This Guide is aimed at the concerned citizen who wants to understand how school funding works in Michigan. Whether or not you have a lot of background in public policy, you will find useful material here.
A great deal of information about our schools and their budget situation is available on the internet, though it is not always easy to find. Here are some key resources that every parent should find useful.
Ann Arbor Public Schools
AAPS main web site with links to the resources offered there, including
AAPS Board of Education
School board main web site
AAPS Education Foundation
The Education Foundation is a non-profit committed to supporting the quality of education in the Ann Arbor Public Schools. Starting in the mid-1990s, the Foundation has given grants to individual teachers for classroom projects. With the current funding restrictions that our schools work under, the AAPSEF is aiming to expand its mandate to help preserve key programs that might otherwise suffer for lack of funding.
To understand the current debates about school funding, it really helps to know how the current system works, how it came about, and earlier attempts to fix it. In this document we'll provide links for more information on how school funding currently works in Michigan, and proposals for change.
System created by Proposal A
In 1994, Michigan voters approved changes to the state school aid program that dramatically revised how schools are funded. The twin goals of the changes were to reduce property taxes and to increase equity in school funding. Experts agree that the first goal was achieved, but that progress on equity has been more mixed. More importantly, much of the burden of school funding was shifted from property taxes to things like the sales tax, which are more sensitive to economic conditions. (About half of the revenue for the state School Aid Fund comes from sales taxes, and a further 20% from income taxes.) The changes also prevent local districts from increasing their own taxes for school operating expenses; school funding depends on statewide tax revenues. Lastly, increases in the taxable value of homestead property were capped at the lesser of the rate of inflation or 5% (until a property is sold); as a result, the taxable value of homestead property now significantly lags SEV overall, so that property tax revenue has not risen as fast as property values.
For an overview of the history of the changes introduced by Proposal A, and some of its effects, see this article on the Burns Park PTO discussion site:
http://burnsparkpto.org/confer/node/29
This article also includes links to important background documents.
A detailed backgrounder prepared by the Legislature's Senate Fiscal Agency can be found here:
http://www.senate.michigan.gov/sfa/Publications/JointRep/FINPROPA/95COMP...
A Senate Fiscal Agency evaluation of Proposal A after ten years can be downloaded here:
http://www.senate.michigan.gov/sfa/Publications/Issues/PropA/ProposalATe...
This issue paper makes clear the tradeoff between lower taxes for property owners, and revenues for school districts, that the current system represents - with the benefits clearly going to property owners.
Other general background information can be found on the website of the Legislature's House Fiscal Agency: http://www.house.mi.gov/hfa/schoolaid.html, and the Senate Fiscal Agency: http://www.senate.michigan.gov/sfa/Departments/DPk12_web.html
Current school budget issues
For an overview of the AAPS budget situation, you may find this article useful:
http://burnsparkpto.org/confer/node/31
It reports on one of Supt. Todd Roberts' public budget forums last fall, describing the financial situation facing AAPS. An important part of the picture is problems with school aid from the state.
See also here for letters from Dr. Roberts and the superintendent of the Farmington Public schools describing the bind their districts are in: http://www.aaparentsforschools.org/?q=node/7
Proposals for change
Most recently, Governor Jennifer Granholm has proposed restructuring several state taxes that would be earmarked in part for school aid. Our summary of the proposal can be found here:
http://www.aaparentsforschools.org/?q=node/4
More detail can be found on the State Budget Office's website: http://www.michigan.gov/budget/
One of the recent attempts to change school funding was the Proposal 5 initiative, on the ballot last fall. While the proposal was defeated, the debate over it highlights some of the problems with the current system and outlines various ideas for change. You might begin with this article:
http://burnsparkpto.org/confer/node/30
It contains links to some important resources, and the comments to the story have further information (you must be registered on Penguin Talk to view the comments).
This chapter lists some of the details behind the taxes which fund the state School Aid Fund. Having these kinds of facts available helps all citizens understand how the system works and the impact any changes would have. [Please be patient as we fill in the blanks.]
