(Editor’s note: This
commentary is an edited version of written testimony Education Policy Director
Michael Van Beek recently submitted to the Michigan Senate Appropriations
Michigan school districts have accumulated a significant amount of long-term
debt over the past couple of decades. According to data from the U.S.
Department of Education’s National Center for
Education Statistics, Michigan school districts were $21 billion in debt at
the end of the 2009 fiscal year (the most recent data available). That equates
to about $14,066 per student — the third highest in the nation and 66 percent
more than the national average of $8,473 per student.
The amount of long-term debt owed per student by Michigan school districts has
steadily increased since 1995. After adjusting for inflation, Michigan schools
owed 162 percent more per pupil in 2009 than they did in 1995. Michigan has
been in the top five nationally in long-term debt per student every year since
There is, however, a limitation to comparing Michigan to other states in terms
of long-term debt. The state of Michigan does not provide any direct state
funding for school construction and other capital costs — the primary reason
schools borrow — while other states do provide such aid to districts.
But even comparing Michigan to just states that do not provide any state
assistance for capital costs and debt services, Michigan schools still stand
out for their high level of debt. For instance, the average debt per-pupil for
the 13 states identified by a 2007 University of
Nevada-Las Vegas study that do not provide any state aid for capital
outlays or debt services was $9,253 in 2009, about 34 percent less than
State policies impact the ability of Michigan school districts to accumulate
large amounts of debt. For instance, the state’s School
Bond Qualification and Loan Program enables school districts to use the
state’s credit rating when selling bonds, and it also allows districts to
borrow from the state’s School Bond Loan Fund when their local tax base does
not generate enough revenue to make their bond payments. Essentially, districts
borrow money to make payments on borrowed money.
There are several serious concerns about the SBLF. Chief
among these is that it’s growing more and more expensive to maintain. Borrowing
by districts that cannot meet their full bond payment obligations has moved in
only one direction since 1995 — up.
In a report
for Public Policy Advisors, Nick Khouri wrote in 1997: “[T]he SBLF burden is
growing at an unsustainable rate. Local school district borrowing from the SBLF
is forecast to jump 500 percent — from $118 million in 1996 to $733 million —
by 2009.” Reality turned out to be worse than Mr. Khouri’s projections. In
2009, districts owed
$951.7 million to the SBLF, and in 2010, the total owed surpassed $1
A well-functioning SBLF program needs perpetual tax base
growth and continuous low interest rates. At times, both of these may be
available, but after the “Great Recession,” the idea that government can rely
on higher revenues as a result of ever-increasing property values should be a
thing of the past.
The SBLF ultimately increases the overall costs of
borrowing, with some of these additional costs being incurred by the state and
ultimately subsidized by reductions in funding available for districts that do
not borrow from the program. Other increased costs are incurred by future local
taxpayers, who may or may not benefit from the original bond proceeds and whose
ability to raise revenue for their own use is restricted. Lower tax rates for
current taxpayers are subsidized by higher tax rates for future taxpayers.
The original intent of the SBLF may no longer be relevant.
It was created in the 1950s, when the baby boomers were reaching school age.
The purpose of establishing the SBLF was to enable school districts to borrow
more than their tax base could afford to meet the challenges of a fast growing
student population. Michigan is in a different era now, in which school
enrollment has dropped for each of the past nine years, resulting in an overall
decline of 13 percent since 2003.
There is legislation in
the Michigan Senate that would address many of these issues and limit the risk
the state assumes on behalf of heavily indebted school districts. Surprisingly,
even though only about 25 percent of districts currently borrow from the SBLF
(but 100 percent pay for it), public school special interest groups, such as
Association of School Boards, oppose this legislation. Not surprisingly, so
construction companies and others that profit when schools can borrow from
Even if the SBLF is limited or scaled back, districts can
still use “sinking funds,” which are basically savings accounts dedicated for
school construction and repair. And, as always, there’s nothing that prevents
districts from using general fund monies for capital expenditures. These
options have not been popular among districts historically, because they
require either asking for unpopular tax hikes or saying “no” to ceaseless union
demands to squeeze every dime from the general fund to boost compensation for
The large amount of debt schools have accumulated over the
years likely has an indirect but negative impact on the state’s economy. Many
businesses and investors measure a state’s expected future rates of taxation by
assessing the total amount of government debt. All else equal, the more debt
schools amass the less attractive to businesses and investment this state will
be compared to others.
Michael Van Beek is education policy director at the
Mackinac Center for Public Policy, a research and educational institute
headquartered in Midland, Mich. Permission to reprint in whole or in part is
hereby granted, provided that the author and the Center are properly cited.