In a nutshell:

• School has begun for some districts without a state budget in place to inform districts how much funding they can expect to receive from the state
• The prospect of a state government shutdown adds further uncertainty to district financial planning and operations
• While the average district has sufficient cash on hand to sustain a short-term shutdown, a longer one would cause many to run out of money

Despite a long debate pitting the tourism industry against the school community over a state law mandating schools start after Labor Day, a record number of districts applied for, and received, waivers to begin classes early this year.  That means many schools are already in session.

While students, teachers, and administrators are back at their desks, the current budget stalemate in Lansing leaves schools with no clearer idea of their financial picture for the 2019-20 school year than they had when they left for summer break in June. Given the vital role that state funding plays in K-12 education, coupled with the prospects of a state government shutdown, there is considerable uncertainty surrounding local district budgets.

State budget stalemate and shutdown

Both chambers of the legislature passed their versions of a budget in July. However, they are much different than the governor’s proposed spending plan, which is premised on a 45-cent-per-gallon fuel tax increase to address crumbling roads and related funding shifts to increase investment in public education and other programs. While there is near-universal agreement that road funding must be addressed (both chambers’ spending plans boost road funding), the main sticking point is by how much, and where it should come from (new taxes or existing state funds). If additional taxes, which ones and how much? If existing funds, what program can sustain cuts? 

As August comes to a close in Lansing with lawmakers still on summer recess and no final budget in sight, we are starting to hear whispers of this drastic interruption. Michigan state government shut down due to a failure to pass a budget by the start of the new fiscal year (October 1) in 2009 and some are beginning to think it might be in the cards again. 

What does a shutdown mean? All “non-essential” government services are put on hold. While public safety services continue, other state-funded services residents rely upon would cease. Road and bridge projects stop. The state cannot send money to schools and local governments.

Schools already face funding uncertainty; shutdown only adds to it

While the budget impasse breeds uncertainty, this is tempered by the fact that all three spending plans (executive, house, senate) propose increased funding compared to the previous year. There is a silver lining for schools: it is the size of the funding increase that is unknown, not whether one is coming. Still, the fact remains that schools are incurring costs today without knowing how much revenue they will receive from the state.

And even with a budget in place, uncertainty surrounding fall enrollment numbers still looms for many districts. Declining enrollment has been an ongoing problem for the vast majority of them.

A shutdown, and the potential for delayed aid payments, adds to the fiscal uncertainty districts already face. This is largely because of the way state payments are scheduled. Districts receive 11 monthly payments beginning in October (no September payment); a full three months after the start of the school fiscal year (July 1) and nearly two months after the first day of school (Labor Day). With more districts receiving waivers to start in August, schools are already accruing expenses and won’t receive a payment until October. A shutdown threatens the timing of that first payment.

Often, districts rely on short-term cash flow financing to make up for not receiving a September aid payment.  Many borrow from the State Aid Note Loan Program to bridge the gap between August and October, while others pursue loans from financial institutions. In either case, the mechanics are the same; districts receive a lump-sum loan from a lender (state government or outside institution) and pledge repayment, with interest, from future state aid payments. Cash flow loans are not intended to pick up the added fiscal pressure arising from a delayed payment. 

The average district (excluding very small ones) has only enough cash on hand to last just over a month and a half if the October payment is postponed due to shutdown. Forty-seven districts only have enough to last 15 days.

With the budget unfinished, districts have been in a wait-and-see mode for the better part of two months. Meanwhile kids and teachers are heading back to the classroom and districts are spending money they may not have. A shutdown will make matters worse. The last state shutdown lasted only a few hours. Services were not interrupted in any noticeable way and payments to schools were not delayed. A budget stalemate lasting long enough to impact aid payments could have serious repercussions for districts across the state.