Analysis of Proposal 5

tuition growth

Assessing Previous Levels of Education Funding

Primary and Secondary Education

As noted above, supporters of Proposal 5 have cited recent declines in education funding. A comment on the K-16 Coalition Web site notes, "For the last three years, K-12 school districts saw no increase in State Aid. ..."[17]

State government spending on primary and secondary education has indeed remained flat during most of Michigan’s recession, a period during which general fund revenues declined substantially in both real and nominal terms. This lack of funding growth did contribute to fiscal challenges for school districts.

tax revenues

Nevertheless, the recession’s effect on state funding for primary and secondary education has not been as large as it has been for most other state programs. Fiscal 2005 general fund spending for many general fund-reliant programs, including economic development programs and the department of civil rights, was down significantly from 2001 levels.

In contrast, school aid fund spending in fiscal 2005 was about the same as — and in fact, slightly higher than — it was in 2001. As recently as fiscal 2002, the basic per-pupil foundation allowance increased more than 8 percent from the year before,[18] and another per-pupil increase of about $200 has been budgeted for fiscal 2007.[19]

The relative advantage that primary and secondary spending had over other program budgets might seem unusual, given that primary and secondary education is the state’s single largest budget item and that small percentage cuts in this spending area would have yielded relatively large savings. These savings probably would have been welcome at a time of lower revenues, rising taxes and substantial state spending reductions. The Michigan Constitution, however, dedicates certain sales and property taxes to education. These tax revenues, which did not decline as rapidly as the revenues placed in the general fund, were spent on primary and secondary schooling during the years in question.

The more generous treatment of state primary and secondary spending helped ensure that Michigan’s per-capita spending on primary and secondary education would remain high relative to long-term inflation and relative to other states. As noted above in "Local School District Funding After Proposal A," aggregate annual state funding for local schools from fiscal 1995 to fiscal 2005 increased by more than 40 percent, compared to a total inflation rate of 27 percent.

Michigan is still one of the highest-spending states on public primary and secondary education. According to the federal government’s National Center for Education Statistics, Michigan’s total per-pupil spending in 2003 was ninth in the nation,[20] and according to the National Education Association, the average salary for Michigan instructional staff was eighth.[21]

The American Legislative Exchange Council reports similar findings, writing that Michigan’s per-pupil spending in 2004 was ninth among the states and nearly 15 percent above the national average, while the average compensation for instructional staff at Michigan public schools that year was more than $54,000 — second-highest in the nation, and more than 25 percent above the national average.[22] The NEA, in contrast, estimated Michigan’s compensation for instructional staff to be the eighth-highest among the states, but also concluded that this compensation exceeded $54,000.[23] Michigan’s school spending ranked similarly in previous years.[24]

While state spending growth on primary and secondary education has slowed during the recent recession, school funding during the past decade has risen significantly above the rate of inflation, and this funding has remained high in comparison to other states. 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 met.

State Community Colleges and Universities

Michigan’s state community colleges and universities have had high spending rates compared to public higher education institutions in other states. As noted earlier, 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.[25]

State funding for community colleges and universities has changed more during the current recession than has state funding for primary and secondary education. State aid to community colleges and universities in fiscal 2005 was nearly 10 percent lower than in fiscal 2001.

Nonetheless, this cut was less than the nearly 11 percent decline in general fund revenues. Some other state programs, such as the state "strategic fund" (for "economic development"), were cut significantly more.[26]

It is perhaps unsurprising that the governor and the Legislature cut state aid to universities and community colleges, rather than school districts. Universities and community colleges have other sources of nonstate revenue, including tuition. It is clear in retrospect that these institutions were generally able to tap these other sources to compensate for the lower levels of state funding. Total expenditures from the general funds of the four-year universities increased every single year from 2001 thru 2005, even as aid to these schools from the state general fund was reduced.[27]

