In a Nutshell:

• Michigan Supreme Court decision does not disrupt the delicate balance in state-local fiscal relations under the Headlee Amendment.
• State payments to charter schools cannot be included in the Headlee calculation of the proportion of state spending paid to local government. Excluding these payments from the calculation will not reduce the revenue sharing percentage below the constitutionally-required minimum 49 percent.
• The Court of Appeals, on remand, will have to deal with two important questions: 1) whether payments to charter schools authorized by local governments (traditional public and intermediate school districts) should be included in the Headlee calculation, and 2) what state body/officer is responsible for local government mandate reporting, a Headlee provision ignored for decades.

In late July, the Michigan Supreme Court ruled in a nearly five-year-long legal battle pitting local government interests against the State of Michigan. The final decision in Taxpayers for MI Constitutional Government v State of Michigan, affirms one and overturns two previous decisions made by a three-judge Court of Appeals panel in the fall of 2019. Both the plaintiffs and defendants, unhappy with different aspects of the COA’s opinion, appealed to the higher court for relief.

All three claims in this case alleged that the State of Michigan improperly implemented the 1978 Headlee Amendment to the Michigan Constitution and therefore shorted the required amount of state taxes flowing to the local governments. The State of Michigan prevailed on two of the three issues decided by the Supreme Court. The State was also granted a reprieve of sorts from complying with certain reporting requirements included in state law; the state has failed to comply with various aspects of the Amendment’s implementing law for decades and the court’s decision here only delays implementation further.

Headlee and the current case

In November 1978, Michigan voters approved a sweeping tax limitation amendment to the 1963 Michigan Constitution, generally referred to as the Headlee Amendment. It added ten new sections to Article IX (Finance and Taxation), including Section 30, the primary intent of which is to prevent a shift in tax burden from the state to local government.  

To ensure fidelity to the new state-local fiscal relationship created by the Headlee Amendment’s tax and spending limitations as well as the prohibition on unfunded mandates, Section 30 requires that the share of state spending paid to all units of local government (not individual governments, but as a group) does not fall below the proportion in effect in Fiscal Year (FY)1979. This minimum level is set at just under 49 percent. Section 30 is designed as a “check” against the state government offloading financing responsibility for certain services to local governments in the face of its own tax/revenue limitations.

The mechanics involved in the Section 30 calculation are reflected in the simple ratio presented below. At issue, is what categories of payments to local governments (numerator) should be included in the state’s calculation each year. 

State Spending to Local Governments / Total State Spending from State Sources

A group of taxpayers (Taxpayers for Michigan Constitutional Government) filed suit in 2016, alleging that the state has improperly accounted for certain categories of payments, resulting in sustained and growing under-funding of local governments, collectively, across the state. The suit made three claims with respect to the calculation: First, payments to school districts as a result of the 1994 Proposal A school finance reforms should not be included. Second, payments to public school academies (charter schools) should not be included as they do not constitute “units of local government.” Third, payments made to local governments in compliance with Article IX, Section 29 for “new” state mandates should not be included. By including them in the state calculation, the locals argue that the state is allowed to count these payments twice (first to cover the “new” mandate requirement under Section 29 and second to meet the state’s obligation under Section 30).

The inclusion of these three payment types in the ratio numerator has the effect of inflating the proportion of state spending paid to local governments, thus masking reductions of state funding sent to local governments through other funding streams (e.g., unrestricted general revenue sharing). Removing all three categories of payments from the Section 30 calculation could have the effect of reducing the ratio below the constitutional minimum amount of 49 percent. Falling below this amount would, in effect, require the state to share more of its tax revenue with local governments (increase the numerator) or reduce the amount of state taxes (decrease the denominator). The State of Michigan has been above this minimum percentage each year since the passage of Proposal A.

The ruling and what it means for the Section 30 calculation

On the most significant claim in this case, the July 28 Supreme Court decision upheld the lower court’s finding that Proposal A funding is properly included in the Section 30 calculation. At issue was nearly $7 billion in state funding going to school districts as part of the 1994 school finance reforms. Payments to school districts, inclusive of the Proposal A funding, constituted nearly 70 percent of all local government payments in FY2020. Removing this funding from the ratio numerator would have significantly lowered the total proportion of state taxes shared with local governments; well below the minimum 49 percent guaranteed under the Headlee Amendment.

