In a nutshell:

• State education funding cuts are coming in a big way, absent a major infusion of federal funds.
• K-12 cuts are automatically “pro-rated” on an equal per-pupil basis to balance the School Aid Fund budget, unless the Michigan Legislature takes alternative action.
• Relying solely on pro-rated cuts ignores the current inequities in Michigan’s school funding system – funding for students with the greatest educational needs will receive the same per-pupil reduction as students that don’t face as many learning challenges.

The “Pandemic Recession”, or whatever it will end up being called, is causing tremendous uncertainty for Michigan state and local government finances. The problem is both enormous, and simple: State and local budgets are dealing with a one-two punch of rising spending demands associated with pandemic-related costs, and cratering state tax receipts from the temporary shutdown of much of the economy. 

We don’t know the full extent of the fiscal damage on either side of the ledger or what specific steps officials will take to maintain required budget balance. But given the estimated scale of the challenge, budget-cutting will be in the mix and those cuts are likely to begin soon.

When it comes to deciding on K-12 education cuts, state lawmakers would be wise to avoid relying solely on the blunt instrument of across-the-board, per-pupil reductions. That approach will exacerbate inequities in a school funding model that already fails to match resources to individual students’ educational needs. Additionally, policymakers should take caution to avoid undoing recent funding added to help students with special needs and those at risk of academic failure. The imminent cuts to the School Aid budget demand a scalpel, not an axe.

Across-the-Board Cuts are the Default

The blunt instrument is the one we reach for first, but not always the right tool for the job. The same applies in thinking about how to approach upcoming state funding cuts for public education.

State law requires that if the total amount appropriated from the School Aid Fund (SAF) exceeds the amount of revenue actually deposited into the Fund, the state must prorate payments to all entities that receive appropriations from the Fund. This automatic proration process is the default method for dealing with revenue shortfalls. There is no equivalent provision for the state General Fund budget. 

The process is initiated when the Department of Treasury determines that a shortfall exists and notifies the State Budget Director. The Budget Director must then notify the legislature at least 30 days before it reduces payments. During the 30-day period, the legislature can take alternative action, either by appropriating additional other funds (e.g., General Fund, Rainy Day Fund, etc.) to the School Aid budget, reducing appropriations, or some combination of the two. If it does not act, then payments are automatically prorated based on a number of statutory formulas. 

We expect the shortfall notification to occur in conjunction with the May Consensus Revenue Estimating Conference scheduled for Friday, May 15. 

To determine what appropriations and how much to reduce, Treasury and the Department of Education must first calculate the percentage of total School Aid Fund appropriations made to different entities collectively, including local and intermediate school districts (including charter schools), community colleges and public universities, and other entities that receive these dollars. The total shortfall is then distributed proportionally, based on the percentage that has been appropriated to each type of entity (local districts, community colleges, etc.). Local districts will shoulder nearly all of the proration burden because they receive the largest share of School Aid Fund dollars. For perspective, total appropriations to community colleges and public universities amount to $764 million in Fiscal Year 2020, compared to $13.3 billion appropriated in the School Aid budget.

For the share of the total reduction allocated to districts, state law dictates that the Department of Education must spread the amount across all districts as an equal per-pupil amount (Note: this is not the same as the per-pupil foundation allowance). Intermediate district, community college, and university payments take their hits based on an equal percentage basis.

Approximately $6.2 billion of the total FY2019-20 School Aid Fund appropriations to local and intermediate districts are protected from proration because of constitutional mandates and court orders (e.g., special and general education funding floors). This leaves nearly $7.1 billion of appropriations that will be subject to adjustments.

Simple Per-Pupil Cuts are a Blunt Instrument

Here is where “fairness” begins to look like the opposite: Even with certain payments protected, proration threatens to exacerbate a number of inequities inherent in Michigan’s current school funding system. That is because the state funding that districts receive to educate students with special needs and at risk of academic failure would get the same reductions as payments to students who don’t require additional attention and resources. Funding for these student populations is already inadequate, according to research.

Just as Michigan’s current “one-size-fits-all” approach to funding K-12 schools fails to ensure equal opportunity in the classroom for all students, across-the-board funding cuts ignore the reality that students have different educational needs that come with different costs. While it might be politically expedient to treat all students the same when it comes to balancing the budget, the truth is that student needs are not equal. This is the case when adding funds to the budget, and also when pulling funds back to address a revenue shortfall. 

Protect Other Efforts to Address Funding Inequities

This recession couldn’t come at a worst time for the budding consensus about the deficiencies of the state’s current funding model. Reformers have been advocating for a more equitable, student-centered funding model; that is, one that provides a base per-student funding amount, plus additional weights (funding) distributed according to student/district characteristics. These weights may be for students with developmental and/or cognitive challenges, learning English, or from economically disadvantaged backgrounds. Additional weights may be used for specific district characteristics — remote, sparsely populated, limited broadband connectivity. 

Policymakers have warmed to some of the reform ideas in recent years, but have been hesitant to scrap the Michigan model altogether. Instead, they have opted to integrate aspects of a student-centered model with additional resources to meet unique needs. For example, after years of reimbursing districts at the minimum level for their special education costs (29 percent), lawmakers added funds to the FY2020 budget to increase it by two percentage points. But, after this infusion, the amount of dedicated special education resources still remains millions of dollars short of covering all the statewide costs.  Similarly, SAF dollars to address at-risk students’ needs jumped from $300 million in FY2017 to $500 million today statewide. Despite this massive increase, the effective at-risk funding weight is only nine percent and well below the 35 percent recommended by the research and what reformers have called for.

As stated above, this is a terrible time for a recession to blow up budgets — is there ever a good time? — but particularly for education. The state has tried, with varying success, to raise its students’ educational achievement since the end of the Great Recession and maybe even earlier. Calls for reform have come from all policy corners, including finances. And although incremental steps have been taken towards more equitable state funding, some contend that more needs to be done.

If lawmakers reach for a blunt instrument to deal with the School Aid Fund shortfall, they risk harming those students most struggling to achieve, as well as the recent funding gains for programs to support them. A scalpel is the more appropriate tool for making education cuts.