To help achieve this increased spending, the universities raised the average in-state undergraduate tuition rate during this period by nearly 38 percent, while total inflation for the same period was just above 10 percent.[28] In arguing for Proposal 5, the K-16 Coalition has pointed to this trend, observing that the reduction in state aid to colleges has led to an increase in college tuition.[29]

There appears to be some truth in this observation, but it is worth noting that large tuition hikes were common before the reductions in direct state aid. From 1995 through 2001, while state appropriations for universities increased faster than the rate of inflation, tuition did as well. Average in-state tuition at Michigan universities was more than 28 percent higher in 2001 than it had been in 1995 — an increase of nearly twice the inflation rate, which was a little more than 15 percent for the period.[30]

Thus, while Proposal 5 might ameliorate tuition hikes during years when state government revenue growth declines, the problem of rapidly rising tuition at state colleges and universities is unlikely to be solved even if Proposal 5 passes. Indeed, given the recent record of state aid and tuition, large annual tuition hikes seem likely to persist even if state government provides the accelerated rate of state aid growth that the governor and Legislature furnished from 1995 to 2001, when Michigan’s economy was strong.

Budget Effects

Had Proposal 5’s requirements been in effect in recent years, state spending for primary and secondary education would have had to increase in fiscal 2003, 2004 and 2005, rather than remain essentially constant. Proposal 5’s effect on spending for universities and community colleges would have been even larger. Rather than declining, higher education spending would have had to increase at the 10 percent inflation rate for that period, producing state spending in 2005 that was $233 million above 2001.[31]

Accommodating such budget increases for a major spending area like education would have demanded significant amounts of money. Finding these sums would have been even more difficult during the recession-induced decline in state tax revenue, which left 2005 general fund spending more than $1 billion below that of 2001. Programs that received large cuts might have received larger ones, or taxes might have been raised even further during the recession.

Without Proposal 5’s spending requirements, lawmakers had the discretion to cut some programs more than others, shielding some programs from the full impact of the revenue decline. For example, from 2001 to 2005, state spending on education at all levels did not drop as much as revenue for the general fund did. State spending for prisons was even slightly higher in 2005 than in 2001, while general fund money spent on the state police dropped by more than 24 percent.[32] (Note that much of this decline in state funding for the state police was offset by increased funds from other sources, such as federal monies.[33])

If Proposal 5 were to pass, state lawmakers would have much less discretion during any future decline in state revenue growth. Taken together, the Proposal 5 education spending areas are about 54 percent of state revenue from state sources. By mandating that public education spending rise with the rate of inflation, Proposal 5 would require increases for this 54 percent, regardless of the economic condition of the state and the funds available for the remaining 46 percent.[34] State lawmakers would find it hard to balance the budget (a constitutional requirement in Michigan) without raising taxes or making reductions in state spending for human services, corrections, veterans services or other state programs receiving general fund revenue.

Potential Reductions in Certain State Education Spending in Fiscal 2007 as a Result of Proposal 5

Some of the state programs that would likely face budget pressure are education programs that are not specifically protected by Proposal 5. As explained above in "Overview and Background of Proposal 5: Provisions," Proposal 5 requires at least an annual inflationary increase in global state education spending, as well as similar annual increases in a number of specific education spending areas, such as the primary and secondary school foundation allowance.

Certain primary and secondary education areas, however, are not required to increase at all and could freely decrease, as long as overall education spending rose at no less than the inflation rate (a list of these "unprotected" areas appears in Graphic 5). These unprotected education areas would in fact be at risk of losing state funding.

The reason involves the nature of the protected spending categories. It is possible, for instance, to meet Proposal 5’s inflationary mandate for total school aid spending without satisfying the proposal’s mandate for inflationary increases in the per-pupil foundation allowance. An inflationary increase in total per-pupil foundation allowance spending might not provide an inflationary increase in the foundation allowance itself if the number of students were to increase or if there were a net increase in the number of students at higher-spending schools. In this case, lawmakers would need more money to meet the proposal’s requirement for an inflationary increase in the per-pupil foundation allowance.

