Modernizing K-12 Funding: Guiding Principles

Calls for more money to fund K-12 education are common but fail to make a clear connection to better outcomes for students. School systems spend most funds on personnel, yet inertia, union resistance and the friction of state bureaucracy combine to thwart changes to reshape basic incentives embedded in outdated employee compensation and management systems. Other strategies, like district consolidation or additional contracting out for services, offer few extra efficiencies.

As student population shrinks and school systems adjust to move beyond pandemic-related challenges, policymakers need to rethink existing funding systems. Significant changes are needed to fuel systems that better respond to individual student needs and provide financial incentives to districts to meet those needs. To review, three goals outlined above are ripe for state policymakers to improve in the next iteration of Michigan K-12 state budgeting.

1. Student-Based: Dollars should be distributed more fairly based on individual student needs, funded at equivalent levels regardless of the chosen educational setting. One great challenge can be found in determining appropriate amounts to address the needs students in poverty and those with disabilities. To create a more student-based funding system, state policymakers must also account for the incentives created by federal dollars, especially those already designated for these purposes.


2. Efficient: Local education providers should be given greater incentive to use both existing resources and new funding streams effectively. More promising results should come from strengthening accountability to the parent, who is most invested in a child’s academic success, rather than from state-imposed mandates.


3. Transparent: There is value in ensuring funds are clearly traceable from the source to how they are used at the site where the student is served. But in a student-based, choice-driven funding system, it’s even more important to see the outcomes that are linked to available resources and spending decisions. That type of transparency better enables informed decision-making by parents in partnership with local educators, who all can see whether the system is giving individual or select groups of students the chance to succeed.

State leaders can revamp Michigan’s K-12 funding system to break down existing barriers and give families more tools to chart a suitable course that prepares them for future challenges and opportunities. Two key and related principles also ought to govern reform:

1. Portability: The greatest possible amount of money should accompany students to their school of choice during the term they are enrolled. Students could direct dedicated portions of dollars to additional providers for courses or services that lead toward educational goals. The Flex Learning program, proposed especially for students in the upper grades, meets this design standard.[67]


2. Flexibility and Local Decision-Making: Technology and cultural norms give today’s students access to more flexibility than prior generations knew. State policymakers and officials should respond by freeing the greatest possible amount of education money from designated uses, allocating resources in a way that enables more decisions to be made as close to the student as possible.[*] Local decision-making benefits from the knowledge of an individual student’s needs and circumstances.

Together, these principles provide a guide to transforming the focus of K-12 funding from schools to students. While the details of such a change could manifest differently, the following offers a vision for that reform.

1. Increase core funding for students. The first priority should be to shift more dollars from designated categorical funds into direct, student-based aid. Dollars should be distributed in a way that finally eliminates the gap between the vast majority of districts funded at the standard foundation allowance rate and the remaining few funded at higher levels.

   Many of the state’s categorical grants are allocated to local or intermediate school districts to support current educational services to students in grades K-12, but there’s little evidence that increased categorization yields better results. On the contrary, districts and other providers have greater incentive to serve students’ needs when less money is tied to characteristics, programs and other inputs. Excluding funds designated for special education services, this comprises nearly $780 million in the 2020-21 Michigan School Aid budget, or over $550 per student. These dollars should be distributed as portable allowances attached to individual students based on what services and schools they choose.

   In a time of unprecedented school aid revenues, lawmakers may feel less pressure to downsize categorical appropriations. If anything, when revenue is up, lawmakers tend to sock more into categorical grants. They should resist this urge and reverse course. The ongoing priority for state budgets should be to wean local officials off secondary revenue sources and focus attention on providing equitable grants that follow students as closely as possible to the education service provider of their choice.

2. Remove needless Schools of Choice boundaries. State law should change to enable students to enroll in any public school program offered anywhere statewide. With today’s technology and remote work becoming a growing reality around the world, there is no good reason to limit the opportunities of students to the artificial lines that define the geographical boundaries of a school district. On the other side of the coin, state law should no longer limit districts to operate facilities and programs just within their own geographic boundaries. Just as there’s not a justified purpose to limiting students’ access to courses, there’s no justification for restricting which students a public school in Michigan can serve.

   Under current law, most Michigan school districts enroll nonresident students who live in a neighboring district within the same ISD, in a neighboring ISD, or both. In all, nearly 15% of the state’s public school pupils attend a conventional district outside their assigned boundaries, through the state’s Schools of Choice law or through a local Cooperative Education Program.[68] These voluntary agreements allow some individual districts to be funded by cooperating peers when students enroll outside of their resident district.

