Proposal A
On October 1, 1994 Michigan
officially ushered in its new school
finance program.
Basic Foundation Allowance
 Basic
foundation allowance of $5,000.
 All
districts below $4,200 in spending
raised to $4,200 immediately.
 Districts
between $4,200 to $6,500 per
pupil, revenue increases are limited on a
sliding scale to between $250 and $160 per
pupil.
Five years after it was approved
by voters, Proposal A has:
Injected large amounts of money into less-affluent
schools, many of them small, rural with previously
low local millage rates.
 Slowed revenue growth for wealthier districts.
Many districts accustomed to double-digit
increases have been limited to less than
inflationary increases.
 Made enrollment, not property taxes, the major
factor in how much money schools receive. The
more students in a district, the more money it gets.

 Closed
the gap about to $1,500 per pupil
among 85 percent of state’s 555 districts.
 That gap won’t close completely under
Proposal A formula, nor was it ever
intended to.
Impact of the New Distribution
Plan
 Double
digit per pupil increases at the low
end of the revenue distribution curve
 Less than inflationary increases for districts
at the high end of the revenue profile.
 Major beneficiaries of this new foundation
plan are districts located primarily in rural
areas with operational millages less than the
1993-94 state average of 34 mills.
Subsequent Years
 Foundation
allowance adjusted annually by
two indices: a) a revenue index, and b) a
pupil membership index.
 Range
in revenue between high revenue and
low revenue districts shrinks from 3:1 to a
2.5:1 in the first year and gradually down to
a 2:1 range.
Foundation Guarantee Per
Pupil
MICHIGAN EDUCATION FUNDING Per Pupil Local
Revenue FY 95
Supplemental property tax required over
$6,500 to achieve $160 per pupil revenue
increase
$160 per pupil increment at $6,500
$6,500
49 school
districts
183 school
districts
$5,000
275 school
districts
$160 per pupil increment at $6,500
$4,200
48 school
districts
Established mimimum for all school districts =$4.200
$0
0
LEVIED MILLAGE
18 Mills Non- Homestead
18 MILLS
Local districts receive the difference between the districts foundation guarantee and
the per pupil yield from the 18 mills non-Homestead local property tax.
Foundation Allowance:
Revenue Examples
Base
Non-Homestead
Foundation Property Tax State
Lowest
Basic
Basic
Basic
"Hold" Cut-Off
Highest
$5,170
5,462
5,462
5,462
6,962
10,916
$824
456
1,108
3,022
1,700
1,473
$4,346
5,006
4,354
2,440
3,762
3,989
Supplement Hold-Harmless
State
$0
0
0
0
1,500
1,500
Local Property Tax
$0
0
0
0
0
3,954
Per Pupil Foundation Allowance
Increases: K12 Districts
Districts
Lowest Revenue
Median Revenue
Pupil Weighted Median
Highest Revenue
FY94 FY99 $ Change
$3,398 $5,170 $1,772
4,675 5,462 787
5,275 6,068 793
10,294 10,916 622
% Change
52.1%
16.8%
15.0%
6.0%
NOTE: Detroit CPI-Urban Consumers increased an estimated 14% in this time
period.
At-Risk Equity Adjustment

$274 million is set aside for at-risk funding.

At-risk money is based on a per-pupil amount
equal to 11.5 percent of the districts foundation
allowance.

