Editor's note: The content of this document was last updated Aug. 28, 1995.
Introduction
On December 24, 1993, the first wave of nearly a year of Michigan school reforms was hammered out in the state capitol of Lansing. It included a new charter school initiative and an opportunity for the citizens of Michigan to vote on changing the way public schools are funded. The result of an intensive, often partisan debate touched off last summer when the state legislature and Governor John M. Engler agreed to eliminate property tax funding for Michigan's 3,286 K-12 public schools, the Christmas Eve compromise signaled that education would never again be the same in the Wolverine State.
On March 15, 1994, the voters turned out in large numbers to overwhelmingly approve what The New York Times dubbed a "revolution in financing its public schools." In the process, they swapped most local property taxes for higher taxes at the state level and implemented strong Constitutional limitations on the future growth of taxes and school spending at both the local and state levels.
A month later, the Governor pushed through sweeping changes in collective bargaining rules for public school teachers. Those changes will give broad new authority for school boards to manage the schools by dramatically reducing the clout of teacher unions.
Now other states are asking, "Has Michigan given us a model to emulate?" That's a particularly burning question in the 28 states facing lawsuits over the wide disparities in school spending created by property taxes. In most of the 50 states, issues of teacher strikes and what topics must be dealt with at the bargaining table have vexed legislators for years. Michigan tackled them head-on.
No other state has, in such a short period of time, done as much as Michigan on the two major fronts of the education wars--finance and quality reform. A detailed review of these remarkable changes may be of great instructive value to legislators across the country.
Michigan Statistics
The impetus for doing something about school finance in Michigan arose from widespread public anger over burdensome property taxes. Governors and legislators of both parties over a twenty-year period tinkered with the system, proposing ballot initiatives and statutory adjustments--only to be rebuffed by partisan bickering or an untrusting electorate.
Governor Engler was elected in 1990 on a platform that called for a 20 percent reduction in property taxes. Unable to win approval in the legislature to implement that pledge, he went to the voters twice with ballot proposals--both of which proved unsuccessful in winning approval. The first, in November 1992, would have cut taxes by exempting 30 percent of every property parcel's assessed value from school operating taxes and capped assessment growth at the rate of inflation or 3 percent annually, whichever was less. The second proposal, in June 1993, would have rolled back property tax millage for schools from the statewide average of 35 mills to no more than 27 mills in any district and capped assessments at 5 percent.
Voters did not turn thumbs down on those proposals because they had changed their minds about property taxes being too high. Rather, complicated provisions made both proposals difficult for the general public to understand and susceptible to a flood of often deceptive advertising by opponents. Moreover, voter skepticism of politics and politicians runs deep in Michigan. Many people were unconvinced that the end result of either proposal would be lower taxes and more stable funding for better schools.
By 1993, Michigan's property tax burden had become one of the nation's highest. On a per capita basis, it was 3rd among the states, 30 percent above the national average, 23 percent above the average for the other Great Lakes states, and 25 percent above other industrial states. The argument that property taxes were driving people from their homes and businesses from the state was widely acknowledged.
The state's share of public school funding had been dwindling for years. By the 1991-92 school year, local government accounted for 59.9 percent of school revenues, the state 35.5 percent, with federal revenues accounting for 4.6 percent. The State Lottery, sold to the citizenry 20 years before as a new source of additional school funding--was regarded as the political equivalent of "bait and switch": as lottery proceeds flowed into education, the legislature cut general fund appropriations for the schools almost dollar-for-dollar.
The average operating expenditure per pupil was $4,607 in Michigan in the 1991-92 school year. The lowest-spending district in the state spent $2,815 and the highest spent $9,040. The average teacher salary was nearly the highest in the U.S., at $41,490.
In the period between 1980 and 1992, statewide average school spending increased at an average annual rate of 8 percent--twice the rate of inflation. There was no appreciable change in student performance on standardized tests in those years.
At the same time, the state's high school graduation rate was barely above 70 percent and there were 15 school districts where more than 75 percent of the incoming seniors could not pass a 10th grade test and earn a state-endorsed diploma. In almost half of the state's 561 districts, the same was true for more than 50 percent of incoming seniors. Despite the investment of billions of dollars on K-12 education and annual increases that routinely (and often significantly) outpaced inflation, SAT scores were flat for more than a decade.