At this point, the presence of "protected" and "unprotected" education spending would produce a significant incentive for lawmakers to shift funds from unprotected areas to protected ones. Such shifts would not decrease overall education spending, and they would enable lawmakers in the first year to avoid raising taxes or cutting more noneducation areas in order to meet the inflationary increases required for the per-pupil education areas — such as the foundation allowance — specifically shielded by Proposal 5.

Status of Education Spending Areas
Under Proposal 5

“Protected”: Must Increase
No Less Than Inflation

Primary and Secondary Per-Pupil
Foundation Allowance

“At-Risk” Pupil Spending

Special Education Spending

Intermediate School District Operations Spending

“Unprotected”: No Requirement That Spending in
These Categorical Areas Increase (Partial List)

Adult Education

Bus Driver Safety Instruction and Bus Inspections

School Readiness Program (preschool programs for
four-year-olds who may be at risk of later failure)

Children of Incarcerated Parents

Math/Science Centers

School Breakfast Programs

Vocational Education

Hearing and Vision Screening

Engineering Michigan’s Future
(a middle school math initiative)

Juvenile Detention Facility Programs

Court-Placed Pupils

Adolescent Health Centers

Indeed, a recent budget memorandum by the Michigan Senate Fiscal Agency suggests that state government would in fact reduce spending in unprotected education areas in fiscal 2007, the first year in which the proposal would take effect. According to the memorandum, the mandatory general fund costs of Proposal 5 in the first year of implementation would exceed the recently enacted appropriations for the fiscal 2007 general fund budget by $566.6 million.[36] This working figure is one of the report’s major findings. In fact, $565 million has become the estimated cost of the proposal used in the official description of Proposal 5 on the November ballot.

Yet $566.6 million is not the full estimated cost of Proposal 5; rather, it is the cost calculated by the MSFA on the assumption that "unprotected" education spending areas would be tapped to provide $141.7 million in monies for Proposal 5’s protected education spending areas. This assumption is explained in a note in the analysis:

"Note: The Legislature’s increase in gross baseline funding for K-12, combined with the dollars available in ‘discretionary’ or ‘nonrequired’ categoricals appropriated in the Legislature’s K-12 budget would provide sufficient funding to pay for the specific funding ‘guarantees’ listed above provided that some of the existing School Aid discretionary categoricals were reduced from their Conference report FY 2006-07 level and new items in the Legislature’s budget were not funded. In other words, existing and new program funds (e.g., Adult Education, School Readiness, or Middle School Math grants) could be used to offset the costs found in the specific funding guarantees required in the initiative. However, if the K-16 costs were simply added on top of the Legislature’s School Aid budget, then the costs of funding all of the Legislature’s initiatives plus the K-16 requirements would be $141.7 million more than the $180.3 million noted above, or $322.0 million."[37] (Emphasis in original.)

The MSFA therefore effectively estimates Proposal 5’s total first-year cost, including the proposal’s MPSERS costs, to be $708.3 million. Since $708.3 million would place pressure on the state budget at a time when Michigan’s economy and state revenues continue to lag, it is not unreasonable to assume, as the MSFA does, that lawmakers would respond to Proposal 5 by shifting funds away from "unprotected" education areas. This assumption seems particularly valid given that lawmakers have made cuts to these programs in recent years. Even with the offsets, the remaining $566.6 million would represent a hike of 9 percent over the 2006 spending level — more than double the estimated rate of inflation from 2006 to 2007.

Of course, local districts could choose to use the extra money provided to them by Proposal 5 to replace any lost state monies for these specific programs. In addition, cuts to these "unprotected" state programs may well be justified; the Mackinac Center, for instance, has recommended reductions in state spending on school readiness grants.

