This financial dynamic began in 1994, when Michigan voters approved the proposed constitutional amendment known as Proposal A, which created the state per-student “foundation allowance” that ties most districts’ operating income closely to student enrollment.[xxvi] From that point on, if a Michigan school district did not continue to attract students, it generally faced stagnant and even declining operating income.[xxvii]

This cost discipline increased in 1995 with the advent of charter schools,[xxviii] which are public schools that are authorized to enroll, and to receive state money for, students living anywhere in the state. (As with conventional public school districts, state money for charter schools takes the form of a per-pupil foundation allowance.[xxix]) Conventional public school districts that lost students to charter schools generally faced a decline in operating revenues.

The cost discipline increased further in 1996, when section 105 of the State School Aid Act was passed to allow conventional school districts to accept a student residing within their intermediate school district and receive state money for the student without the permission of the student’s district of residence.[74] This cross-district competition for students, commonly referred to as “school choice” or “schools of choice,” expanded again in 1999 with the passage of the State School Aid Act’s section 105c, which allowed a conventional public school district to unilaterally accept and receive state monies for students residing in a bordering intermediate school district.[75]

This competition for students and the state monies assigned to them has clear cost implications. For instance, every full-time student who departed a school district in fiscal 2007 represented a financial loss to the district of the district’s foundation allowance of $7,085 or more.[xxx] Poorly performing schools districts can thus lose students to other districts or to charter schools, and when large numbers of students leave a district, the financial losses can rise quickly. For example, in a 12-month period ending in the autumn of 2006, Detroit Public Schools lost nearly 14,000 students.[76] This represented an estimated decline of approximately $100 million in operating revenue from foundation allowances alone.[xxxi] Some of that money followed children to other school districts, but not all of it necessarily accrued to conventional public schools and charter schools elsewhere in Michigan. Parents of some of these students probably enrolled their children in private or parochial schools, while other parents may simply have moved to other states.

Indeed, parents’ incentives to leave the state are likely to increase. Michigan is unique in the economic decline it has experienced since 2001, and residents have been leaving at an increasing rate. According to statistics provided by the United Van Lines moving company, Michigan had the nation’s highest rate — tied with North Dakota — of United Van Lines’ outbound moves in 2006.[77] A staggering 66 percent of UVL’s Michigan client traffic left the state, meaning that just 34 percent of the company’s Michigan-related moves were inbound.[78] Last year, Michael J. Hicks, an assistant professor of economics at the Air Force Institute of Technology and an adjunct scholar with the Mackinac Center for Public Policy, performed a statistical analysis of United Van Lines’ survey data and found it to be very highly correlated with actual U.S. Census migration data.[79] This makes the UVL numbers something of a leading migration indicator.

Similarly, University of Michigan economists have predicted that the state can expect to lose jobs through 2007 and 2008.[80] This outcome would produce eight straight years of job losses, a streak not seen since the Great Depression.[81]

Declining economic opportunities are likely to lead to lower-than-expected pupil counts. Declining birth rates may do the same. Over the next year, state budget officials project a loss of 15,575 public school students statewide, a decline of 0.93 percent.[82] A Michigan Senate Fiscal Agency memorandum sums up the situation:

“It is believed the primary reason for this estimated drop in pupil memberships is declining birth rates; in other words, larger classes are exiting the K-12 system than are coming into kindergarten. These declines in pupil memberships, while costing the State fewer dollars, mean, at a minimum, $7,085 fewer for each pupil lost at the local school level.”[83]

[xxvi] Proposal A also reduced financial disparities among the state’s school districts, raised the state sales tax from 4 percent to 6 percent, created a 6 mill state property tax, and lowered property tax rates on most Michigan homes and many other real and personal properties. For further discussion of Proposal A’s financial provisions, see Ryan S. Olson and Michael D. LaFaive, "A Michigan School Money Primer for Policymakers, School Officials, Media and Residents." (Mackinac Center for Public Policy, 2007), 5, 24, 39-40, 55 (accessed June 5, 2007).

[xxvii] Income for capital purposes remains independent of state per-pupil monies, since capital spending is financed locally by school district property taxes. Money raised through these taxes for capital purposes cannot be redirected to school operating expenditures, however.

[xxviii] Michigan’s original charter school law was passed in 1993, but it faced a substantial court challenge before prospective charter schools began receiving state money under the law. The law was subsequently upheld by the Michigan Supreme Court in 1997, but a second charter school law had already been passed in 1995, and charter schools began to exert competitive pressure on conventional public school districts from then on.

[xxix] Charter schools are authorized to receive state money for their pupils through a revocable “charter” granted by a state university, community college or conventional public school district.

[xxx] The foundation allowance associated with a particular pupil varies from district to district. The smallest per-pupil foundation allowance for a district in fiscal 2007 was $7,085, while the allowance exceeded $10,000 in a few districts. The amount of per-pupil state and local operating money that a district receives for a particular student may be less than the foundation allowance, which is not so much an exact amount of money as it is an accounting device. For a detailed discussion of the general foundation allowance and the per-pupil monies actually associated with it, see Olson and LaFaive, “A Michigan School Money Primer for Policymakers, School Officials, Media and Residents.”

[xxxi] The Detroit Public Schools’ per-pupil foundation allowance in fiscal 2007 is $7,469. Multiply that figure by 13,800 students, and the financial loss to Detroit amounts to $103,072,200. Some federal revenue based on enrollment of “at-risk” students or special education students may also have been lost to the district.