Proposal Would Punish Prudent School Districts

House Bill 5963, sponsored by Rep. Tim Melton (D-Pontiac) would force schools to spend down their general fund balances to 15 percent of their current operating expenditures. This attempt to micromanage their budgets isn't likely to help schools become more fiscally stable or deal with dwindling enrollment and the resulting declines in revenue.

Districts use their general fund balances for many purposes. Some use it to pay bills in full (avoiding finance charges) in the couple of summer months when no state school aid payments are received. Others use it to hedge against factors beyond their control, like student enrollment decreases or employee health insurance premium jumps.

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At the very least, this legislation should not apply to public charter schools. Since these schools cannot levy local property tax millages for capital projects the way conventional districts can, they use their general fund balances to pay for buildings and other capital expenses. Largely for this reason, charter schools tend to maintain higher fund balances. HB 5963 would prohibit them from managing their capital expenditures effectively and put them at a severe disadvantage.

Those high charter school fund balances distort estimates of potential savings from the bill, projected by House Fiscal Agency to be $150 million. If charters are not included, the savings would be much lower.

Not surprisingly, it appears that most school board members, business officials and superintendents oppose this legislation. In fact, the only group that has testified in favor of it is the Michigan Education Association school employees union. The MEA not only supports this bill, but they want to limit fund balances even more than the proposed 15 percent. The union supports a 5 percent cap on fund balances, and suggests that schools just borrow when they need money. After all, they argue, interest rates are only 1.24 percent.

What the MEA appears not to understand is that borrowing to cover operating deficits is never a fiscally responsible practice. They must also not realize that these interest rates are only low when schools maintain a healthy fund balance. If a school has a mere 5 percent fund balance, lenders may well demand a higher rate, diverting yet more funds from actual school operations. In addition, the current low rates may well be a temporary phenomenon, and so are hardly a sound basis for making long-term public policy.

Perhaps the worst aspect of HB 5963 is that it will essentially punish schools that have maintained fiscally sound budgets. Districts that have negotiated union contracts that they can afford and planned for the future would be hurt the most. Since schools spend about 85 percent of their general fund on labor, and revenues are determined primarily by the number of students enrolled, the bill would have the affect of forcing districts to hire more employees or pay higher salaries and benefits to the ones that they currently employ, neither of which they’ll be able to afford in the future.