Potential Reductions in Noneducation Spending as a Result of Proposal 5

If "unprotected" education spending were not tapped to increase funding for Proposal 5’s protected education areas, state lawmakers would be even more likely to consider cuts in noneducation spending. This approach would indeed shift state spending priorities even further toward education — Proposal 5’s ostensible purpose — but a first-year shift of up to $708.3 million dollars from noneducation spending would indeed be significant. (Tax increases to supplement revenue are considered below, in "Potential Tax Increases as a Result of Proposal 5.")

Such a shift would come almost exclusively from the state’s general fund monies. Some of these funds would not be available under Proposal 5: In fiscal 2007, about 21 percent of the general fund budget will be spent on community colleges and universities, a spending area that would have to increase at no less than the inflation rate.[38] In addition, nearly 1 percent of the general fund will be dedicated to the state’s contractual commitments, such as building rent and debt payment, some of which is education-related. (This spending cannot legally be decreased.)[39]

Thus, at least 22 percent of the general fund would not be available to buttress education spending. If lawmakers chose to raise the revenue required by Proposal 5 in fiscal 2007 through noneducation spending cuts, the remaining budgets receiving general fund money would bear the brunt. The $708.3 million needed to meet Proposal 5’s education spending requirements would represent 9.8 percent of the remaining noneducation general fund spending.[40] The $566.6 million that would be needed if "unprotected" education spending were also cut would represent 7.9 percent.[41]

Hence, assuming no increase in taxes, the governor and the Legislature could raise enough revenue to meet Proposal 5’s spending requirements in one of two ways: by making a 9.8 percent cut to noneducation general fund spending; or by making a 7.9 percent cut to noneducation general fund spending and $141.7 million in cuts to "unprotected" primary and secondary education spending. These cuts could be made to each program across the board. Alternatively, some budgets could be cut more than others, but most budget areas simply are not large enough to provide a significant percentage of the money needed. For instance, the combined general fund expenditures to maintain the office of the governor, the state Legislature and the state judiciary are less than half of the $566.6 million dollars that would be needed at minimum. The only noneducation general fund budgets large enough to receive the full brunt of such spending are corrections, human services and community health.

  • Corrections. Nearly the entire state prison budget is paid from the general fund. If all of the spending required for Proposal 5 came from the corrections budget, the $708.3 million in extra spending would represent 36 percent of fiscal 2007 total prison spending; $566.6 million would represent about 29 percent.

  • Human Services. The state’s primary poverty assistance program (welfare) relies on the general fund for one-quarter of its spending. If all of the spending required for Proposal 5 came from the human services budget, the $708.3 million in extra spending would be equivalent to 16 percent of the total fiscal 2007 human services budget; $566.6 million would represent almost 13 percent.

  • Community Health. This program delivers assistance to public hospitals; Medicaid funding for those with limited incomes; and assistance for those with mental illnesses and developmental disabilities. Community health is by far the largest program receiving general fund money, and the general fund provides one-quarter of all community health funding. If all of the spending required for Proposal 5 in fiscal 2007 came from community health, the $708.3 million in education spending would be equivalent to more than 6 percent of the total community health budget, or about 24 percent of community health’s general fund revenues. Similarly, $566.6 million would be equivalent to about 5 percent of the total community health budget, or 19 percent of community health’s general fund revenues.

Potential Tax Increases as a Result of Proposal 5

Substantial tax increases could also be used to raise some or all of the first-year spending required by Proposal 5. Just as this money represented a significant percentage of general spending, however, this sum could also represent a significant increase in taxes.

For instance, $708.3 million would represent more than 37 percent of the revenue currently raised by the Single Business Tax, the state’s main source of business income taxation; $566.6 million would represent more than 30 percent.[42] It is also probable that increases of 30 percent to 37 percent in the SBT would not be sufficient to increase SBT revenues by like amounts, particularly during an economic slump. An SBT tax increase could instead depress the state’s business activity, producing lower-than-expected tax revenues.

