On Nov. 7, 2006, Michigan voters will be asked to consider a
proposed new law that would, if passed, require annual state spending to
increase at no less than the inflation rate for the following state budget
areas: public school districts and charter schools; certain specific budget
items in state spending on public school districts and charter schools; and
state universities and community colleges. The proposal also contains new
requirements for state payments to districts with declining enrollment and
places liability for school employee pension cost increases on state government,
rather than school districts. The proposed new law will appear as "Proposal 5"on
the ballot, and its mandates would take effect in the 2006-2007 school year.
Past Spending on Public School Districts
During the recessionary period from 2001 to 2005, Michigan
state government’s spending on primary and secondary education did not keep pace with inflation.* Nevertheless, it did increase slightly during this period.
Moreover, state school aid fund spending in 2005 was more than 40 percent higher than in 1995 — about $1 billion above the 27 percent total inflationary growth for that period. State school aid spending easily remained the single largest expenditure of state government.
Michigan is still one of the nation’s leaders in school
spending. According to the federal government’s National Center for Education
Statistics, Michigan’s per-pupil spending in 2003 was ninth in the nation, and
according to the National Education Association, the average salary for Michigan
instructional staff was eighth. In 2004, the average compensation for
instructional staff at Michigan public schools was more than $54,000. If one of
Proposal 5’s main goals is to ensure high and rising primary and secondary
school spending over the long term, it would seem that goal has already been
Past Spending on State Universities and Community Colleges
State appropriations for community colleges and universities
were nearly 37 percent higher in 2001 than in 1995, compared to 15 percent total inflationary growth. State higher education expenditures dropped nearly
10 percent between 2001 and 2005. Yet Michigan’s public universities and
community colleges were able to raise money from tuition and other sources;
total expenditures from the general funds of the four-year universities
increased every year from 2001 through 2005. Spending per capita by Michigan’s
public institutions of higher education was ninth in the nation in 2002 — nearly 33 percent above the national average.
It is also worth noting that even as the growth in state
appropriations for universities exceeded the inflation rate between 1995 and
2001, the average undergraduate in-state tuition at Michigan universities rose
more than 28 percent — an increase of nearly twice the inflation rate. Thus,
while Proposal 5 might ameliorate tuition hikes, it is unlikely to solve the
problem of rapidly rising tuition.
Pension and Retirement Health Care Costs
The pension and retirement health care provision of
Proposal 5 involves a state-administered retirement plan primarily for employees
of Michigan public school districts. A recent, credible estimate suggests that
the cost of the retirement plan will increase more than 94 percent by 2016. In
contrast, the cost increase from 1996 to 2006 was about 50 percent. The total
retirement fund contribution increases from 2004 through 2006 cost the average
school district an additional $178 per pupil, exceeding the state’s per-pupil
foundation allowance increase during the period by $3 per pupil.
The major factors driving the hike in retirement costs are a
growing imbalance in the number of workers supporting retirees, the need to
recover recent stock market losses, and a substantial projected payment increase for the retirement health care benefit. While the cost of the health insurance benefit represented less than 45 percent of retirement fund contributions in 2005, it is projected to reach more than 62 percent in 2020.
The proposal does not change the retirement fund cost
structure, even though the substantial majority of private-sector employers do
not offer any retirement health care benefit at all. Instead, Proposal 5 would
shift nearly all of the future retirement fund cost increases from the budgets
of school districts to the state. If Proposal 5 were to pass, the state general
fund budget would assume responsibility for $386.3 million of an estimated
$1.9 billion total retirement fund cost in fiscal 2007 alone. This
$386.3 million figure is in fact larger than 16 of the 26 state departmental
budgets from fiscal 2006.
By putting the financial pressure of rising retirement
contributions on state government, Proposal 5 would make local budgeting easier,
but would also subsidize school districts’ personnel budgets by reducing the
local cost of payroll. This subsidy could lead districts to make otherwise
unsustainable staffing decisions and drive overall retirement liabilities even
Likely Budget Effects of Proposal 5
State lawmakers had the discretion to cut some programs more
than others during the current recession. Proposal 5 would leave lawmakers with
less flexibility during future declines in state revenue growth. State spending
on education at all levels represents 54 percent of the state budget that
depends on state revenues. Proposal 5 would mandate that this spending rise with
inflation regardless of the funds available for the remaining 46 percent.
Proposal 5 would provide lawmakers an incentive to cut state
spending on certain primary and secondary education programs, such as adult and
vocational education, by an estimated $141.7 million in fiscal 2007. Indeed, the Michigan Senate Fiscal Agency has assumed such cuts would take place, and these cuts lower the first-year cost estimate for Proposal 5 to $566.6 million.
Without the cuts, the estimated first-year cost would reach $708.3 million.
Assuming no increase in taxes, legislators could meet Proposal 5’s 2007 spending requirements in one of two ways: by making 9.8 percent cuts to noneducation general fund spending, such as human services, corrections or veterans services; or by making 7.9 percent cuts to this spending and $141.7 million in cuts to the "unprotected" primary and secondary education spending noted above.
Tax increases could also be used to raise some or all of the
first-year spending required by Proposal 5. In the case of the income tax,
$708.3 million would represent about 11.1 percent of current revenue, while
$566.6 million would represent 8.9 percent. Raising taxes on Michigan
households, however, would decrease their disposable income and raise the
effective cost of such things as higher education.
Colorado’s experience with a similar state education spending
mandate suggests that tax increases, spending cuts to noneducation programs, or
both are reasonably likely to occur if Proposal 5 is passed.
Proposal 5’s Potential Effects on Education and the Economy
There is no apparent correlation between Michigan’s high
spending for education on the one hand and brighter kids and more jobs on the
other. Despite the relatively high level of Michigan’s spending on education,
Michigan students have posted mediocre standardized test scores, and Michigan’s
economy is now one of the nation’s worst. Economist Richard Vedder recently
found no association between state spending on higher education and economic
Proposal 5 could produce unintended educational effects. Granting additional
money to districts with declining enrollment could insulate poorly performing
districts from the financial consequences of their failures. This reduced
penalty, along with the proposal’s spending increases regardless of academic
performance, could lower poorly performing districts’ incentives to reform.