   Expanded enrollment opportunities could first be made available on an individual course basis. Districts would still receive their full foundation allowance based on a pupil’s enrollment. But participating students could opt to use a portion of their allowance to “purchase” courses and other educational services provided or sponsored by other districts. The enrolling district would be guaranteed an administrative fee, with the opportunity to keep more based on a student’s selection of courses within the home district. Outside course providers would receive some of their fee as students sign up, but a student would have to complete the course in order to receive full funding.

   This design holds providers more directly accountable to users.[69] Ultimately, though, all students, families and education providers should be afforded the ability to enroll more broadly within the state’s boundaries.

3. Eliminate ‘count days’ and target school funding to real student needs. A district’s student funding should be based on average daily membership, or ADM, rather than two main count days. This will pay districts more accurately for the students they actually serve. ADM uses more frequent and consistent student enrollment counts to adjust district funding levels. This approach counts the full-time equivalent of students actively enrolled in a school as it changes over time and adjusts state aid payments monthly or periodically based on updated numbers. It assigns essentially the same funding weight to each school day, attaching tangible financial value to districts that continue to serve students. Reversing the pandemic formula to place greater weight on current enrollments represents the first step toward a more nimble and student-centered funding system.

   The switch from multiple count dates to an ADM system would ensure dollars more closely follow students throughout the school year. Though empirical research is limited, one study shows that ADM policies have a strong statistical relationship with more students completing school rather than dropping out.[70] The likeliest reason for this relationship is that school systems have a greater incentive to effectively serve marginal, at-risk students. The incentive is enhanced by associating tangible value with keeping students enrolled and engaged on all the days instruction is provided, not just during certain periods that unduly determine funding. If every day matters for educational purposes, it should matter for fiscal purposes as well.

4. Enhance reporting of finances in connection with student outcomes. User-friendly websites should report the relationship between dollar inputs and expenditures with assorted results for students. Measures of academic growth could be displayed alongside trend lines that highlight other metrics of student well-being and success. Given a more robust market for families to choose schools and courses, the responsibility for reporting should not rest alone in the hands of a centralized state agency. New and existing private services that capture customer reviews and data on school performance could step up to meet the demand.

   Closely related, the state should upgrade its online data interface to display more clearly how dollars are spent at the school building level. Michigan should model its school-level expenditure web portal after places like Colorado or Georgia. The upgrade should allow comparisons of resource allocations to instruction, administration and other services. Additional transparency in school-level spending patterns may highlight the need to give school leaders greater autonomy over resource decisions.

5. Adjust funding weights for at-risk students. Michigan officials should assign at-risk pupils more money as part of their portable student allowance. Students in poverty or for whom English is a second language typically require additional supports to succeed at school. For eligible students, an additional percentage should be added above the standard foundation allowance to reflect this need. This total student allowance should then follow each student to the site or program where they are served, not just to the district administrative level.

   Students who come from households at or below 130% of the federal poverty level would be recognized as economically disadvantaged. This classification should be based on eligibility for other social service benefits, as identified through the direct certification process.[†] Research demonstrates that the more loosely vetted process of determining free and reduced-price meal eligibility identifies many students who do not actually live in poverty.[71] In addition to low-income pupils and English language learners, students who are homeless, living in foster care, or who come from migrant families would automatically qualify for an at-risk funding bonus.[‡]

   A 2018 report released by the School Finance Research Collaborative calls for Michigan to adopt a poverty funding weight of 35%. The figure represents a compromise recommendation between analysts’ cost estimate of desired educational resources and surveys of local teachers and school administrators.[§]

   It is widely accepted that it takes more resources to educate the average student in poverty than a middle-income or affluent child. But it is not clear how much more the average low-income Michigan student needs to succeed. Schools with demographically similar populations often get disparate academic results with similar funding levels.[**] Further, as leading education finance scholar Marguerite Roza has observed, unseen human factors can lead similar schools to spend funds in similar ways but produce significantly different achievement outcomes.[72]

   These complexities call for both matching funds to schools where they are served and giving school operators maximum flexibility to help address individual student needs. With school-level spending and results more clearly reported, it will be easier to set and adjust at-risk funding weights properly, informed by additional data. The starting point for the funding weight should be no lower than the 11.5% standard currently used in the school aid law.[73]

6. Guarantee students with disabilities options for special education services. Michigan leaders ought to break the intermediate school district grip on local special education program dollars. That tight grip often prevents students with disabilities from accessing resources outside the area where they live. Under current law, a student can receive special education services in another ISD if both the district of residence and the enrolling district agree on a cost-sharing plan.[74] The intermediate district’s control of dollars also may limit a student’s ability to access certain schools, often public charter schools, within its regional boundaries.

