Guy Gordon (00:00.652)
Welcome back to another edition of the Facts Matter Podcast. I’m Guy Gordon. we made a lot of news at the Citizens Research Council with a new state budget. certainly got more transparency from state leaders when we realized that the documentation they’d given us was not exactly complete. One of the things that was equally significant, perhaps not as equally significant, but it’s still significant, but didn’t get a lot of attention, is the emergence of this.

new process of replacing revenue when it’s lost to a a drop in student enrollment. This is something that was done under the School Aid Fund. We bring in Craig Thiel, research director for the CRC, to kind of explore this with us because it is something new. It is a new element of the budget, Craig.

Craig Thiel (00:43.778)
Yeah, guy. thanks for having me. Yeah. you know, it’s something that the school community has been well aware of for decades. We’ve been having declining K-12 public enrollments for about two decades now. the challenges that arise from this have their roots in you know population stagnation in Michigan, lower birth rates, economic conditions, but

Schools have

Guy Gordon (01:13.088)
Also the growth of school choice where there is leakage to alternative schools.

Craig Thiel (01:18.11)
Right. And so I I you know the the shrinking of this the public school enrollment pie is one element and then at the district level and we’ve seen growth of the number of slices of that pie growth. So the pie shrinking and the number of slices are is increasing. So there’s two n two kind of stories there. One the shrinking pie and then the larger you know demands on that pie.

Guy Gordon (01:37.123)
Yeah.

Guy Gordon (01:49.794)
So y y this but bottom line, when you tie funding to the student and the number of students shrinks, your funding shrinks, and the state has found a way to try to mitigate that. I want to jump in on how they did that in the budget, but first let’s just get our hands around the size of the problem. How much has K through twelve student enrollment declined in the state of Michigan, say over the past twenty years?

Craig Thiel (02:13.728)
Yeah, so when you look at the number of kids that the state’s funding going back to twin two thousand and three, and then looking at our most recent student count for the twenty-six school year that just completed, it’s down about twenty five percent. So there were some periods where the decline was over statewide, over one percent a year, but right now it’s hovering around about one percent per year. So we have

Back in 2003, we had 1.7 million K twelve students enrolled in public schools. And now we’re below 1.4 million, closer to 1.3 million. So that 25% decline over 20 year period is about 1% a year, as I mentioned. and and that’s the you know, that’s the size of the pie that I was referring to earlier. Now

Guy Gordon (03:04.822)
Yeah.

Craig Thiel (03:13.578)
You know, one thing I we talked about is the the number of school districts in the state of Michigan has grown over this twenty year period. traditional districts have maintained their count at about five hundred and fifty districts, but we’ve seen the number of public charter schools increase from under a hundred districts to over to about three hundred today. So there’s been a

kind of a shrinking of the pie and then the pie has been sliced into more pieces over this period.

Guy Gordon (03:46.528)
Right. And and I mean and the pie, then you’re you’re also increasing the administrative costs when you’re duplicating efforts in by having so many school districts, but every district wants its autonomy, they want to serve their perci particular constituency, so consolidation becomes a real challenge.

Craig Thiel (04:03.424)
Yeah, and there’s been efforts to to try to encourage and incentivize districts, neighboring districts to do this. There hasn’t been much success on that front. so this budget r really takes a look at this declining enrollment challenge and incorporates into the main funding formula a three year student count average. So every district

next year is going to be able to take the larger of their fall count in October or the average of their last three school years for student funding or for school funding purposes.

Guy Gordon (04:47.757)
Okay, so are districts held harmless? I mean, for instance, if they lose fifty students, they lose a half million dollars. Under this state replacement funding formula, would they get that full half million or are they still going to have to try to right size their budget through the variable cost savings that they may incur because the enrollments declined?