Grows by same % foundation allowance.
 The
basis for distributing the funds is
tied to income eligibility criteria for
free lunch and amounts to an additional
$650 to $750 per eligible pupil for the
majority of school districts.
 Equity
adjustment provides balance to
the more favorable treatment given the
low-mill, outstate rural areas who were
the major beneficiaries of the basic
foundation allowance.
 Funds
used primarily to supplement,
not supplant, existing at-risk programs!
Categoricals
 Most
categorical programs (earmarked
entitlements for special needs) rolled into
the foundation allowance.
 Retained
categoricals are those mandated by
Federal law Bilingual Education and
Special Education. Exceptions:
math/science centers, gifted and talented,
early childhood and vocational/technical
training.
Retirement and Social Security
 Responsibility
for the payments of FICA
and retirement shifted totally to schools.
 Amount
of funding state toward these
obligations in FY 93-94 included in the
foundation grant to local school districts.
 Districts
now pay the increased costs
associated with FICA and retirement.
Revenue Sources
The State Education Tax
 State
now levies a State Education Tax in the
amount of 6 mills on all property. This tax is
collected locally.
 Local
treasurers remit the tax to their county
treasurer, and the county treasurer forwards the
tax to the state.
 School
districts are no longer entitled to any
allocated millage.
Local Millage Levies
 18
Mills on Non-Homestead Property
 Plan
requires that all school districts, with
the approval of the electors, levy 18 mills
locally on non-homestead property. Millage
previously approved by the electors, for
which the authorization is not expired,
would be considered to be approved until
such time that it expires.
Supplemental Property Tax
(Hold Harmless Millage)
 Districts
with a foundation allowance
exceeding $6,500 may levy, with the
approval of the school electors, a
supplemental property tax hold harmless
millage.
 Tax
cannot exceed prior year revenue per
pupil adjusted annually by the index growth
of the Foundation allowance.
Michigan School Aid Fund Revenues: Immediately
Before and After Reform ($ in Millions)
Revenue Source
for School Aid
Fund
FY 1993-94 Before
Reform
$
State Sales Tax
State Property Tax
Income Tax
Earmarking
Lottery Proceeds
Tobacco Tax
Use Tax
Specific Taxes
Real Estate
Transfer Tax
TOTAL
%
FY1994-95 After Reform
$
%
FY1999-2000 Consensus
Estimate
$
%
$1,987.8
$0.0
77.2%
0.0%
$3,564.6
$1,064.4
50.9%
15.2%
$4,398.6
$1,355.0
47.1%
14.6%
$0.0
$510.7
$18.5
$0.0
$58.9
0.0%
19.8%
0.7%
0.0%
2.3%
$882.5
$547.8
$397.2
$318.9
$135.8
12.6%
7.8%
5.7%
4.6%
1.9%
$1,839.8
$608.0
$351.4
$412.7
$154.0
19.7%
6.5%
3.8%
4.4%
1.6%
$0.0
0.0%
$91.1
1.3%
$218.0
2.3%
$2,575.9
100.0%
$7,002.3
100.0%
$9,337.5
100.0%
Fig. 1: Local/State Funding Mix
Statewide Totals
FY 95
Local
19%
FY 94
State
45%
Local
55%
State
81%
Includes Effect of Homestead Credits
Enhancement Millage
 A local
district may levy, with voter
approval, up to three additional mills
for program enhancement in 1994-95,
1995- 96, and 1996-97.
 These
mills are not equalized.
 Beginning
in 1997-98, replaced with
regional enhancement millage. An ISD,
with approval of the majority of constituent
voters, may levy up to three mills to
enhance local school district operations.
 The
total dollars raised across the ISD are
distributed to all constituent local districts
on an equal, per-pupil basis a form of taxbase sharing.
Sinking Fund Millage
 With
voter approval, a school district
may levy a tax of up to 5 mills for a
period of 20 years for the purpose of
creating a sinking fund. These monies
may be used only for the purchase of
real estate for and construction of
repair of school buildings.
School Bonds
 Law
now restricts bonding for upgrades in
computer software and computer support
personnel, and also bonding for
maintenance projects.
Schools cannot bond for a period beyond the
useful life of an asset.
Assessment Caps
 The
Michigan Constitution has been
amended to limit assessment increases
to 5 percent or inflation, whichever is
less, until the property is transferred at
which time the assessed valuation is set
at market value.
Other Major Tax Components
Old System
New System
Sales Tax
Use Tax
Cigarette Tax
Other Tobacco Products
2.4%
None
2 cents
None
Property Transfer Tax
Income Tax
Lottery
Interstate Telephone Tax
GF/GP Grant
None
None
All Profits
None
Legislatively
determined
4.4%
2%
47.5 cents
16%
of wholesale price
3/4%
23%
No change
6%
No change
Strengths of Proposal A
 Significant
property tax relief for
homeowners and businesses.
 Reduced
reliance on property tax for
funding schools.
 By
reducing reliance on the property tax
and capping assessment growth, greater
equity is assured.
 $270
million for at-risk students,