   Instead, the state should guarantee consistent shares of local, state and federal dollars follow students with disabilities to help fund needed services and programming, regardless of where they live. Those dollars should reach any chosen district or charter school within or beyond the ISD. One legislative proposal would require an ISD to spend a per-pupil share of its local, state and federal funds with another ISD where one of its resident students is enrolled, if the two agencies cannot otherwise come to a funding agreement.[††]

   A more sustainable solution, in the spirit of the original Proposal A, would shift the burden for financing special education services from local agencies to a statewide formula. While preserving other sources of special education revenue, state policymakers should adjust the current approach as follows:

   • Cap the ISD special education millage. A nearly tenfold gap exists between the highest rate (6.265 mills) and lowest rate (0.6371 mills) in the state.[75] Effective on a near future date, lawmakers should cap the rate at or about 2.4 mills, roughly the median among ISDs. To help ensure that the effects are revenue-neutral, the change should be compensated by a proportional increase in the State Education Tax, which currently assesses most properties at 6 mills.[76]
   • Repurpose ISD equalization categorical spending to student formula funds allocated on a per-pupil basis. While the first step would lower the ceiling on locally generated special education revenue, the Legislature should simultaneously raise the funding floor. New dollars generated should top off local millage revenues based on the enrollment of disabled students.[‡‡] The state should establish multiple weights to fund special education pupils, with higher weights to underwrite the needs of those with more severe diagnoses. A similar approach is already used in 21 different states.[77]

   The combined effect of these changes would be to balance the diverse needs of individual special-needs students with the disproportionate power of intermediate school districts. ISDs would have more incentive to create and fund programming that serves students both within and beyond their boundaries.

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[*] Michigan could follow a model set up by U.S. Secretary of Education Betsy DeVos to incentivize funding that bypasses district offices and puts more discretionary money into the hands of local school leaders. See Marguerite Roza, “DeVos Proposed $50 Million for Districts to Decentralize Federal Money, to Put Schools in the Driver’s Seat. It’s a Smart Idea” (The 74, March 27, 2019), https://perma.cc/8345-EAVS; Aaron Garth Smith, “Why We Should Send Education Dollars Directly to Schools” (The Hill, Oct. 29, 2019), https://perma.cc/JPU9-AW9F; Andrew Ujifusa, “Betsy DeVos Announces Aid to Help Create 'Student-Centered' Funding Systems” (Education Week, May 12, 2020), https://perma.cc/4AQA-ANZK.

[†] Direct certification means that local education officials make students whose families qualify for certain other federal aid programs automatically eligible for subsidized school meals, by matching student enrollment information with data from other government agencies. See “MSDS Direct Certification Report (Center for Educational Performance and Information, 2022), https://perma.cc/7882-NFC6. The rate of 130% of federal poverty level corresponds with current guidelines for federal free (not reduced) lunch eligibility.

[‡] This would not differ greatly from Michigan’s current approach to measuring student poverty. See “Section 31a At-Risk” (Michigan Department of Education, 2022), https://perma.cc/7TE4-TRKA.

[§] "Costing Out the Resources Needed to Meet Michigan’s Standards and Requirements," (Augenblick, Palaich and Associates; Picus, Odden and Associates Jan. 12, 2018), 221-223, https://perma.cc/54UY-33N2. Analysts use federally subsidized lunch eligibility as a proxy for poverty. For descriptions of the Evidence-Based and Professional Judgment approaches used for costing out, see “School Finance Research Project Study: Explanation of Methodologies” (School Finance Research Collaborative, 2022), https://perma.cc/D6WR-D6F6.

[**] Wide variations can be seen in the performance of Michigan schools with similar rates of students who are eligible for free lunch assistance, as measured in the Mackinac Center’s Context and Performance Report Cards, available here: https://www.mackinac.org/depts/epi/performance.aspx.

[††] These are Michigan Senate Bills 410 and 411 of 2021. For more information, see Kathryn Summers, “Special Education Millage” (Michigan Senate Fiscal Agency, June 8, 2021), https://perma.cc/W2WA-ZCUM.

[‡‡] This approach represents a more ambitious version of a proposal to increase the section 56 equity categorical recommended in the “Special Education Funding Subcommittee Report” (State of Michigan, November 2017), 9, https://perma.cc /S4B4-9NUS.