Sales & Use Taxes
FY 2006 contribution: $5.29 billion, 48%
Sixty percent of the revenues collected by the first 4% of the sales tax go to the school aid fund; all of the money raised by the last 2% of the sales tax and the 2% use tax go to the school aid fund. [Michigan Constitution Art. IX, ยง 11, as amended March 1994] This convoluted formula emerged from the changes made by Proposal A in 1994. At that time, Michigan had a 4% sales tax, of which 60% went to school aid. Proposal A added 2% to the sales tax, and a companion use tax, which was entirely earmarked for school aid.
Real Estate Transfer Tax
FY 2006 contribution: $298 million, 3%
The real estate transfer tax is a tax paid when property changes owners. The rate is calculated as $3.75 in tax for each $500 (or fraction thereof) of the property's total value - effectively, 0.75%. These funds are earmarked by statute to the School Aid Fund. [State Real Estate Transfer Tax Act, Act 330 of 1993]
State Education Property Tax
FY 2006 contribution: $2 billion, 18%
Proposal A also created a state-wide property tax, levied on all property, of 6 mills ($6 per $1000 of property value). This tax replaced all local taxes on homestead property for school operating expenses, which were eliminated (with the exception of "hold harmless" millages -- see below). [State Education Tax Act, Act 331 of 1993; MCL 211.903] There is also an allowed local property tax on non-homestead property which is collected locally but is regulated by state law and funds part of a district's foundation allowance (see below).
Article IX, Sec. 3 of the Michigan Constitution specifies that changes to the maximum amount of property tax that may be imposed for school operating expenses beyond the limits in force in 1994 must be approved by a three-quarters vote of both houses of the State Legislature.
Income Tax
FY 2006 contribution: $2 billion, 18%
The portion of the income tax which is earmarked to the School Aid Fund has, since 2000, been determined by a formula that takes into account the current tax rate. The current formula sets the SAF's share of income tax revenue equal to 1.012% divided by the current income tax rate for individuals. At the moment, that works out to 1.012%/3.9%=26%. The formula has the effect of making the SAF share shrink as the tax rate increases, so that if the total income being taxed remains the same, an increase in the tax rate is essentially offset by the reduction in the SAF share, leaving education funding the same. [Income Tax Act of 1967, PA 281 of 1967, Section 206.51(2)©]
Michigan Lottery
FY 2006 contribution: $688 million, 6%
Cigarette & Tobacco Taxes
FY 2006 contribution: $472 million, 4%
Other Taxes
FY 2006 contribution: $292 million, 3%
This includes the Casino Wagering Tax, the Liquor Excise Tax, and Industrial & Commercial Facilities taxes.
Local sources of revenue for schools
Overall, local school operating taxes (regulated by state law) provided 19% of local school district's operating funds statewide in fiscal 2005, compared to 74% for direct state aid and 7% for Federal funds.
Tax on non-homestead property
The amended school code, which sets up and regulated the current system of school funding, sets limits on property taxes that local districts may impose on their own initiative. Specifically, districts are allowed to levy no more than 18 mills on local property, and that only on non-homestead property (with a few exceptions). While these taxes are local, they are counted as the local contribution toward the district's foundation allowance, which the state then supplements to bring the total to the foundation allowance for the current year. [Revised School Code, Act 451 of 1976, as amended; MCL 380.1211(1)]
"Hold Harmless" levies
That same portion of the school code does make an exception to the amounts of tax that can be imposed locally on homestead property. For districts that were already spending more than $6500 per pupil in 1994, the law allows them to levy local taxes on homestead property to collect the exact amount of the difference. This is known as the "hold harmless" millage.
The $6500 figure was the maximum the state would pay out from its formula in the first year after Proposal A. However, districts which were already spending more than that were allowed to tax themselves to get back to the level they were spending just before Proposal A. This amount was fixed, however, at 1994 levels; so-called "hold harmless" districts have been allowed to collect precisely enough taxes to raise that additional per pupil amount each year. The amount is not indexed for inflation or otherwise adjusted; it remains the same as it was in 1994. One result is that the value of these "hold harmless" millages has decreased over time as their real value is eroded by inflation.