In addition, the Single Business Tax is high compared to the corporate income taxes imposed by other states. Michigan’s Single Business Tax was ranked the second-worst business tax in America by the nonpartisan Tax Foundation of Washington, D.C.[43] The Foundation warned in March 2006 that this tax could cause Michigan to lose jobs to neighboring Indiana.[44]

Given that the Legislature has recently approved an end to the SBT effective Dec. 31, 2007, lawmakers may consider raising revenue for Proposal 5’s mandates by increasing taxes paid directly by Michigan’s citizens. In the case of the sales tax, the estimated $708.3 million cost of Proposal 5 in fiscal 2007 would represent 8.4 percent of revenue, while $566.6 million would represent 6.7 percent.[45] The sales tax rate cannot be raised above its current level of 6 percent without amending the Michigan Constitution,** but sales tax revenue could be increased by broadening the base of the tax to include services and other industries whose sales are currently untaxed.

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.[46] As with the SBT, the sales and income taxes would probably have to be increased by more than these percentages to net the requisite revenue, since increases in tax rates can deter the activity subject to the tax and therefore net less revenue than a simple proportional estimate would suggest.

Raising these taxes would likely have economic costs, however. Raising taxes on Michigan households would decrease their disposable income at a time of relatively high state unemployment, while raising the effective cost of such things as higher education. This result would tend to counter one of the intended goals of Proposal 5, which, according to the K-16 Coalition, is to make college more affordable.[47]

** The state sales tax rate is limited by Article 9 Section 8 of the state constitution.

Colorado’s Experience With a Similar Law

In November 2000, Colorado voters narrowly ratified Amendment 23, which placed a state education spending mandate in the Colorado Constitution. The amendment required that during the 10 years following its approval, state spending on local public schools increase annually by no less than one percentage point above the rate of inflation. In subsequent years, the amendment required state spending on local public schools to increase at or above the inflation rate.

When Colorado taxpayers voted to approve Amendment 23, the state was experiencing annual state budget surpluses of nearly $1 billion. Under a requirement in the Colorado Constitution, these surpluses were being refunded to taxpayers as checks from the state government. A later study by the Colorado General Assembly summarized the budget environment of the day by stating, "It was widely believed that the state’s surplus had grown so large that an economic downturn would not eliminate it."[48]

Unfortunately, a recession began as the spending mandate was implemented, and the budget surpluses ended. By 2005, state tax collections were running more than $200 million less than they had been in 2001.

In the interim, Amendment 23’s spending mandate had pressed the state’s primary and secondary education spending up $719 million.[49] Faced with a nearly billion-dollar discrepancy between its previous revenues and its currently mandated costs, Colorado lawmakers made disproportionate cuts to popular state programs, such as capital construction and homestead property tax exemptions for seniors.[50] In 2005, with the state coming out of recession and budget experts again projecting surpluses, advocates of the programs that had been cut helped pass Referendum C, a spending mandate that will allow the state to keep all of the projected revenue surpluses for the next five years, rather than return them as taxpayer refunds.

Colorado’s experience suggests that tax increases, spending cuts to noneducation programs, or both are reasonably likely when state government responds to mandated education spending increases. True, Amendment 23’s "inflation-plus-one" requirement is more demanding than the inflationary increase required by Proposal 5. Still, the requirements of Michigan’s Proposal 5 would be broader than Colorado’s Amendment 23, since Proposal 5 includes additional specific education spending guarantees and requires inflationary spending increases for higher education, not just primary and secondary schooling.

The spending pressures faced by the Colorado General Assembly were probably no more severe than those that would be faced by the Michigan Legislature under Proposal 5. The reductions in spending for noneducation programs in Colorado during the state’s recession were substantial, so much so that these cuts were unpopular enough to convince a majority of Colorado voters to suspend future tax refunds in 2005. Referendum C’s five-year suspension of these refunds, in turn, amounted to a de facto total state tax increase estimated to exceed $4.88 billion, according to a recent press report.[51]

The Additional Liability of MPSERS

Most of the public attention to Proposal 5 has involved the provisions for inflationary education spending increases. The proposal’s provision for the MPSERS cost transfer deserves serious attention, however, because this provision would account for more than half of the projected cost increase in fiscal 2007 if Proposal 5 were approved.

