Michigan Should Reform School Lending System

(Editor’s note: This commentary is an edited version of written testimony Education Policy Director Michael Van Beek recently submitted to the Michigan Senate Appropriations Committee.)

Michigan school districts have accumulated a significant amount of long-term debt over the past couple of decades. According to data from the U.S. Department of Education’s National Center for Education Statistics, Michigan school districts were $21 billion in debt at the end of the 2009 fiscal year (the most recent data available). That equates to about $14,066 per student — the third highest in the nation and 66 percent more than the national average of $8,473 per student.

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The amount of long-term debt owed per student by Michigan school districts has steadily increased since 1995. After adjusting for inflation, Michigan schools owed 162 percent more per pupil in 2009 than they did in 1995. Michigan has been in the top five nationally in long-term debt per student every year since 1997.

There is, however, a limitation to comparing Michigan to other states in terms of long-term debt. The state of Michigan does not provide any direct state funding for school construction and other capital costs — the primary reason schools borrow — while other states do provide such aid to districts.

But even comparing Michigan to just states that do not provide any state assistance for capital costs and debt services, Michigan schools still stand out for their high level of debt. For instance, the average debt per-pupil for the 13 states identified by a 2007 University of Nevada-Las Vegas study that do not provide any state aid for capital outlays or debt services was $9,253 in 2009, about 34 percent less than Michigan.

State policies impact the ability of Michigan school districts to accumulate large amounts of debt. For instance, the state’s School Bond Qualification and Loan Program enables school districts to use the state’s credit rating when selling bonds, and it also allows districts to borrow from the state’s School Bond Loan Fund when their local tax base does not generate enough revenue to make their bond payments. Essentially, districts borrow money to make payments on borrowed money.

There are several serious concerns about the SBLF. Chief among these is that it’s growing more and more expensive to maintain. Borrowing by districts that cannot meet their full bond payment obligations has moved in only one direction since 1995 — up.

In a report for Public Policy Advisors, Nick Khouri wrote in 1997: “[T]he SBLF burden is growing at an unsustainable rate. Local school district borrowing from the SBLF is forecast to jump 500 percent — from $118 million in 1996 to $733 million — by 2009.” Reality turned out to be worse than Mr. Khouri’s projections. In 2009, districts owed $951.7 million to the SBLF, and in 2010, the total owed surpassed $1 billion.

A well-functioning SBLF program needs perpetual tax base growth and continuous low interest rates. At times, both of these may be available, but after the “Great Recession,” the idea that government can rely on higher revenues as a result of ever-increasing property values should be a thing of the past.

The SBLF ultimately increases the overall costs of borrowing, with some of these additional costs being incurred by the state and ultimately subsidized by reductions in funding available for districts that do not borrow from the program. Other increased costs are incurred by future local taxpayers, who may or may not benefit from the original bond proceeds and whose ability to raise revenue for their own use is restricted. Lower tax rates for current taxpayers are subsidized by higher tax rates for future taxpayers.

The original intent of the SBLF may no longer be relevant. It was created in the 1950s, when the baby boomers were reaching school age. The purpose of establishing the SBLF was to enable school districts to borrow more than their tax base could afford to meet the challenges of a fast growing student population. Michigan is in a different era now, in which school enrollment has dropped for each of the past nine years, resulting in an overall decline of 13 percent since 2003.

There is legislation in the Michigan Senate that would address many of these issues and limit the risk the state assumes on behalf of heavily indebted school districts. Surprisingly, even though only about 25 percent of districts currently borrow from the SBLF (but 100 percent pay for it), public school special interest groups, such as the Michigan Association of School Boards, oppose this legislation. Not surprisingly, so do school construction companies and others that profit when schools can borrow from the future.

Even if the SBLF is limited or scaled back, districts can still use “sinking funds,” which are basically savings accounts dedicated for school construction and repair. And, as always, there’s nothing that prevents districts from using general fund monies for capital expenditures. These options have not been popular among districts historically, because they require either asking for unpopular tax hikes or saying “no” to ceaseless union demands to squeeze every dime from the general fund to boost compensation for unionized employees.

The large amount of debt schools have accumulated over the years likely has an indirect but negative impact on the state’s economy. Many businesses and investors measure a state’s expected future rates of taxation by assessing the total amount of government debt. All else equal, the more debt schools amass the less attractive to businesses and investment this state will be compared to others.


Michael Van Beek is education policy director at 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.