Overview and Background of Proposal 5

Summary

On Nov. 7, 2006, Michigan voters will be asked to consider a proposed new law that would, if passed, predetermine certain financial priorities for state government by mandating annual increases in state spending for education at all levels. The proposal also contains requirements for new state payments to districts with declining enrollment and places increased liability for school employee pension costs on state government, rather than school districts. The proposed new law will appear as "Proposal 5" on the ballot.

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Proposal 5 is not a proposed amendment to the state constitution; it is a citizen "initiative," as described in Article 2, Section 9 of the Michigan Constitution. This constitutional provision allows citizens to draw up proposed laws, gather registered voters’ signatures in support of the proposal and submit them to the Legislature for approval or rejection "without change or amendment" within 40 session days. If the Legislature fails to approve the citizen initiative, the proposal is presented to the state’s voters at the next general election.

Proposal 5 was submitted to the Legislature by the "K-16 Coalition for Michigan’s Future," an alliance of public education employee unions and representatives of parent organizations and public education institutions, including the Michigan Education Association, the Michigan Parent Teacher Student Association and the Michigan Association of School Boards. In this instance, the Legislature did not approve (or reject) the proposal. If Michigan voters pass the proposal on Nov. 7, it will become law, and the Legislature will not be able to repeal or amend it unless three-fourths of both the Michigan House and the Michigan Senate support the change.

The proposal’s mandates would take effect in the 2006-2007 school year. Because the Legislature has already approved the fiscal 2007 budget, which covers this school year, lawmakers would be required to revise the budget and make additional payments to educational institutions if voters approve the proposal.

Provisions

The brief ballot summary and exact text of Proposal 5 appear in an appendix at the end of this study. In plain language, Proposal 5 would create the following spending requirements:

Mandated Spending Increases for "K-16" Education Budgets

The proposal would require annual state spending to increase at no less than the rate of inflation in two major areas of education spending by state government:

1. total spending for public school districts and charter schools(primary and secondary education), and

2. total spending on universities and community colleges.

Note that these provisions do not limit the money raised by local property taxes to service school district debt for construction and capital expenses. Local property taxes would continue to increase or decrease in accordance with the outcome of local bond elections and constitutional limits on property tax rates.

Proposal 5 would also mandate that state spending on education would increase at no less than the rate of inflation for four main components of state spending on public school districts (item No. 1 on the list above):

1. the per-pupil foundation allowance paid to districts and charter schools for each student;

2. "at-risk" pupil spending;

3. special education spending; and

4. intermediate school district operations spending.

These four provisions mean that state government would provide at least an inflationary increase not just in primary and secondary state education spending as a whole, but also in each of the listed subcategories. Primary and secondary education spending that did not belong to the list of four budget areas could decrease or grow at less than the inflation rate, as long as total primary and secondary spending still matched or exceeded inflation.

As noted above (in item No. 2 in the first list), total annual state spending for Michigan’s public universities and community colleges would also receive an annual inflationary spending increase. This mandate, however, would not apply to each individual school. Thus, annual spending for some universities could increase by more than inflation, while spending for others could increase by less (or decrease), as long as the total spending in the higher education budget increased by at least the inflation rate. The same would be true for schools that received their state funding from the community colleges budget.

New Spending Requirements

Proposal 5 would create two new spending requirements for the state’s education budget:

1. additional state foundation payments to districts with declining enrollment, and

2. a decrease in disparities in state funding between school districts.

The first of these involves an adjustment to the current method of funding school districts. Under present law, most of the money distributed from state government to local school districts is provided through a per-pupil "foundation allowance." School districts are required to report accurate counts of their student population each year, and state government then pays most districts based on the pupil counts.

About 11 percent of the state’s districts, however, currently receive their per-pupil foundation allowance based not on the usual counts, but on the average of the districts’ counts in the current year and in the previous two years. These districts qualify for this alternative payment method through their low population densities, small enrollment (fewer than 1500 students) and ineligibility for special state monies for geographically isolated areas, such as islands.[1]

Proposal 5 would extend the alternative payment option to any district wishing to use it. Since the three-year formula would include student counts from previous years, it would increase the state money that districts with declining enrollment received. Districts with stable or increasing enrollment, on the other hand, would remain free to receive their per-pupil foundation allowance based on their current student enrollment.

Proposal 5’s second new spending provision would speed up the process of reducing the funding differences between Michigan’s higher-spending public school districts and lower-spending school districts (and charter schools). Some reduction has occurred since the passage of Proposal A in 1994, but Proposal 5 would further the decrease so that the difference between the foundation allowances for the higher-spending and lower-spending districts would fall from the current $1,300 per pupil to $1,000 per pupil by fiscal 2012.[2]

A Transfer of Responsibility for School Employee Pension Cost Increases

Proposal 5 would also shift payment responsibilities for the Michigan Public School Employees Retirement System. MPSERS is the state-administered retirement plan for employees of Michigan’s local and intermediate school districts and for employees of some public universities, community colleges, charter schools and libraries. Public school districts, intermediate school districts and these districts’ employees make up more than 90 percent of payments into MPSERS.[3]

MPSERS is for the most part a conventional "defined-benefit" retirement plan. MPSERS is managed by the Michigan Office of Retirement Services and is governed by an appointed board representing various school and government stakeholders. The MPSERS staff, with guidance from the board, selects where and how to invest pension funds, and education retirees receive a fixed payment after retirement based upon their years of employment and salary history.[4] Additionally, MPSERS enrollees are eligible to receive a retirement health care benefit for themselves and their dependents at a discount, paying less than 15 percent of the actual premium cost of their medical insurance from the time of retirement until they are old enough to receive federal Medicare benefits.[5]

MPSERS funding comes from two sources: public school districts and their employees. Employees contribute a refundable percentage of their pretax salary to the pension fund. Public school districts — the employers — provide the substantial majority of the funding. The school district’s payment is calculated as a percentage of payroll and is set by the MPSERS board at a level that is actuarially determined as necessary to keep the MPSERS fund solvent.

For the 2004-2005 school year, the rate was set at 14.87 percent of total payroll, with 8.32 percentage points distributed to the pension fund and 6.55 percentage points distributed to the health care fund. Local school districts now pay the MPSERS obligation directly, primarily with money sent to them by the state.

Local school districts assumed their current MPSERS responsibilities in 1995, following the passage of Proposal A, the landmark state education finance reform proposal of 1994. Since then, the districts’ annual MPSERS contribution rate has fluctuated from a high of 14.92 percent of pretax payroll (during 1997) to a low of 10.68 percent of pretax payroll (the following year).[6]

Proposal 5 would change this system for fiscal 2007 and beyond. Under the proposal, local school districts would pay the lesser of two amounts: four-fifths of the total employer MPSERS contribution, or 14.87 percent of pretax payroll. Any additional monies needed to maintain MPSERS’ financial viability would be paid from the state of Michigan’s general fund budget. For instance, under the current MPSERS payment formula, school districts’ expected contribution rate is 17.74 percent of payroll in fiscal 2007. Under the proposal, school districts would pay about 14.19 percent of payroll (four-fifths of 17.74), with the difference, approximately 3.55 percent of payroll, paid directly by state government. School employees’ payments to MPSERS would not change under the proposal.