Craig Thiel (05:08.426)
Yeah, yeah. you know th they’re going to incur a revenue loss for sure. The the ex full extent of that won’t have to be born in the next budget year. They’ll be able to kind of kind of phase in that student loss over time. the math works and the math will be different for every district based on you know how how many students they leave, what

lose and what percentage of their enrollment goes down. But by using a three year average, districts are able to kind of gradually reduce their operating expenses to match what their their revenue is going to be.

Guy Gordon (05:53.079)
Giving them time to write size.

Craig Thiel (05:55.378)
It’s definit yes, it’s a management tool for sure. it it adds to the predictability and the stability of school finances because business officials are gonna know. We know the last two years of our enrollment, what’s been happening, and now they project what their fall enrollment’s gonna be, and that’s that’s going to add to the the predictability knowing those two previous year student counts and and Michigan hasn’t had a

a r a declining enrollment policy for over twenty years at

Guy Gordon (06:30.261)
Right. This is this is just came about in twenty three, right?

Craig Thiel (06:33.684)
Yep, yep. And we were we’ve been funding the the declining enrollment kind of through a a separate line item in the budget and now the state has taken the step to incorporate it into the the base foundation funding formula. But there’s a catch there.

Guy Gordon (06:53.483)
Well, and I want to get to that in a moment. But first I want to get to address this kind of elephant in the room, which is taxpayers look at this and they say, look, if if decline if roll enrollment declines, then the taxpayer and the district should learn how to write size and save. Why is that so challenging? And I know it kind of comes down to fixed costs versus variable costs and those things that can’t necessarily be managed.

Craig Thiel (07:19.912)
Right, right. So

Guy Gordon (07:20.823)
So explain to the t from a taxpayer standpoint why you just can’t, you know, downsize and right size.

Craig Thiel (07:25.126)
Yeah. Yeah. Economics tells us over the long run all costs are variable. And that certainly applies in in a school district setting. The challenge in in it with schools and kind of recognizing that revenue loss immediately is that what we might think of as variable costs in other sectors are actually more like fixed costs, at least in the short term for schools. So

Think about losing fifty students in a in a school district. you know, those students are spread across multiple classrooms, multiple buildings, right? It’s not that those 50 kids are all in the fifth grade and you can lose two fifth grade teachers. You you just can’t. So over time, districts will have to recognize the lower revenue number from enrolling fewer students, and they will right size.

Guy Gordon (07:58.638)
Mm-hmm.

Craig Thiel (08:24.564)
you know, the number of whether it’s fifth grade or third grade, or they may reconfigure grades, they may reconfigure school buildings to adjust. There’s all types of adjustments that can happen, but it takes some time to do that. So

Guy Gordon (08:36.257)
Yeah.

Guy Gordon (08:39.917)
Well the other one is transportation, right? You know, you y the size of your district and the ge geography that you’re serving, that doesn’t shrink. You may be able to downsize the size of the bus to to some of the outlying areas if you’ve had enrollment declines there, but the bottom line is the the overall cost of running a transportation system doesn’t change much.

Craig Thiel (09:00.618)
Nope, nope, it doesn’t. And and the same with the you know, the physical plant, you know, the buildings, you know, eventually you may be able to shrink to the point where you don’t need a building. So if you’re operating two middle schools, maybe you can consolidate them into a single middle school. Maybe you can it you know, take a grade that wasn’t an elementary and push it into a middle school and and do that. And and some districts are

Guy Gordon (09:25.847)
Right.

Craig Thiel (09:29.002)
Take declining enrollment seriously and have policies. So in advance of working on their budget, they have to look at what are under enrolled schools. They look at what the revenue is brought in for those school at the revenue that’s brought in to those individual schools and then the expenses. And then now they have the data at least to say, okay, you know, this is an under enrolled school. We got and it’s the r you know, the result of

declining enrollment or it could be choice within the district happening, but we need to take a a hard look at these under enrolled schools and then look to close schools or consolidate grades or something along that those lines.