Public attitudes increasingly revealed in Michigan what seemed to be holding true for the nation as a whole--namely, resentment that we were spending more and more and getting less and less for our money.
Clearly, frustration levels with the entire political process of taxing and spending for public education were reaching the boiling point in mid-1993. Politicians were in a mood to break the logjam with some kind of dramatic move.
The Bombshell of '93
Fresh from yet another voter rejection of a school finance question in June, Michigan lawmakers in July 1993 began a new round of debate. On July 19, Senator Debbie Stabenow (D-Lansing) offered a surprise amendment to abolish all property taxes for schools without any plan for replacing lost revenues. Whether her proposal was a sincere gesture, pre-election posturing (Stabenow was a declared candidate for Governor at the time), or a political miscalculation is still a subject of disagreement around the state. In any event, Governor Engler embraced the idea and within 24 hours the deal was done. Michigan would have no property taxes for schools come mid-1994-- a whopping $6 billion tax cut.
The clock was now ticking. The Governor and legislators in both parties understood that if nothing else happened, schools would lose most of their funding in a matter of months. The hole (or at least a very big part of it) would have to be plugged, and almost everyone agreed that it had to be plugged by the end of the year if schools were to start 1994 with some measure of assurance and predictability. Michigan's Great Education Debate was underway.
From the start, Governor Engler insisted that the end of property tax funding for schools should be the beginning of fresh thinking about all aspects of public education. Indeed, he put quality issues ahead of finance issues. No private business decides on price before it determines what its product is, he argued, and neither should government.
The Governor proposed the most far-reaching set of quality reforms ever offered by a sitting governor--inter-district school choice, abolition of teacher tenure, relaxation of certification rules, and the most progressive charter school initiative of any state, to cite a few. Declaring before a joint session of the legislature that "Public education is a monopoly and monopolies don't work!" he proposed a regime of choice, competition and accountability that would empower parents, teachers, administrators and educational entrepreneurs to break free of a failing, bureaucratic system.
School reformers were disappointed, however, that when the Christmas Eve compromise materialized, finance changes emerged as far more significant. Most of the Governor's quality initiatives had failed by narrow margins in the legislature, or had been watered down substantially. Cross-district choice didn't make the cut. Measures to rein in the power of teacher unions were mostly gutted. Reforms of tenure and certification were minimal.
The one major quality reform that survived, though in somewhat diluted form, was the Governor's charter school initiative. Michigan became the first state to adopt a law that put no upper limit on the number of charter schools that could be created. These "borderless" schools-of-choice can be created anywhere in the state by any local school board, community college, or state university. Existing public schools may opt into charter status, freeing them from certain state regulations. The Governor hopes to see 200 new charter schools open their doors by the fall of 1995, each one receiving the same per-pupil allocation of state funds as that of the district in which they are located.
Of the fewer than 10 charter schools slated to open in the fall of 1994, the Noah Webster Academy has drawn the most attention. A particularly innovative one, it will link home schools across the state to a team of teachers at a single site in Ionia County in southwestern Michigan. Backed by the state's guaranteed "foundation" grant, each pupil will receive a computer, plus all the necessary software, laser printer, modem, and other equipment they will need to communicate with the teachers. Organizers of the school say that the curriculum, though necessarily refraining from advancing any particular religion, will have a back-to-basics emphasis and will stress traditional values. The parents of nearly 1,000 Michigan children, as of mid-summer 1994, had applied to enroll their sons and daughters in this one new school alone.
There are, however, dangers in the charter school movement that true reformers must recognize. One is complacency--the attitude that these encouraging half-way measures are a fulfilling substitute for a genuine free market in education. Another danger is that, along the way, some private schools--tempted to sacrifice some of their independence by the prospect of public dollars--may opt into a charter public school arrangement. Indeed, all five of the new charter schools approved by Central Michigan University in August 1994 were existing private schools.
