Making Sense of K-12 Funding

Memorandum 1129, October  2014

The current political debate seems fixated, at times, on the issue of state funding for public K-12 schools. Specifically, claims and counterclaims have been leveled about whether state funding has increased or decreased in recent years. Although disputes over public education finances are nothing new, recent changes in the way the state allocates funds to local school districts has created confusion and has fueled the present debate. These changes have made it more difficult to provide straightforward, simple answers to questions about school funding. Today, accurate and comprehensive responses to questions about school funding require additional explanation, much more than may have been required in the past.
This State Budget Note answers three fundamental questions surrounding the issue of school funding. 1) Is school funding up or down compared to four years ago? 2) Over this period, has funding gone up as much as it could have? 3) Are individual school districts better off today than they were four years ago?
Is Funding Up or Down?
The answer to this basic question is an unequivocal “up” when just the raw numbers are considered. However, providing this simple answer requires additional explanation to understand the larger fiscal picture facing schools, including where the additional funding is being directed and how the money is being used.
Public schools receive operating funding from federal, state, and local sources; however, it is state lawmakers, not local school boards, that have sole control over funding decisions involving state funds – including the amount of funding available for public education and the per-pupil dollar amounts allocated to each school district. State dollars have financed the majority of local school district budgets since the adoption of Proposal A in the mid-1990s when state taxes replaced local property taxes as the primary revenue source for public schools. Most of a district’s general operations are financed from a combination general state aid (e.g., foundation allowance) and categorical grants (e.g., at-risk student funds) allocated through the state budget.  State education appropriations are financed almost exclusively by the School Aid Fund (SAF) with the General Fund responsible for a couple line items.
Chart 1 shows the most recent five-year total appropriations history, by major fund source, for K-12 education (excludes adult education and early childhood funding).
Total appropriations increased from $12.9 billion in FY2011 to $13.6 billion for the current fiscal year (FY2015), with annual increases in every year since FY2012. The decline from FY2011 to FY2012 was the result of the phase-out of temporary federal education dollars (i.e., stimulus funding); in FY2011, Michigan received about $500 million from federal sources to maintain state spending. With the end of the federal stimulus dollars, state lawmakers chose to reduce appropriations rather than replace the funds with state dollars.
In terms of K-12 resources that lawmakers control directly, state-source appropriations rose from $10.7 billion to $11.8 billion over the five-year period, a total increase of $1.1 billion or about 2.5 percent per year. Much of the increase, beginning in FY2012, was used for SAF-financed appropriations specifically to address public schools’ legacy costs associated with the state-administered Michigan Public School Employees Retirement System (MPSERS). School districts’ unfunded retirement liabilities are up significantly because of the financial market downturn in 2008 and the decision by state lawmakers to begin prefunding retiree health care benefits. Even with the increase in funding, the total unfunded accrued liability increased from $12 billion in 2009 to $25 billion in 2013.
To address these growing liabilities and provide districts with more predictability in financial planning, the state enacted reforms to the retirement system in 2012 to cap the schools’ contributions for unfunded retirement liabilities to 20.96 percent of payroll. Under the law, required retirement payments above the cap are satisfied by the state from a separate School Aid Fund appropriation ($675 million in FY2015). In addition to this direct state funding, an additional $100 million appropriation is allocated to help individual districts meet their annual retirement contributions. Combined, total MPSERS-specific funding increased more than five-fold from $155 million in FY2012 to $883 million in FY2015.
While it is the case that state-sourced funding to K-12 education increased in recent years, this growth has funded appropriations intended to address schools’ retirement obligations, specifically the unfunded liabilities resulting from past years’ underfunding. These retirement payments are mandatory and have to be satisfied one way or another, either through direct state appropriations or via the state aid provided to individual school districts through their foundation allowances. While districts continue to finance the majority of their unfunded retirement liabilities from a portion of the foundation allowance they receive, under the current arrangement, the state budget is providing specific funding to help finance a share of these liabilities. In both cases, retirement contributions are funded with SAF dollars.
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