Proposal 5’s MPSERS provision does not attempt to address MPSERS spending by changing its cost structure, though such changes have been recommended by others. For instance, the Citizens Research Council has suggested that MPSERS spending might be brought under control by lowering pension benefits for new hires, reducing MPSERS health care benefits for employees with less than 30 years vested in the system and requiring higher school employee payments for both pension and health care benefits. The Dec. 14, 2004, Detroit Free Press reported that Tom White, executive director of the Michigan Association of School Business Officers and chairman of the K-16 Coalition, has suggested that providing only a partial MPSERS health benefit to school employees with less than 30 years’ employment could help reduce future costs.[52]

Proposal 5, however, focuses on transferring MPSERS costs from district budgets to the state budget whenever they exceed a certain level (essentially 14.87 percent of payroll, if costs rise as predicted in the next two years). The MPSERS provision is written in a way that would prevent the state from counting its MPSERS payments towards the education spending mandated by Proposal 5.

Placing MPSERS outside the state’s education budget would have two effects on the state budget. First, it would raise the overall state liability for funding various aspects of state education programs. This liability would include not just paying an inflationary increase in education spending as defined under the proposal, but also paying certain MPSERS benefits in addition, since the MPSERS benefits could no longer be counted as part of the inflationary education spending increase mandated by the proposal. This added fiscal responsibility is one reason that the first-year cost of Proposal 5 would be estimated to reach $708.3 million if no funds are transferred from "unprotected" to "protected" education programs.

Second, the provision further reduces the amount of state noneducation spending that would remain discretionary under Proposal 5. This constraint would become significant whenever revenues were scarce and lawmakers chose to find money for Proposal 5’s spending mandates by reducing budgets for noneducation programs. Since MPSERS costs would effectively be protected "noneducation" spending, larger percentage cuts would be necessary to other noneducation programs (such as state police, welfare, environmental quality or community health) in order to raise the same amount of money.

The state’s MPSERS responsibility under Proposal 5 would amount to a significant portion of protected "noneducation" spending. 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 MPSERS cost in fiscal 2007. This MPSERS cost is projected to increase considerably, but $386.3 million is in fact larger than 16 of the 26 fiscal 2006 departmental budgets.[53] Proposal 5’s MPSERS provision would therefore significantly increase the stakes in state budget decisions during slowdowns in revenue, such as the current one.

Arguably, this pressure could increase state government’s incentives to reform MPSERS by adjusting its benefits to a more sustainable level. But it may also encourage distorted spending decisions by local school districts, as discussed below.

Potential Distortions in School District Staff Decisions

By putting the financial pressure of rising MPSERS costs on state government, Proposal 5’s MPSERS provision would relieve school districts of the need to manage rising MPSERS payments — an outcome that would make local budgeting easier, but would subsidize school districts’ personnel budgets by reducing the local cost of payroll. This subsidy in turn could lead districts to retain or hire staff that the districts could not otherwise afford.

Some may view such subsidies as inherently good, since they can result in more school personnel. These personnel are not always teachers or classroom employees, however; some may be service employees or administrators who are not necessarily critical to classroom learning. In addition, subsidies to hire and retain personnel can distort budget decisions in ways that cause difficulties later. The Detroit Public Schools amassed a $200 million deficit in 2004 following a period in which it increased its staff while student enrollment was falling significantly. It seems unlikely that even Proposal 5’s compensation for districts with declining enrollment could have made such a strategy viable in the long run.[54]

The MPSERS subsidy included in Proposal 5 would also remove an additional incentive for school boards to bargain carefully with employee unions over wages and salaries. By the nature of MPSERS’ defined-benefit plan, any raises that school officials award lead directly to proportional increases in MPSERS costs. Under the current system, both these MPSERS cost increases and the pay raises must be financed by the school district, meaning it assumes the full cost of its payroll decisions.