Other, relatively minor reforms--some helpful, others not--were set in motion as well. A mandatory core curriculum, the details of which await further action in Lansing, is to be implemented in the 1997-98 school year. By the 1999-2000 school year, districts must require students to attend 1,000 hours--a 20 percent increase from the current 900 hours a year. Parent-teacher councils are to be set up to assist in school decision-making. Special help, such as state grants for districts with high percentages of failing or at-risk students and extra money for professional development training, is to be provided. Selected "master teachers" will be offered a one-year sabbatical. High school students will soon be able to take an unlimited number of classes at community colleges or universities in subjects not offered at their local schools, and receive credit for them from their districts.
Overall, a start was made toward breaking the education monopoly, but efforts to inject greater choice, competition and accountability into the system will surely be revived at a later date. Governor Engler and sympathetic legislators, frustrated that quality reforms did not go as far as they had hoped, have promised as much. For the moment, school finance was center stage in Michigan's Great Education Debate.
The Voters Make A Choice
The Christmas Eve compromise brought forth two radically different methods of refinancing Michigan schools. Republicans were the principal backers of one--the Governor, as its chief architect, in particular--and the Democrats were primarily behind the other, so the ensuing debate incorporated the inevitable partisan overtones. The date for voters to make a critical decision was March 15.
The electorate of Michigan was asked to affirm or reject the Republican plan, known as "Proposal A." Voting "No" this time, however, was not the same as in past ballot questions. The status quo would not be restored if "A" was defeated. Instead, the Democrats' statutory, or so-called "back-up" plan would automatically take effect. Either plan would restore all the revenues cut by the earlier action of the legislature.
Both plans offered a mix of tax hikes, cuts, and shifts--the details to follow--but the central question which dominated the public debate was, "Which impacts a state's economy with the least negative effects, the sales tax or the income tax?"On this issue, the two plans were poles apart: Proposal A would raise the state sales tax and cut the personal income tax. The back-up plan would leave the sales tax unchanged and boost the income tax sharply. Because of an existing state revenue limit in the Michigan Constitution, both plans called for the restoration of some local property taxes, though under Proposal A they would be half as large as under the alternative, and constitutionally limited.
The U.S. Advisory Commission on Intergovernmental Relations (ACIR) calculates relative "tax capacity" and "tax effort" for every state. Tax capacity is an estimate of the amount of revenue a state would collect if it utilized a "representative" tax system comprised of national average tax rates applied to commonly used tax bases. A state's tax effort is the ratio of its actual revenues to its estimated capacity. According to ACIR data for 1991, Michigan's sales tax capacity ranked 24th, at 3 percent below the national average, while the state's sales tax effort ranked 43rd, at a substantial 31 percent below the national average. Michigan's personal income tax capacity, meanwhile, ranked 18th, at just 1 percent below the national average, while its personal income tax effort ranked 27th, at 4 percent above the national average.
Of additional importance for the state's regional competitiveness, a 6 percent sales tax would still place Michigan's below the average of state sales taxes in the region. At least in relation to other states, Michigan seemed to have less "room" to raise its income tax than it did to raise its sales tax. This one issue, more than any other, framed the debate in which voters made up their minds. By a margin of better than 69-31 percent, they approved Proposal A. As a result of that vote, Michigan's tax structure for schools will shift from a heavy reliance upon local property taxes to a mix of mostly consumption taxes imposed at the state level.
The state's sales tax will rise from 4 to 6 percent and will be extended to include interstate phone calls for the first time; the cigarette tax will go from 25 cents to 75 cents per pack; the tax on real estate at the time of sale will rise from a negligible fee to 0.75 percent of market value; and Michigan's flat rate income tax will be cut from 4.6 to 4.4 percent. Property taxes are slashed from a statewide average of 35 mills on all taxable property to a base of 6 mills on homesteads and 24 mills on second-homes and businesses. Michigan taxpayers, on net balance, will realize a tax cut of at least half a billion dollars this year, and close to $200 million next year.
