Revenues not used for funding the foundation allowance are increasingly becoming a more significant factor in school district budgets. Even as foundation allowance rates have become more equalized, local schools get a smaller share of their revenues from the foundation allowance.
In 2008, more than 70% of the total funds collected by districts and charters came in the form of foundation allowance dollars. A dozen years later, the allowance comprised only 63% of total revenues. Total revenues statewide increased slightly in real dollars to just over $13,000 per pupil in 2020. Yet on average, districts and charters took in more than $1,000 per pupil more from other allocations and funding sources outside the foundation allowance in 2020 than in 2008. That translates to an extra $1.48 billion in nonfoundation allowance revenue.[*]
A large amount of this money comes from what are called categorical grants. These are funds appropriated by the Legislature for specific purposes or programs. The number and size of these categorical grants fluctuate from year to year. A sizable share of this funding is not distributed according to student enrollment, but is designed to benefit districts with certain characteristics, or to underwrite specific educational programs or state mandates. These funds are allocated without accounting for locally raised dollars.
Taken as a whole, the distribution of categorical funds widens the disparity in funding among districts. In 2020, the small number of highly funded hold-harmless districts brought in nearly $450 more per full-time student, on average, in categorical grants than the typical district funded at the minimum foundation allowance rate.
A key driver in that disparity is the appropriation of about $1.525 billion in Section 147 categorical funds, designated to offset employee pension obligations. These allocations — first included in the state’s 2012 budget — are based on payroll expenses rather than student counts.[†] As a result, districts receive a disparate range of Section 147 allocations per student.
In the 2019 school aid budget, state lawmakers designated nearly $3.67 billion from the state treasury through 75 different line-item grants. This amount comprised 28% of the state’s total school aid allocation.[‡] As part of a contentious battle over the 2020 budget, Gov. Gretchen Whitmer’s veto ultimately removed more than a third of the line items. Even so, the final enacted budget preserved enough of the larger line items to slightly increase the share of categorical dollars in the 2020 budget.
Many categorical funds underwrite specific programs in areas such as early literacy and career-technical education. Some funds are competitively awarded to vendors who provide services (e.g., student testing). Districts may receive some of these funds to help pay for special added costs or to recoup lost tax revenue from other sources.
Other line items bear a more direct relationship to student demographics, based on the recognition that students with certain characteristics typically need extra support to meet academic standards. Bilingual education funding, for example, is consistently allotted according to the number of pupils who meet certain measures of English language proficiency.[§] In 2020, most districts netted about $945 for each student deemed at-risk due to various measures of poverty or family instability. Districts with higher foundation allowances receive significantly smaller at-risk allocations per student, because they typically serve a smaller portion of at-risk students.[**]
The foundational assumptions used to undergird the increasing use of categorical funding is problematic. State policymakers appear to believe that local school districts, without the extra state funds, would fail to provide the programs and services that these politicians believe students really need. While some students certainly benefit from the targeted programs the state Legislature funds, it is highly improbable that lawmakers would know better than individual parents, teachers and school leaders what services local students need most. This reality suggests that a lot of this categorical spending is inefficient at best, or worse, wasteful.
Lawmakers have continued their preference to boost K-12 funding through line-item categorical grants. This approach enables elected officials to exert more control to prescribe how local agencies use dollars. It also tends to distribute money in a way that does not necessarily align with the local needs and characteristics of students served.
[*] In 2007-08, Michigan school districts and charter schools took in $12.147 billion through the foundation allowance, 70.7% of $17.172 billion in total revenue. Twelve years later, only $11.78 billion out of $18.745 billion in total revenue arrived through the foundation allowance. Subtracting federal funds, the foundation allowance went from 75% of revenues in 2008 to 68% in 2020. Using a slightly different methodology, the Edunomics Lab measured Michigan’s student-based allocations at 67% of combined local and state revenues in fiscal year 2018. Michigan ranked 11th out of the 29 states analyzed. See “Student-Based Allocation: Doling Out Dollars Based on Student Needs” (Edunomics Lab, 2022), https://perma.cc/4L26-2JRH.
[†] See “School Aid Archives” (Michigan House Fiscal Agency), https://www.house.mi.gov/hfa/Archives/SchoolAidArchive.asp. The initial allocations under Section 147 for Fiscal Year 2011-12 totaled $288 million, a figure that has only grown since.
[‡] “Budget Briefing: School Aid” (Michigan House Fiscal Agency, Jan. 2019), 6, 15, https://perma.cc/4R55-ZAQ8. This figure can quickly be determined by subtracting the state’s foundation allowance spending ($9,431,000,00) from total state School Aid spending ($13,098,645,300), which includes the total allocations from both restricted funds and the general fund.
[§] MCL § 388.1641. For 2019-20, the Legislature appropriated anywhere from $100 for each English language learner with the highest proficiency to $900 for each learner with the lowest proficiency.
[**] MCL § 388.1631a(2), (4). The figure is derived from a calculation of a “statewide weighted average foundation allowance” that calculates all the foundation allowance dollars allocated up to the target rate and divides the total by the number of full-time equivalent students in membership. The resulting figure of $8,214 is then multiplied by the statutory weight of .115, to approximate $920. Districts with foundation allowances above the minimum level generally receive at-risk funding at 35% of the standard allocation. See also “FundEd: Poverty Funding Policies in Each State” (EdBuild), https://perma.cc/U5F7-RSPN.