This fiduciary responsibility provides school boards with a substantial financial incentive to keep salaries and wages from rising out of control. Consider a school district with a $10 million payroll. At present, that school district is financing this payroll and a MPSERS contribution equal to 14.87 percent of this payroll (about $1.5 million). With projections of the MPSERS contribution rising to 17 percent of payroll next year, the district is already planning on a big cost increase — around $213,000 — even if payroll doesn’t rise at all. The district is therefore already likely to be careful about adding to its payroll; every dollar it grants in new wages will bring the district an additional 17 cents in new retirement costs — or, in a few years, 20 cents or 25 cents, if the MPSERS contribution rate continues to rise as expected.

In contrast, if Proposal 5 passes, school districts will be paying 14.87 percent of payroll or less. The district described above would not need to cover the $213,000 spending increase that would occur due to the rise in the MPSERS contribution rate. This de facto state subsidy could encourage the school board to use any of the district’s remaining money for new hires, further pay hikes or retaining personnel that the district could not otherwise afford. Part of any additional MPSERS contribution occasioned by the district’s subsequent payroll decision would be paid not by the district, but by the state. The state, in turn, would have no immediate means of restraining the spending, except to send less money to the district in the first place — an approach limited by Proposal 5’s other education spending mandates.

The partial division between payroll decisions and those who pay for them could lead to a further acceleration of MPSERS costs. The resulting dynamic would be similar to the "third-party payer" dilemma in health care.

Concern Over Adequate Funding for MPSERS

Proposal 5’s MPSERS provision would move increases in MPSERS costs into the state’s general fund, where higher costs are not as large a percentage of the budget’s total spending as they are of school districts’ total spending. Because the state must still find money to finance MPSERS costs, the shift to a larger budget is still unlikely to end pressure to reform MPSERS. To the extent that the budgeting shift stalled reform of the MPSERS system, however, the cost to state taxpayers would be higher.

It is possible to argue that these higher costs are worthwhile. In December 2004, the Detroit Free Press quoted a Michigan Education Association spokeswoman referring to MPSERS benefits as saying, "It’s a reasonable package that attracts people to the profession in the first place. … Any reduction in benefits hurts our ability to recruit."[55]

There may indeed be recruiting trade-offs in restraining MPSERS health and retirement benefits for future employees. But benchmarking MPSERS benefits for school employees with the retirement benefits provided by other employers suggests that the school employees’ package is unusually generous.

According to a survey of American employers by the Kaiser Family Foundation, just 34 percent of firms with 200 or more employees provided health care benefits to retirees. Among private firms and small businesses with fewer than 200 employees, just 3 percent offered such a benefit. The substantial majority of private-sector employers do not offer any retirement health care benefit at all.[56]

Similarly, a majority of workers do not receive a defined-benefit pension comparable to MPSERS. Recent estimates suggest that fewer than half of American workers receive retirement savings plans from their employer, and that the majority of those who do have a 401(k) or other defined-contribution plan.[57] These defined-contribution plans do not guarantee a certain pension payment, but rather provide tax-favored retiremement savings.

Even public-sector employers have converted to defined-contribution plans. For example, Michigan judges, legislators and most other state employees were switched to defined-contribution plans in the late 1990s. Public school teachers were ultimately not included in this change. MPSERS itself recognizes that its pension program is generous; a MPSERS Web page greets school employees with the message: "Welcome! As a member of Michigan’s Public School Employees Retirement System, you are eligible for one of the best public pensions around."[58]

Most Michigan businesses and their employees are paying taxes to support a MPSERS benefit that is considerably better than the retirement plan that is available to them. At the same time, the assertions made in the Citizens Research Council report on MPSERS have not been credibly refuted since their release, and they have been reasonably accurate so far. The CRC report portrays a serious financial challenge for the taxpayers of Michigan that will grow substantially larger and more difficult to remedy with each passing year that it remains unaddressed.