For the first time, the state will guarantee schools a "foundation grant" of at least $4,200 per child, substantially above the $3,000 now spent in Michigan's lowest-spending districts. The highest-spending districts (the 35 that spend more than $6,500per child) are permitted a limited amount of additional, voter-approved property tax millage to keep their current spending levels intact. Spending disparities will still exist, but less than before. The gap will probably close sufficiently to inoculate the state from court challenges on the equity issue that have plagued other states.
Proposal A dedicated 100 percent of the revenue from the 2-cent sales tax increase, as well as 60 percent of the revenue from the old 4-cent sales tax to schools. It also dedicated 14.4 percent of state income taxes to schools and guaranteed in the state Constitution that school funding could not fall below the total for the 1994-95 school year.
If Proposal A had failed, the "back-up" plan would have raised the state's Single Business Tax (an onerous value-added tax that Governor Engler has sought to reduce), boosted the income tax to a flat 6 percent, and cut property taxes to 12 mills on homesteads (twice that of the 6 mills in Proposal A) and 24 mills on other property. It would also have upped the cigarette tax, but only by 15 cents.
The lessons from these developments in Michigan school finance are numerous, but three in particular may be most instructive to other states:
Sales taxes are more palatable and less destructive than income taxes.
Proposal A succeeded in large measure because the public perceived it as a choice between these two kinds of taxes. A common sentiment was, "I'd rather pay a tax on some of what I buy than a tax on everything I earn." The case was bolstered by the fact that Michigan's 4 percent sales tax was 30 percent below the national average and raising it to 6 percent would place it very close to both the national and regional average. Coupled with A's slight reduction in the income tax and the huge cut in property taxes, the higher sales tax in a state visited by hordes of out-of-state tourists was not a very tough sell. The Governor also frequently and persuasively argued, as most economists do, that high income taxes are a direct assault on investment, business expansion, and job creation.
By taxing both labor income (wages and salaries) and investment income (interest on savings, dividends, etc.), personal income taxes subject savers to double taxation--forcing them to pay taxes first on their salary and then again on the investment income earned by the portion of their salary which they save. This double taxation makes saving less financially rewarding, a fact economist Dean Stansel made plain in a February 1994 paper for the Mackinac Center for Public Policy.
Acting as rational economic agents, individuals respond to the disincentives of income taxes by saving less of their income than they would in the absence of an income tax. This artificially low level of saving causes the capital stock to be smaller than it would otherwise be, leading to less investment, lower productivity growth, and reduced incomes. Income taxes place a major, direct burden on economic growth.
Consumption taxes, on the other hand, do not directly punish saving. Since a given level of income can only be consumed once, using consumption as the tax base avoids the problem of double taxation present with an income tax. Given the choice between a higher income tax and a higher sales tax, the sales tax wins hands down with respect to minimizing the harm to economic growth.
Any tax shift should be accompanied by tax limitation.
Unlike the unpopular back-up plan, Proposal A incorporates much-needed taxpayer protections. For instance: annual increases in property assessments for tax purposes are capped at 5 percent or inflation, whichever is less, on each individual parcel; and a vote of three-quarters of both houses of the legislature is required before Lansing can raise the base rates of property taxes in the future.
Moving to centralize school funding at the state level is, by itself, fraught with dangers. No evidence exists suggesting that school performance improves the more distant the funding source. States like New Hampshire, which rely almost entirely on local funding of schools and receive very little from the state, consistently show superior outcomes in the classroom and higher public support for what schools are doing. That's primarily because of the old adage, "He who pays the piper calls the tune."
Less involvement by state government means more local control by the very people who are most involved with education in the first place--teachers, principals, and parents. Less state involvement almost always means less bureaucracy and politics, lower costs, more freedom for innovation, fewer schemes from professional "educrats" in state capitols to "homogenize" and mold young minds. Teacher unions would inevitably find it more difficult to win greater spending from hundreds of autonomous local school boards than from a limited number of state legislators in a centralized funding environment.
By itself, Proposal A would have brought with it all of these dangers. What saves Proposal A from that prospect is the so-called "Headlee Amendment" to the Michigan Constitution, approved by the voters in 1978. That amendment establishes a ceiling on state revenue--from all tax sources--of 9.49 percent of personal income. Proposal A pushes state revenue right up to that ceiling, which means that Governor Engler and the Republicans have put in place a permanent and powerful restraint on the growth of government in Michigan. If the teacher unions come to Lansing now and demand more school spending, even sympathetic lawmakers will have to say, "We can't legally do that unless we cut spending somewhere else."
