In January of 2003 it was determined that there will likely be a $127 million deficit in the fiscal year 2002-2003 state School Aid Fund, which is the source of school operating funds. The state Constitution requires the budget to be balanced, and state law requires the governor to close the deficit using a "pro-rated" distribution formula to determine the size of cuts to school districts, unless the legislature adopts a different formula. These cuts affect different school districts in different ways, depending on the various factors which determine how much state aid individual districts currently receive. Because of this, legislation was introduced to modify the cutting formula so as to revise the distribution of cuts. What follows is a brief description of the factors which determine the size of cuts to different school districts.

The formula for mandated per-pupil state "foundation grants" to school districts is a product of the 1994 Proposal A school district funding compromise. This voter-approved Constitutional amendment was accompanied by the imposition of a statewide six-mill state education property tax, and replaced local property tax receipts with annual state grants as the source for school operating expenses. Operating expense grants to poorer districts were set at a minimum level much higher than what the districts had spent previously, when they relied on smaller local tax bases to cover these costs. In return, grants to wealthier districts were set at an amount above this minimum level, in order to "hold harmless" the larger budgets of these districts, which had been boosted by higher local tax receipts. Since then the grants to lower-spending districts have grown faster than those to the wealthier ones, narrowing the spending gap – but the gap is still significant.

In addition to the Proposal A per-pupil grants, the formula for which is set in the Constitution, schools receive varying amounts of "discretionary nonmandated" grants, the amount of which is determined by the legislature in annual budget bills. The lower-funded schools get more of this discretionary money in an effort to narrow spending disparities.

As an incidental result of this historical background, the pro-rated cuts tend to affect lower-funded rural districts more than wealthier suburban districts or urban districts, due to the higher proportion in the former of "discretionary nonmandated" funding open to cutting, compared to Constitutionally-protected foundation grants. The "bottom line" is that many lower-funded rural districts take a "hit" of between two and four percent under the pro-rated cuts formula. Wealthy area and urban districts only lose around one-percent of their funding.

Legislation to Modify Executive Order Cuts to School Districts

Several bills were introduced in response to the pro-rated cuts, offering various alternative formulas which would revise the relative impact on different school districts. In general, the bills attempted to spread the cuts more evenly across all school districts. They are described by MichiganVotes.org (see below), which also has links to the bill language and other information. The pro-rated cuts for each school district can be viewed at: ESTIMATED FY 2003 Proration And Other Options to Reduce Expenditures, prepared by the non-partisan House Fiscal Agency.

The prospects for such legislation depended less on partisan politics – Democrat vs. Republican – than on regional politics – urban vs. rural, wealthy vs. poor. The positions of most legislators on whether to attempt a modification of the "pro-rated" cuts was determined by how the school districts they represent fare under one or the other budget-cut formulas. This made for an interesting and unusual political dynamic, as lawmakers representing net-winners or losers sought to forge cross-party coalitions to advance a formula which cut their districts the least.

In the end, none of the bills were adopted before the Feb. 14 deadline to prevent the "pro-rated" cuts from going into effect. If a compromise were reached later between the legislature and the governor it is possible that part of the cuts could still be modified. Given that lawmakers are also dealing with a much larger $365 million shortfall expected in the 2003-2004 school budget, this is not likely.

Descriptions of bills that would modify the "pro-rated" cuts formula can be found at House Bill 4227 and Senate Bill 183.

Whichever budget cut formula is used, schools should seek to realize savings by privatizing non-core functions such as buses, janitors, and food service. Michigan has one of the lowest proportions of teachers to school administrative personnel of any state in the union, suggesting that significant savings could be realized by cutting bureaucratic overhead. Further savings could be gained by seeking alternative health care insurance for teachers, rather than relying on the overpriced service provided by an arm of the state school employee union. Finally, repealing a state law that inflates wage rates on school construction and renovation projects would save more than $150 million annually.

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Jack McHugh is a legislative analyst and manager of MichiganVotes.org, a legislative database operated as a free public service of the Mackinac Center for Public Policy. More information is available on Michigan's budget challenge.