Guy Gordon (10:12.129)
All right, and final question in terms of the background of this. D different districts are affected differently. Is there an urban versus rural component here where the the enrollment it seems to have a a bigger impact on urban districts?

Craig Thiel (10:26.654)
Y yes, and so when we get out away from kind of the statewide pie shrinking and look at, you know, what’s happening at the Dristrict level, our analysis that we did a a couple of years ago suggests that declining enrollment has been most pronounced in urban areas of the state. and that has been the result of of school choice policies in those in the state and

Parents taking advantage of public charters or interdistrict choice options where you can, you know, attend a school in the neighboring school district or two school districts over because it’s a better fit for your child. It matches where your place of employment is. So, you know, school choice policies have definitely had an effect. Those have been at least

Guy Gordon (11:01.9)
Mm-hmm.

Craig Thiel (11:23.014)
most pronounced in the urban centers. So those are the districts that are dealing with it. But with our shrinking population, again, going back to that big pie picture, you know, population declines have happened across the state, and in some of those population declines have been most pronounced in rural parts of the state. So we we we’ve looked at the numbers most recently and two-thirds of

the roughly eight hundred school districts in the state, about five hundred and fifty of them, have had year over year student population declines the last couple of years. And that two thirds, sixty percent number has been fairly stable for the last four or five years.

Guy Gordon (12:10.217)
Okay, so state budget leaders since twenty twenty three have tried to mitigate some of the impact of the enrollment declines. In this time it it is part of the regular school funding budget. How big is that appropriation relative to the size of our school budget?

Craig Thiel (12:29.75)
So when this Lansing officials decided to kind of include some distinct, discrete funding for declining enrollment a few years ago, they allocated seventy million dollars to that. and they’ve allowed districts access to that seventy million figure for the last couple of years. So the way that program worked is districts were able to recoup about

Guy Gordon (12:51.597)
Mm-hmm.

Craig Thiel (13:00.042)
fifty percent of the revenue loss that occurred through that seventy million dollar reduction seventy million dollar appropriation. This next school year, rather than have a separate line item for the declining enrollment, they’ve factored the declining enrollment policy into the school funding model in how we count students. So we’re gonna use a three year average

We’re going to allow districts to use the greater of their current year enrollment count. So growing districts don’t have to like use a three-year average. They can use the larger of the current year or the three-year average student count. And then the state’s going to pay the full foundation on those that three year average count.

Guy Gordon (13:29.152)
Okay.

Craig Thiel (13:52.65)
We’ve looked at the the budget and it looks like it’ll cost the state about a hundred and eighty-six million dollars to do this next year. So we go from a seventy million dollar program to about a hundred and eighty-six million dollar program, about more than twice as large. and so that’s that’s a big number. but when you look at how does that one hundred eighty-six compare to this total K twelve funding pot, it’s less than one percent of

all funding going to districts. So big for sure, just on its own, but as part of the larger funding that comes from the state for public education, it’s a it’s a fairly small piece.

Guy Gordon (14:23.254)
Okay.

Guy Gordon (14:37.303)
So b from a budget process standpoint, how sustainable is it? This is are these one time dollars? Are these baked in?

Craig Thiel (14:43.03)
So this

So this is the the the catch and this is something that we’re reporting on in in the the brief that we published this week. most every aspect every aspect of the school funding formula is a permanent piece. The foundation, if we set it at ten thousand dollars this year, we districts are expecting to get at least ten thousand next year per student. and

you know, the student count, we’ve been using a a a count where we we do a a kind of a ninety ten blend of ninety percent of what this year’s student count is and then we look back and do ten percent of last year’s spring count and so that’s always been fixed. And the funding that’s associated with those components has been ongoing in the budget. This budget taps into

some available one time resources that is that are in the school aid fund and uses those dollars to fund this hundred and eighty six million dollar appropriation. So districts can count on those dollars, lock those dollars in for next year’s budget. But as we look to the twenty seven, twenty eight school year, the next school year, those dollars aren’t in the budget and districts are going to have to plan accordingly this year.

to use those resources really as one time resources unless this next budget cycle makes them permanent.

