School Finance 101

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School Finance 101

• Presented by Thomas E. White
• Michigan School Business Officials
• October 2004

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The Michigan Budget

• Total State Budget 39.1 billion
• States 2 Major Funds
• General 8.7 billion
• School Aid 12.5 billion
• State Funds Restricted for Other Purposes
• Transportation
• Federal Revenues

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General Fund Budget

• 83 of General Fund Spending in 4 Areas
• Higher Education 1.8 billion
• Community Health (Mental Health, Public Health,
  Medicaid) 2.5 billion
• Corrections 1.7 billion
• FIA (Family Services, Juvenile Justice, Public
  Assistance) 1.1 billion
• All Other General Fund Programs 1.5 billion

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School Aid

• State Provides About 80 of Total State Local
  Revenues to Local Districts
• Almost All the Revenue Base Earmarked
  Specifically for Schools
• Sales Tax is Principal Revenue Source (41)

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Five Years of Budget Problems

• Declining General Fund Revenues
• Slow Growth School Aid Fund Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?

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Perspective on Revenues

• Actual General Fund Revenues in FY03, FY04 FY05
  Below FY95
• 10 Years of Higher Costs Increased Needs Go
  Unfunded
• Some Programs Crowding Out Others

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FY2004 Review General Fund

• Budgets Cut 1.7 billion
• General Fund 1,335 million
• School Aid 361 million
• One-time Resources Savings 807 million
• Fees Other Revenues 453 million
• Other Changes 155 million
• Tax Increases Off the Table
• More Cuts Coming

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FY2004 School Aid Review

• School Aid Down Year to Year 128 million
• First Decline Since Proposal A
• Retirement Percentage Going to 14.87 from 12.99
  - Reserves used to postpone increase
• Can More Cuts Be Avoided?

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How Weak is the Economy?

• Michigans Recent Statistics
• 46th in Personal Income Growth
• 48th in Unemployment Rate
• 49th in Employment Growth (Decline for Michigan)
• 49th in Index of Economic Momentum (Population,
  Personal Income, Employment)

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Internal Causes of the Problem

• Spending Growth Outpacing Revenue Increases
• Medicaid Double digit growth
• Corrections
• Some programs crowded out of budget
• Tax Cuts Eroding the Revenue Base
• Failure to Implement Permanent Budget Balancing
  Changes

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General Fund School Aid Operating Deficits
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Summary of One-time Resources (in millions)

• Rainy Day Fund 1,363
• FY2000 School Aid Fund Surplus 984
• FY2000 General Fund Surplus 212
• Medicaid Benefits Trust Fund 561
• Advance State Education Tax Collection Date 455
• Tobacco Settlement/Merit Award Revenues 317
• Temporary Federal Fiscal Assistance 655
• Bond for Pay-as-you-go Capital Projects 211
• Revenue Sharing Accounting Change 181
• Refinance Bonds 209
• Employee Wage Concessions 110
• Other 759
• Total 6,017

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Summary of Other Budget Cuts

• Higher Education Cut 14 in 2 Years 297
  million
• Revenue Sharing Cut 15 in 3 Years 293 million
• State Workforce Down 8,500 in 3 Years (14)
  Smallest workforce since 1974

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State Government Employment Trends
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Cumulative Effect of SBT and Income Tax Cuts
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Proposal A What Did it Do?

• Senate Fiscal Agency Report Says
• 28 districts are better off
• 553 districts are worse

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What About Taxpayers?

• Michigan was 14th in Tax Burden in 1993
• Michigan was 20th in Tax Burden in 2000
• Property Taxes are 6.1 Above National Average
• Sales Use Taxes are 0.8 Below National Average

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What About Taxpayers?

• Senate Fiscal Agency
• Overall, the state and local tax burden fell to
  0.5 percent above the US average using taxes as a
  percentage of personal income.

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Good Things from Proposal A

• Reduced Spending Gap
• 1993
• Lowest 10 districts averaged 3,476/pupil
• Highest 10 districts averaged 9,726/pupil
• 179 difference
• 2000
• Lowest 10 districts averaged 6,700/pupil (92)
• Highest 10 districts averaged 11,389/pupil
  (17)
• 70 difference

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Good Things from Proposal A

• Less Reliance on Millages
• Average Local School Operating Millage
• 1993 33.9 mills
• 2000 8.4 mills

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Proposal As Impact on Foundation Allowance

• Foundation Allowance has not Increased in 3 Years
• Summary of K-12 Budget Cuts Since 2002
• Lost 127 million in prorated foundation
  allowances categoricals in 2002-03
• Lost 111 million in reduced/eliminated
  categoricals in 2003-04
• Lost 131 million in prorated foundation
  allowances in 2003-04

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How Schools Have Responded to Cuts

• January 2003 May 2004
• 272 districts (52) laid off 2,700 employees
• 393 districts (75) did not fill open positions
• 277 districts (52) had increased class size
• 434 districts (83) reduced supply budgets
• 52 deferred maintenance on existing facilities
• 36 froze salaries/benefits for some employees

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How Schools Have Responded to Cuts

• Districts Expect to Balance 2004-05 Budgets
• 216 will lay off 5,400 employees
• 330 (77) will not fill open positions
• 226 (52) will increase class size
• 256 (48) will defer 25 million in renovations
  repairs
• 90 (21) will reduce school days
• 154 (36) will reduce staff hours
• 217 (50) will delay purchasing textbooks
• 340 (79) will spend from savings

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How to Evaluate a School Funding System

• Predictability
• Equity
• Adequacy
• Stability

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Whats Wrong with Current System

• State Controls Revenues BUT Schools Have
  Responsibilities
• State Cut School Revenues by
• 550 Million A YEAR
• Does Not Address Infrastructure Needs
• Does Not Adequately Address Declining Enrollment
  Districts

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Whats Wrong with Current System

• Increasing Uncontrollable Costs Passed On to
  Schools e.g. retirement
• Rules Keep Changing e.g. 20j
• Not Keeping Pace with Inflation
• Adequate?

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What to Do

• Tell Your Story
• Get Involved Politically
• Stay Involved Locally
• Be Persistent
• A marathon not a sprint