September 2010
Report 363

Summary

Financial support for Michigan public elementary and secondary education continues to be a major public policy issue despite the fact that significant resources are dedicated to serving nearly 1.7 million children each year. In state Fiscal Year 2007-2008 (FY2008) Michigan schools received $16.2 billion in state and local revenues for on-going operations. This support equaled 4.6 percent of Michigan personal income in FY2008. Although public education is a priority, there are concerns that it is currently under-funded, and that spending pressures will outpace the resources available each year in the future.

Some of the current concerns about the financial support for education can be better understood in the context of the financing system and its components. Specifically focusing on the financing system’s design and the economic, political, and demographic actors affecting it provides valuable insights into the outputs it generates, such as the level of resources in the aggregate or on a per-pupil basis. The structure of the system and its components influences how resources grow year-over-year. Michigan’s education financing system is influenced by a variety of factors, most notably the underlying economic bases upon which public revenues (primarily taxes) are derived, demographic changes involving the aging of the Michigan populace, and modifications to state law, specifically tax policy changes. Furthermore, because financing public education is a state responsibility as a result of Proposal A of 1994, these finances have to be understood in the larger context of aggregate state finances.

Most of the recent discussion on the issue of school finance and recommendations for reform focus on the amount of state financial support for education. Central to this discussion is the slowdown in state School Aid Fund revenue growth arising from the transformation of Michigan’s economy dating back to the beginning of the last decade. Compounding the effects of the structural changes in the economy was the failure of the Michigan economy to exhibit any sustained rebound from the mild 2000-2001 recession. These factors combined to negatively affect the state’s ability to increase support for education throughout much of the last decade, especially in relation to economic activity and prices. Recently, the Great Recession of 2008 decimated state tax revenues from all sources, causing actual year-over-year declines in FY2009 and FY2010. The revenue picture facing Michigan schools beginning in the early 2000s is much different than that immediately following the Proposal A reforms, when the state’s economic picture was much brighter.

Looking forward and absent state policy changes, state support for education will be contingent on Michigan’s recovery from the Great Recession. Both the strength and duration of a recovery will be factors in determining the level of state resources in the near term. However, future state revenues, regardless of their ultimate level, will face new demands arising from the decline in property values that will drive down property taxes dedicated to schools. Property taxes exhibited considerable stability since the adoption of Proposal A. Any growth in state tax revenues dedicated to schools is likely to be negatively affected by the loss of local revenues, thereby continuing the fiscal pressures of the past into the foreseeable future. Prospectively, and over the longer-term, annual growth potential of education revenues will be contingent on the structural relationships between the tax bases and economic activity in the state. It is expected that demographic, legal, and economic factors will combine to further weaken the relationships in the future. Given the extremely centralized nature of the financing system, only state, and not local, policy makers have the authority to address these weaknesses.