recognizing the additional cost
associated with educating students
from impoverished backgrounds.
 Brings
Michigan’s tax structure more
in line with surrounding states.
 Schools,
for the most part, are out of
the millage business.
 Created
a more attractive business
climate in Michigan, particularly for
encouraging the return of business to
urban areas.
Proposal A:
At a Crossroads
The Most Worrisome Aspects of
Proposal A
 Can
the sales tax and other earmarked revenue
guarantee the long-term stability for supporting
schools that the property tax once provided?
 Schools
traded local control of revenues for a
system driven by state funding in the belief
they would receive adequate funding with at
least inflationary increases from year to year.
 When
Michigan voters approved
Proposal A, they assumed that the issue
of school funding had been finally
addressed. They still presume the
increase in the sales tax guarantees
school districts the money they need to
operate.
 Lansing
lawmakers who negotiated
Proposal A believed that sufficient
revenues would be dedicated to cover the
cost of funding schools.
 Schools
believed they would be out of
the annual budget process with all its
uncertainties, delays and political
conflicts associated with being subjected
to the annual appropriations process.
 Since
the passage of Proposal A, there have
been over 20 tax cuts, some which have
reduce the school aid fund.
 The net result for FY 99 over FY 98 alone
has been a smaller increase in school aid
revenue.
 Specifically, the school aid fund has grown
only 2.0% rather than 2.3% increase
anticipated without tax cuts.
 This
reduction in revenue growth will
continue in future years as the effect of
these tax cuts compounds, along with the
implementation of other tax cuts puts into
place between 1994 and 1998, but not as yet
implemented.
 There
has also been a reduction in GF-GP
revenue. The net result for FY 99 over FY
98 alone has been a 2.1% growth in GF-GP,
rather than the 4.0% growth anticipated
without the tax cuts.
 School districts rely on the general fund for
nearly $400 million each year. A reduction
in general fund revenue growth reduces the
total funds available to schools, as well as
other state departments.
Achieving Equitable Funding for
Infrastructure
 Michigan’s
public school buildings are in
great need of replacement and renovation.
 Good public schools rely on an equitable
and adequate funding system for both
operations and infrastructure.
 Proposal A has begun to address funding
inequities in the operations of school
districts, but not for infrastructure.
 Michigan
public school buildings are
funded almost entirely through locally
raised revenues - typically through debt
millage.
 The generation of revenue is based on
property wealth within a school district.
The more State Equalized Value (SEV) a
district has the more easily it can raise
revenues, i.e. the higher the SEV, the fewer
mills necessary to raise any given amount.
 School
districts experience the same equity
problems with capital needs as they has
with operational needs. For example, one
mill in the Buckley School District raises
only $31 thousand per year, whereas in
Utica, it raises $3.3 million. When
Hamtramck Public Schools requested
preliminary qualification of a $51 million
bond, the State Treasurer pointed out that
the district’s balance to the state would
increase into perpetuity.
 With
the extreme in equality in the tax base
used to support infrastructure investment,
change is needed.
Reasons for the Growing Demand
for Infrastructure Investment
 Enrollment
growth
 Urban crowding
 Replacing/renovating existing facilities
– Health and safety
– Age and obsolescence
– Curriculum changes, including technology
improvements
 The
state’s assistance in this area is the
School Bond Loan Program. However, a
district with a low taxable yield could find
itself never able to pay off bonded
indebtedness for a substantial bond issue.
 According
to a US General Office (GAO)
study, the State of Michigan is ranked fifth
from the bottom of the 37 states included in
their study for the amount of assistance that
is provided to local districts for
infrastructure needs.
 The
GAO study also cites Michigan as one
of two states which has never described and
quantified the infrastructure needs of its
schools.
State Funding Options to Assist
Michigan’s K-12 Infrastructure Spending







Mill equalization
Dedicating a state revenue source to K-12 capital spending
Regional infrastructure mills
State revolving loan fund used to lower the interest rate for
some school districts
State infrastructure granted based on need
Restructuring the School Bond Loan Program - including
below market interest rates and subsidy for needy schools
Statewide general obligation bond issue for school capital