Potential Effects on Education and the Economy

State spending on education is often seen as an investment in more highly educated citizens and a better economy. The K-16 Coalition has suggested such benefits from Proposal 5, having written on the coalition’s Web site: "This proposal lays the foundation for increased student achievement. Well-funded districts are better equipped to provide maximum opportunity for student achievement."[59] The Web site also argues: "The proposal will create jobs. By making a steady investment in education now, this proposal will lay the foundation for economic growth and job creation and help Michigan compete globally for high-tech and other jobs."[60]

As recounted above in "Assessing Previous Levels of Education Funding," Michigan has engaged in some of the nation’s highest spending on local school districts and higher education. In 1984, 1994 and 2004, per-pupil spending by Michigan public schools ranked in the top 10 states; average teacher compensation was in the top five; and spending by Michigan’s colleges and universities in 2002 was ninth in the nation.[61]

However, in 2003 Michigan eighth-graders ranked 34th and 27th in the nation on national tests for math and reading, respectively; in 2005, they ranked 34th and 29th.[62] And Michigan’s economy has remained one of the worst ever since, steadily losing jobs while the rest of the nation has been adding them. There does not seem to be a correlation between Michigan’s increased spending for education on the one hand and brighter kids and more jobs on the other.[63]

Indeed, economist Richard Vedder researched the relationship between economic growth and state spending on universities, and he published his findings in a 2004 book entitled, "Going Broke by Degree: Why College Costs Too Much." Describing that research, Vedder has written: "I found a strong negative relationship — higher state spending equals lower rates of economic growth. At the very minimum, the rate of return on state government investments in higher education is very low and very possibly negative at the margin."[64]

Proposal 5, however, could lead to unintended economic effects. To the extent that Michigan lawmakers feel compelled to increase or maintain Michigan’s current tax burden in order to meet Proposal 5’s spending mandates, the state’s business climate could actually be harmed. The Tax Foundation has found not only that Michigan’s Single Business Tax imposes the second-heaviest tax burden in the nation,[65] but also that Michigan’s overall state and local tax burden in 2006 is 16th highest in the nation.[66] Neither of these figures suggests a tax climate likely to improve Michigan’s weak economy.

The proposal could also produce unintended educational effects. Consider Proposal 5’s provision to grant per-pupil foundation allowances to districts with declining enrollment based not on the district’s current enrollment, but on a three-year average that includes the previous two years’ enrollments. This provision could insulate poorly performing districts from the consequences of their failures by providing them with more money than they would otherwise receive. This reduced penalty could lower their incentive to reform.††

It is true that some comparatively desirable school districts in Michigan exist in communities that have, for economic or other noneducational reasons, declining student populations. These districts, however, can demonstrate — and often have demonstrated — that they are desirable by successfully attracting students from other districts through the state’s public school choice program. The money these districts receive for their "school of choice" students helps offset the money they have lost through their local enrollment decline.

The opportunity to regain students through this school choice dynamic is, under the state’s present school choice system, less likely to be available to the sparsely populated, often out-of-the-way districts that are currently permitted to use the three-year average for state reimbursement. Whatever the wisdom of the three-year formula for these districts, extending the option to all districts risks maintaining support to school institutions independent of the needs they serve.

†† It is true that in fiscal 2007, state lawmakers began extending additional monies to districts with declining enrollment, thereby removing some of a district’s incentive to improve. Proposal 5’s formula, however, would generally grant a district an even larger sum of money and therefore a larger disincentive. In addition, overturning the proposal’s formula for districts with a declining student population would take a three fourths vote of both branches of the state Legislature, making the provision much harder to repeal than the fiscal 2007 payment.

Districts with declining enrollment in today’s increased public school choice environment are losing money largely because they are failing to compete successfully for students. Proposal 5’s new spending for such districts could mean that the worst-performing districts are encouraged to postpone restructuring. The incentive to reform would be further softened by the proposal’s mandated inflationary increases in education spending, since this per-pupil funding growth would occur regardless of academic performance.