Michigan schools are governed primarily by the State School Aid Act,[14] a law renewed and revised annually by the state Legislature. The basic purpose of the act is to calculate and appropriate the monies available to the schools for the following school fiscal year. The Revised School Code, in turn, is a state law that sets forth school governance policy, mandates certain educational activities and directs the conduct of local and intermediate school districts and charter schools.

Since 1994, the way in which Michigan’s public schools are financed has been largely guided by Proposal A of 1994, a voter-approved constitutional amendment that reduced the reliance of most school districts on local property taxes and increased their reliance on state sales and property taxes. Proposal A also instituted certain limitations on taxes levied for public elementary and secondary education.[15]

A 1978 state constitutional amendment popularly known as the "Headlee amendment" also plays a significant role in regulating the finance of Michigan’s public school system. The amendment contains a limit on local property tax rates[16] and requires that the state Legislature pay the cost incurred by local governments (including school districts) in meeting any mandate the Legislature imposes on them.[17]

This second provision of the Headlee amendment has led to litigation concerning whether state government has been fully compensating local school districts for the cost of state educational mandates. The most influential legal case in this litigation is Durant v. State of Michigan, a 1980 lawsuit brought by several individuals, 83 local school districts and one intermediate school district concerning state mandates for certain special education services, special education transportation services and a school lunch program.[18] The Michigan Supreme Court ruled in 1997 that the state had not met its constitutional duty under the Headlee amendment to finance the mandates, and the state was ordered to pay the litigating districts approximately $212 million in damages[19] and to ensure that any future cost of the mandates was fully financed by the state.