intermediate school districts had over $1.7 billion in their reserve funds as of the middle of last year. The House Fiscal Agency report showed that some districts has as much as 25% of annual operating expenses in their reserves, while others had close to none. Experts recommend that a district have 15% of annual operating costs on reserve. (In the HFA report, Ann Arbor's fund balance stood at 0.3% of annual expenditures as of last May, though the district's 2006-7 budget had the "undesignated fund balance" ending up at around 8% of expenses.) Rep. Brandenburg claimed that these numbers were evidence that schools had a bigger cushion than many supposed, and called for a 15% limit on reserves. Representatives of state school administrators called the numbers misleading, since many districts use their reserves to pay expenses while waiting for state funding checks, or to save for capital expenditures. In the case of Ann Arbor, the reserve balance has been used to soften the blow of revenue cutbacks, and also absorbed the costs of the substitute teacher settlements.

Rep. Brandenburg pointed out that the total amount of reserves held in excess of the 15% level would be just about enough to plug the hole in school aid funding for this year. However, many districts have enlarged their surpluses with payments from the Durant case settlement, in which schools were compensated for state-mandated special education programs. These payments will not continue, so that most districts' reserves will shrink from now on.

Finally, school officials appeared before a House panel Wednesday asking that a more stable source of funding be found for school aid. A representative for Michigan School Business Officials called for "fundamental change" in how schools are funded in testimony before the House Appropriations subcommittee on School Aid. Officials from several intermediate school districts also gave testimony on the problems they face under the current system of funding.