Furthermore, whatever threat to local control of schools that may exist in the new regime can be eased if the state relaxes its regulations (including those over teacher tenure and certification) and permits the "foundation grant" to be portable across school district lines according to the choices of parents. For many school reformers, those are the next Michigan battlegrounds.
In any event, state legislatures which seek to shift the funding sources of public schools would do well to adopt tough tax, revenue, and/or spending limitations to protect taxpayers and insulate themselves from public cynicism that might sink any real change in the right direction.
The power of state teacher unions is not invincible.
Though the powerful Michigan Education Association (MEA)--by far the state's largest teacher union--and its allies in the legislature held most of the Governor's education quality reforms at bay last December, it lost the public relations war and a major portion of the finance reform battle. The MEA is now widely perceived as a self-serving, obstructionist force that uses its excessive political muscle to thwart needed change. Its traditionally reactionary, pro-status quo sympathies led it to spend a small fortune against Proposal A and on behalf of the income tax-laden back-up plan, only to see 70 percent of the voters endorse Proposal A. Opening the public education system to a statewide, full-fledged, fundamental debate has irrevocably shaken the status quo and set the state on a path toward a more market-oriented, parental choice-driven system in the future which not even the MEA can stop. In fact, events just one month after the passage of Proposal A prove this point.
Engler Moves to Restore Balance Between Unions and Management
Michigan, at first glance, may seem like a most unlikely state to exert strong discipline on its teacher unions. The 127,000-member Michigan Education Association is Lansing's biggest lobby--contributing more than three times the funds to political campaigns in the last legislative elections than any other special interest. From its ranks have come much of the brains, resources, and leadership of the National Education Association.
Moreover, Michigan has traditionally been a strong union state. The MEA could usually count on the United Autoworkers and other powerful unions to forge alliances and thwart any challenge to collective bargaining privileges won in previous legislative battles. The MEA and its smaller rival, the Michigan Federation of Teachers, staged illegal strikes with impunity and bullied school districts into granting some of the highest teacher salaries and per pupil spending in the country.
For years, neither Republican nor Democratic administrations mustered the political courage to restore a proper balance between those who manage the schools and those who work in them. That is, until this year.
With new limits in place on property tax revenues for schools and tougher competition for scarce state dollars for all public spending, it was apparent that cost containment was suddenly of enormous importance. Schools would have to do a better job of controlling their spending, because no longer could they expect non-stop increases in tax revenues. The vacancy of two Democratic seats in the Michigan House-occurring because the lawmakers who had held them were elected mayors of Pontiac and Lansing--gave Republicans the edge in both houses for the first time in recent memory.
In April, on almost straight party-line votes, the Michigan Legislature passed and Governor Engler signed into law sweeping changes in collective bargaining rules for teachers. The new rules take effect on April 1, 1995, and include the following:
A longstanding ban on teacher strikes is to be enforced for the first time. A fine of $5,000 per day will be levied on striking unions, and teachers will be docked one day's pay for every day they walk the picket line. If school boards lock out the teachers, the district will be fined $5,000 a day and board members will be docked $250 a day. To protect taxpayers from subsidizing illegal activity, neither unions nor school boards will be permitted to compensate themselves for strike fines in any bargaining agreement.
Putting Michigan-style restrictions on the power of teachers in other states to strike will raise this inevitable objection: Strikes in the private sector are not banned, so why fine teachers in the public sector when they do the same thing? The crucial difference, of course, is that customers are not forced to pay for the product when a private factory is shut down by a strike. When public employees close down a school, however, taxpayers keep paying for education their children aren't getting. Moreover, workers who strike in the private sector don't get paid for the time they were off the job; in effect, striking public school teachers in the past always knew they would end up compensated for the whole year, regardless of the time they had spent on strike.