Guy Gordon (16:17.005)
Okay, so help me with the logic of this though. If if the state sees that there are fewer students in this district, that means we’re sending fewer dollars there. Why not just take fifty percent of the dollars we’re not sending and backload that into the replacement foundation?

Craig Thiel (16:33.974)
Well and and they basically do that, guy. what they do is when we have fewer students so to to to fund, that allows Lansing officials to increase the foundation grant because those dou dollars aren’t lost, they’re just now there’s more dollars to increase that per pupil allotment. This change is allowing districts to say to to use a three year average

Guy Gordon (17:03.309)
Mm-hmm.

Craig Thiel (17:03.826)
to get their funding for next year as opposed to whatever their funding whatever their enrollment would be come October. So the the the declining enrollment districts are going to have a little longer on ramp if if this is funded long term to to right sizing their budgets. The growing districts are still going to get their funding. They’re still going to get the the full funding for the

Guy Gordon (17:20.598)
Right.

Craig Thiel (17:32.412)
number of kids who’ve showed up this year, which is going to be if if it’s a growing district, that’s greater than the previous year. So they’re going to get funded. you know, if we fold this into the ongoing foundation allowance long term, what it means is the foundation grant won’t be able to grow. The per pupil foundation grant won’t be able to grow as much as it would if we were making those

student losses and the revenue associated with them flow back into the the per pupil amount that the legislature sets every year.

Guy Gordon (18:00.939)
Right.

Guy Gordon (18:08.365)
But you are suggesting that instead of these one time funding sources, we need to have a dedicated dedicated source of funding because we what we’ve got federal projections saying that Michigan’s going to lose over the next few years. I guess we’re one of fifteen states that will experiencing an eight year eight percent decline between now and twenty thirty one.

Craig Thiel (18:26.25)
Right, right. So that that twenty five percent decline that we’ve experienced over the last twenty years is gonna grow each year and faster than the national average. so you know this is this is definitely a long term challenge for Michigan. It has been a long term challenge, and it is a long term challenge looking forward to. So our suggestion is if it’s gonna be part of the school funding formula, base funding formula,

Guy Gordon (18:30.646)
Right.

Guy Gordon (18:34.059)
And faster than the national average.

Craig Thiel (18:55.656)
It should be funded with permanent dollars. and and this batch of legislature, this budget treats it as a one-time appropriation. which, you know, if if districts aren’t cognizant of that and don’t program the dollars accordingly, that could create a funding cliff when they go to build their 2028 budget because they’re gonna say, well, look, you know, we were able to count, you know, a hundred kids last year, and now the

the three year average isn’t available to us. So now we have to go back and and really account for the last three years of enrollment declines in one year. So it it creates a funding cliff that isn’t is is could be substantial for for districts that have been seeing, you know, sizable enrollment declines for each of the last three years.

Guy Gordon (19:47.945)
Okay. Bottom line, even if we had a baby boom, there would still be a six year delay and any kind of remedy for this, and we don’t see a baby boom on the horizon. a nora Nora population you know inward migration here. So it’s something that’s going to be on the horizon that we have to have to handle. As always, you can see Craig’s full paper at CRCMish dot org. Craig, thanks very much. All right.

Craig Thiel (19:52.672)
They’re exactly

Craig Thiel (20:13.686)
Thanks, guy.

Guy Gordon (20:15.19)
In the meantime, we thank you for joining us. As always, tell your friends that if you appreciate the kind of fact-based reporting and analysis that we have here at the Facts Matter Podcast, you can find us on Spotify, Apple, wherever you get your podcasts. And also you can go to the website and maybe donate a few dollars to help keep this fact tank running. In the meantime, I’m Guy Gordon. Thanks for joining us and have a great day.