The Foundation Allowance

Michigan’s school finance system has not been designed for the sake of simplicity. One of the most common points of misunderstanding relates to the state’s use of a “foundation allowance,” which is a revenue stream that comprises the bulk of operating money for the state’s 540 conventional school districts and 300 public charter schools.

The foundation allowance was created after voters approved Proposal A in 1994. Previously, most education dollars derived from local property taxes. But this produced large geographically based funding disparities: districts containing valuable property could raise lots of money for their schools, those with less valuable property not as much.

Proposal A changed all of this. Instead of letting local property values determine funding levels for districts, the foundation allowance is allocated based on the number of enrolled students, with districts receiving a set amount for each student. The foundation allowance is the minimum amount of money per student that the state Legislature guarantees each district will receive. As such, the disparities in the value of local property among districts has no impact on this portion of school funding.

Proposal A was not designed to bring perfect funding equity for all school districts, however. Rather, the plan was to gradually reduce disparities by providing lower-funded districts with larger increases so they could eventually catch up with their higher-funded peers. And over the last two decades, the foundation allowance gap has closed significantly. The highest-funded district in 1994 received a foundation allowance 3.7 times greater than the lowest-funded district. Today, the highest-funded district’s foundation allowance is only about 60 percent larger than the minimum received by most districts.

About three-fourths of districts and all charter schools received the minimum foundation allowance of $7,511 per pupil in 2017. That amount is nearly $3,000 more than the lowest-funded districts received before Proposal A, adjusted to today’s dollars. Meanwhile, today’s largest foundation allowance of $12,064 is over $4,000 less than the largest foundation allowance in 1994, if increases had kept pace with inflation.

Two student counts — one in October and one in February — are used to determine the actual amount the state must pay each district through the foundation allowance. A district’s final enrollment is calculated by adding 90 percent of the October count to 10 percent of the previous year’s February count.

Although the Legislature sets its level and the foundation allowance is considered “state funding,” it is actually financed through a mix of state and local revenues. The local revenue comes from a tax on all “nonhomestead property” in a district — commercial and industrial property or houses that are not a person’s primary residence. Most every school district levies the maximum allowable rate of 18 mills on nonhomestead property to fund a portion of their foundation allowance revenue.

The remaining state-based revenue needed for the foundation allowance comes from the School Aid Fund, which is financed by numerous state taxes. The sales and income taxes and the State Education Tax — 6 mills levied on all property, including primary residences — make up the bulk of the revenue for the School Aid Fund. Lottery revenues also contribute, but make up only 7 percent of these revenues. Other sources include the use tax, tobacco tax and real estate transfer tax.

Graphic 1: Michigan’s Shrinking Foundation Allowance Gap (in 2016 dollars)

Graphic 1: Michigan’s Shrinking Foundation Allowance Gap (in 2016 dollars) - click to enlarge

Source: Michigan Senate Fiscal Agency

The amount that the state contributes to each district’s foundation allowance varies district to district. It works like this: The state calculates how much local revenue a district will get from its nonhomestead tax and then fills in whatever is required to fully fund its foundation allowance. For example, if a district’s local revenue provides $5,000 per student, the state would contribute $2,511, so the district would receive a total of $7,511 per student through the foundation allowance.

Because there’s still wide variation in how much local revenue school districts can raise, the amount that the state contributes to each district can vary considerably. In fact, in a small number of cases, school districts can raise enough money to fund their foundation allowance themselves without the state kicking in any funds. These are sometimes called “out-of-formula districts.”

Other districts rely heavily on the state to finance their foundation allowance. And, one final wrinkle, all public charter schools, because they cannot levy any taxes of their own, rely entirely on the state to fund their foundation allowances.

There are additional nuances. For example, some school districts are assigned a foundation allowance that exceeds the minimum. And some districts are allowed to levy an additional local tax to supplement their foundation allowance. When Proposal A was passed in 1994, these districts had relatively higher funding levels, and the rationale for letting them remain at these higher levels was to hold them “harmless” from the funding reform.

A final important point about the foundation allowance is that it is only one revenue source for school districts. Most districts receive significant amounts of money from other local, state and federal sources. Including these other sources finds that Michigan schools on average collected $14,307 in revenue for every full-time student enrolled in 2016. Nevertheless, the foundation allowance is schools’ most important funding mechanism, because it is the primary source of revenue schools use for their core operations, such as employing teachers, purchasing instructional materials and keeping the lights on.