If contract talks reach an impasse after 30 days, a school board can impose its last, best offer as final settlement and hire permanent replacements for teachers who choose not to accept that offer. Furthermore, an agreement negotiated by a union local and supported by the local members cannot be vetoed by officials higher up in the union, who have done so in the past in an effort to protect high cost settlements worked out by other, more militant locals.
A range of issues will no longer be topics for mandatory collective bargaining: the length of the school day and the start of the school year, schools of choice, charter schools, the installation of new technology and the use of volunteers in the classroom, and privatization of noninstructional services like food, custodial work, and busing. Districts won't be bullied into purchasing expensive teacher health insurance from the MEA's own subsidiary, known as MESSA; instead, school boards will now have new abilities to put health insurance up for competitive bid in the open marketplace. The unions will no longer be able to prevent action on these matters as part of any settlement with management.
For good measure, the Legislature added an important campaign finance reform that has implications for teachers. Teacher unions will no longer be able to automatically deduct funds for politics from their membership's paychecks without each individual's specific, written approval. That reform will liberate many teachers from supporting candidates and causes their union leadership likes but they don't.
The combined effect of these changes will be to empower management to do its job, restoring the ability of parents and the school boards they elect to determine what transpires in the schools and to contain soaring costs. One of the most positive ramifications of these reforms is to spur what some are calling a "privatization revolution" in Michigan schools.
(As a result of a last-minute motion filed by the Michigan Education Association, the Michigan Court of Appeals on March 31, 1995 granted a stay on all of Public Act 112 and minor parts of Public Act 117, pending further order of the court. PA 112 dealt with the anti-strike provisions and the collective bargaining changes cited above, while PA 117 contained the campaign finance reforms also cited above. The Governor's office and most observers expected that ultimately, most if not all of these measures will be upheld and will take effect. On August 3, 1995, the Michigan Court of Appeals upheld a PA 112.)
The Promise of Privatization
In the discussion of school reform anywhere, saving money deserves as much attention as collecting and spending it. If public schools were more careful about what they spend for noninstructional support services, they would have more resources available for actual education in the classroom.
Custodial services, transportation, and food services comprise the lion's share of noninstructional expenses in most schools, but rarely do school boards or administrators bother to "shop around" for the lowest-cost provider of those activities. Historically, most school districts have conducted their business this way: spend more than necessary to get the job done with their own workforce, never ascertain what the actual costs are or compare them with private sector service providers, and complain without end about never having enough money for the classroom.
A survey conducted by the Mackinac Center for Public Policy caught widespread public attention in September 1993, just after Michigan's Great Education Debate began. It looked at seven school districts in the Lansing area and found that annual costs for custodial services were as much as five times higher than those paid by private companies for comparable work.
The East Lansing school district, the survey found, was the highest in custodial costs--annually paying about $2.34 per square foot to clean its 11 buildings with its own unionized work force. The retailer Sears was paying about 85 cents per square foot for its 20 stores in the area, while the Meijer food store chain was doing the job for just 47 cents. The Mackinac Center calculated that if East Lansing schools paid the same rate as Sears, the savings would translate into more than a million dollars--enough to buy 30,000 new textbooks or 500 new computers, or hire 20 new teachers.
Several newspapers in the state applied the Center's analysis to schools in their areas and found similar results. That has helped give new impetus to school privatization--not only privatization of support services, but also of the operation and management of the schools themselves.
Conclusion
Thanks to the sweeping changes enacted in the past few months, Michigan parents and school boards are in the process of taking back their schools. Even if additional, necessary reforms are not forthcoming, what's already been done means that management will manage, and teachers will teach, in ways they haven't been able to for a long, long time. Unions will no longer intimidate their own membership into compliance with the hierarchy's political agenda. The door will be wide open for implementation of new strategies that make use of new schools, motivated volunteers, state-of-the-art technology, and private sector-driven cost control.
Michigan's tax structure, even with the recent changes, imposes less of an overall burden on enterprise than it did barely four years ago. Its mix of taxes is more balanced, so that the state's competitiveness with its sister states is improved.
All in all, that's not a bad record for just a few month's work.
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Lawrence W. Reed is president of 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.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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