While the high court sided with the lower court on this major claim, it reversed course on the two smaller claims (in dollar terms). The Supreme Court opined that charter schools, specifically those authorized by public universities, are not “units of local government” for purposes of the Section 30 calculation and therefore payments to these entities cannot be included in the revenue sharing ratio. 

The Court was not convinced, as the lower court was, by the argument that because charter schools are “school districts” for purposes of receiving state aid under a separate constitutional provision (Article VIII, Section 2) that they must therefore be considered “school districts” for purposes of Section 30. On this point, the majority opinion is clear:

“Simply because a PSA is a “school district” for purposes of Proposal A funding does not necessarily mean that a PSA is also a “school district” as contemplated by the Headlee Amendment. In other words, that the Legislature authorized the creation of PSAs and treats them as school districts for the specific purpose of receiving aid from the State School Aid Fund tells us nothing about whether the voters would have understood a PSA to be a “local government” for purposes of the Headlee Amendment.” 

Taxpayers for Michigan Constitutional Government v State of Michigan

Thus, the Supreme Court examined whether a charter school constitutes a “local government” as the term is defined by the Headlee Amendment (Section 33). The Court ruled that these independent schools do not exhibit the characteristics of a “political subdivision of the state.” Charter schools do not possess attributes commonly associated with local governments, such as defined boundaries, locally elected representatives, or police powers. Thus state payments made to them cannot be included with the payments made by the state to traditional public schools and therefore used in the Section 30 calculation.

Notably, the decision takes a nuanced view of charter school payments, raising the question whether all types of charter schools should be treated equally in the context of the Headlee Amendment.  Specifically, the Court remanded to the Court of Appeals to consider whether state funding to charters authorized by traditional public school districts, intermediate school districts, or community colleges should be counted as state spending paid to local governments for purposes of Headlee. These authorizing entities are units of local government. Because public universities authorize approximately seven of ten charter schools in Michigan, it is possible that, on remand, the courts will find that a substantial portion of total charter school payments each year should be excluded in the Section 30 calculation.

Finally, the decision reversed the lower court’s finding that state payments to fund mandates as required by Section 29 should be excluded from the revenue sharing ratio. On this issue, the Michigan Supreme Court examined the language of the Headlee Amendment and reasoned that nothing in the plain language of the constitutional provision prevented these payments from being counted.

The ruling will have an impact, but will not have a material effect, on the overall Section 30 calculation. Estimated payments to charter schools from all funding streams total more than $1.3 billion annually. The actual totals will be impacted by how the Court of Appeals rules on payments to non-university authorized charter schools. However, we know that in FY2020 the state shared nearly 59 percent of its spending with local governments or $3 billion more than it is required. It is unlikely that eligible charter school payments will approach $3 billion, and thus reduce the proportion of state taxes shared with local governments below the required 49 percent.

And we wait, again

In another reversal, the Supreme Court vacated a grant of mandamus issued by the appellate court at the request of plaintiffs that would have required the State of Michigan to comply with the Headlee Amendment implementing law. Specifically, the Court of Appeals ruled that the state law passed to implement the Headlee Amendment establishes a legislatively-mandated duty that the state, through specific officers and departments, collect, report and place on the public record certain information regarding its compliance with the amendment. The lower court found that the state had breached this duty and ordered it to comply with the law.

In its decision, the Supreme Court did not address the substance of the mandamus claim by plaintiffs, but rather took issue with the lower court’s justification for issuing the writ of mandamus in the first place. As such, it remanded back to the Court of Appeals, to specify which state agency/officer is failing to perform which clear legal duty and that it analyze whether mandamus was warranted. 

The practical effect of this aspect of the decision is that Michigan citizens will, again, have to wait to know whether the constitutional amendment they approved more than four decades ago is being implemented properly and with fidelity. The lower court’s ruling that the Headlee Amendment has been continuously ignored echoes the sentiment of at least two major reports on the topic in the last 30 years. First, the 1994 Headlee Blue Ribbon Commission, assembled by then-Governor John Engler, found a wholesale disregard of the prohibition on the imposition of unfunded mandates. Then, 15 years later, a legislatively-appointed commission to examine the state’s compliance with Headlee found no improvement in the State of Michigan’s compliance with the foundational tax and spending limitations. 

It certainly was a victory for Michigan taxpayers when the Court of Appeals affirmed the findings of these previous inquiries and directed the state to follow the law.  Unfortunately, the Supreme Court decided otherwise. So, again, taxpayers must wait to know if their government is working as they directed it to operate 40-plus years ago.