Michigan School Finance at the Crossroads

MICHIGAN SCHOOL FINANCE AT THE CROSSROADS:

A QUARTER CENTURY OF STATE CONTROL

Michigan State University Education Policy Report January 2019

David Arsen, Tanner Delpier, and Jesse Nagel

Copyright ? 2019 Board of Trustees of Michigan State University

ACKNOWLEDGEMENTS

This project was partially supported by MSU's Education Policy Program and the College of Education. The report reflects the views of the authors and not necessarily those of the Education Policy Program, the College of Education or Michigan State University. We received helpful input from our MSU colleagues Charles Ballard, Alounso Gilzene and Kelly Stec, and from three of Michigan's most experienced school business officials, Robert Moore, Steve Ezikian, and Paul Bodiya. None are responsible for remaining errors.

Copyright ? 2019 Board of Trustees of Michigan State University

Table of Contents

Executive Summary

1

Policy Recommendations

4

1. Introduction

7

2. Equity and Adequacy in School Finance

9

From Local to State Control

10

3. How Michigan's Proposal A Funding System Works

13

Proposal A Comes to Michigan

13

Key Impacts of Proposal A

14

The Proposal A Foundation System

15

Other Revenue Sources for Michigan Public Schools

19

Is Michigan School Finance Equitable and Adequate? An Initial Assessment

21

4. Trends in Financial Support for Michigan's Public Schools

23

Adjusting for Inflation

23

Trends in Total Revenue for Michigan's Public Schools

24

Trends in Foundation Allowance Revenue

25

Trends in At-Risk Funding

28

Michigan's Revenue Trend in National Perspective

29

Why Has Real Revenue Declined?

31

Policy Choices

36

5. Financing Special Education Services

37

Legal Context

38

How Are Special Education Services Funded?

38

Why Michigan's Special Education Funding Is Inequitable

39

Encroachment

42

A Serious Policy Failure

44

Toward a Better Approach

44

6. School Facility Finance

46

The Importance of School Infrastructure

46

How Districts Finance School Infrastructure

48

Michigan's School Facility Finance Problems

50

Policy Options

51

7. Fiscal Aspects of School Choice Policies

54

The Rules Matter

54

Michigan's Charter School Policy

54

Michigan's Interdistrict Choice Policy

55

School Choice Participation in Michigan

56

Funding Levels in Districts and Charter Schools

59

Financial Challenges Associated with Michigan's School Choice Policies

60

Options for School Choice Finance

64

8. Michigan's School Finance Adequacy Studies

65

What Are Adequacy Studies?

65

Michigan's 2016 Adequacy Study

66

Michigan's 2018 Adequacy Study

67

2018 Adequacy Study Findings and Recommendations

70

Reflections on the 2018 Michigan School Finance Research Collaborative Study 71

The Cost to Implement the Adequacy Study's Recommendations

73

Additional Work

76

9. Summary and Policy Recommendations

78

Recommendations

79

Concluding Thoughts

86

Executive Summary

Michigan's current school-funding system was established a quarter century ago with the passage of a major reform commonly known as Proposal A. The new system accomplished what it set out to do--it lowered property taxes and narrowed, but did not eliminate, revenue inequalities across districts. Proposal A also sharply restricted the ability of Michigan citizens to determine the level of funding for their local public schools.

Although the state controls most operating revenue available to Michigan's public schools, it has never calibrated funding levels to the resources needed for students to meet outcome standards, even as the federal No Child Left Behind act and the Michigan Merit Curriculum dramatically increased achievement expectations.

Michigan's public school system is at a crossroads. It is not performing well. In contrast to 1993, Michigan's tax rates and student performance now fall well below the national average. These unsatisfactory educational outcomes now constitute the primary catalyst for changes in funding policy.

With this report, we hope to inform a necessary public discussion of Michigan school funding and how it can be improved. We explain the principles of equity and adequacy in school finance. We provide an accessible primer on how Michigan's K-12 public schools are currently funded. We then turn to analyze in greater detail how the Proposal A system has performed. We identify several key problems, and conclude by offering policy recommendations to address them. After a quarter century, there are evident strains in Michigan's school finance system that should be addressed at the state level.

Over the last 15 years the adequacy of Michigan's school funding has seriously eroded.

? After adjusting for inflation, total K-12 education funding declined by 30 percent between 2002 and 2015. Seventy-four percent of this decline was due to declining state support for schools. Per-pupil revenue declined by 22 percent during this same period.

? Foundation allowance revenue is a vital component of total revenue, providing most discretionary funding for public schools. Per-pupil foundation allowances are set by the state and vary across local districts and charter schools. Michigan's high-revenue districts have experienced a nearly uninterrupted drop in their foundation grants' inflation-adjusted value over the entire Proposal A period, declining by nearly 40 percent. Most districts' real foundation allowances increased in the early years under Proposal A. Since 2003, however, Michigan's basic foundation allowance has fallen by 18.5 percent, while the minimum foundation declined by 25.6 percent.

? Proposal A devoted little attention to addressing the added costs of educating students with added needs. While the number of at-risk students has increased significantly, inflation-adjusted at-risk funding per at-risk student has plunged by over 60 percent since 2001.

? Michigan ranks dead last among states in total education revenue growth since the passage of Proposal A. After adjusting for inflation, Michigan's education revenue in 2015 was only 82 percent of the state's 1995 revenue. No other state is close to a

Michigan School Finance at the Crossroads

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