School Finance Reform Lessons from Michigan

Following is the October 10, 2001 testimony of Mackinac Center Director of Education Policy Matthew Brouillette before the Pennsylvania House of Representative's Select Committee on Public Education Funding.  The committee was charged with making recommendations for a new system of funding for public education in the Keystone State.  Brouillette was invited by Pennsylvania Rep. Jeff Coleman to inform the committee about Michigan's experience with school finance reform (Proposal A of 1994) and the lessons Pennsylvania might learn from the Great Lakes State.

Thank you, Chairman Civera and Representative Coleman, for the opportunity to address the Select Committee on Public Education Funding.  As Pennsylvania begins the arduous task of school finance reform, I hope our experience in Michigan is both instructive and beneficial to your efforts.

Let me begin with a little historical background on Michigan's experience with school finance reform.  In 1994, the citizens of Michigan approved a measure that completely changed how we fund our public schools.  Voters said yes to Proposal A, which reduced school property taxes by about 33 percent and increased the sales tax from 4 to 6 percent.  A comparison of the old and new school finance systems is presented in Exhibit A (attached). 

The two key provisions of Proposal A were (1) the replacement of most school property taxes with an increased sales and other use taxes and (2) the adoption of a minimum "foundation" grant of $5,000 per pupil that would come from the state.  This school year, the foundation grant is set at $6,500 per pupil.

Proposal A had five major objectives: (1) reduce property taxes; (2) reduce reliance on local property taxes to provide school funding; (3) increase the state's share of school funding; (4) assure a minimum level of per pupil funding; and (5) reduce the funding disparities between school districts.

Since the passage of Proposal A seven years ago, most people agree that all of the major objectives have been achieved.  

Proposal A provided Michigan citizens with significant property tax relief.  Total property taxes—which prior to Proposal A had been about 35 percent above the national average—were cut by about 33 percent.  For homeowners, the cut was 42 percent (32 percent after the loss of state tax credits); and for businesses, the property tax cut was about 13 percent. 

Under Proposal A, schools are no longer directly reliant on local property tax revenue.  School districts are now able to focus on attracting and retaining students to generate operating revenue.  Since the state is providing the majority of operational funding, districts no longer have to ask local property owners for additional taxes.  Districts may still seek capital funds from the community, but the vast majority of school districts have been relieved of the burden of securing local revenue.  (Only a few districts—less than 40 of Michigan's 555 districts—are able to seek property taxes for operating purposes.  These were the highest spending districts in the state in 1994 and were permitted to maintain their high levels of taxation).

Proposal A placed the burden on the state to provide adequate revenue for core academic curriculum and achieving school accreditation.  In 1993, the state contributed only 32 percent of total school funding—placing Michigan 48th among the 50 states.  This meant that two-thirds of K-12 revenue had to be generated locally, hence the heavy property tax burden and the high variations in spending among districts.  Under the new system, the state provides about 80 percent of the total cost, moving Michigan up to second among the states.

Proposal A guarantees each district a minimum level of per pupil funding.  In 1994, 55 percent of Michigan's school districts were getting less than $4,500 per student.  In the 2001-02 school year, all Michigan school districts will receive at least $6,500 per student.  Since the passage of Proposal A, overall state per pupil funding has outpaced the rate of inflation. 

Finally, Proposal A has reduced funding disparities among school districts.  Proposal A has narrowed the funding gap between property-rich and property-poor districts.  In 1994, local per pupil expenditures ranged from $3,277 to $10,356.  Today, per-pupil funding has been significantly averaged up with districts receiving no less than $6,500 per pupil this school year. 

In addition to achieving its primary objectives, Proposal A has produced many byproducts—some intended, others not. 

For example, by establishing a foundation grant, Proposal A intended to consolidate most funding categories into one per-pupil amount, giving districts greater flexibility in how and where they allocate their funds.  However, this flexibility has been eroded over the years by the legislative increases in categorical funds. 

Proposal A also had the effect of placing public education funding under constitutional taxation limits.  Michigan has a constitutional limit on the amount of revenue the state may collect (to no more than 9.49 percent of personal income).  Prior to the passage of Proposal A, public education funding was not included in this amount.  Today, these limits apply, putting downward pressure on other state taxes.  Without this taxation limit, Proposal A would have merely shifted taxes and probably provided no net tax relief.

Proposal A helped create greater funding portability for students.  The establishment of a foundation grant has allowed for increased portability and choices for public school parents.  Proposal A helped to expand the state's public schools-of-choice program and charter schools in the mid-1990s.

Proposal A also has encouraged districts to become better money managers.  School districts are now forced to operate within their budgets because their ability to increase local taxes has been restricted.  As a result, districts must plan for demographic changes, cut wasteful spending, and implement better business practices.             

While Proposal A significantly increased funding for low-spending districts, increases in high-spending districts have not been as generous.   Proposal A was clearly designed to boost revenue in low-wealth, low-spending school districts.  In fact, if not for Proposal A, more than 30 small school districts may have gone bankrupt in 1994 (for various reasons including fiscal mismanagement, low property wealth, debt financing, and shifting populations).  But the vast majority of districts in Michigan have experienced revenue increases that exceed inflation.  The exceptions are high-wealth, high-spending districts that receive increases at or a little below the rate of inflation (at 2.8 percent).

Another byproduct of Proposal A is that it subjected school funding to fluctuations in the state's economy.  The shift in taxation from local property taxes to the state sales tax ties public school funding to the state's economy.  The booming economy of the 1990s allowed for significant annual increases in public school funding.  But the long-term impact of this tax shift is just beginning to be understood as we enter our first real economic downturn.

Finally, Proposal A clearly benefited Michigan's elderly, citizens on fixed incomes, and first-time homebuyers.  The significant reduction and capping of property taxes has permitted older and fixed-income citizens to remain in their homes.  Before Proposal A, these citizens were frequently forced from their homes as property taxes regularly escalated.  The cut and cap of property taxes also provided first-time homebuyers with greater access to the housing market.

In conclusion, Michigan's public school finance reform of 1994 has achieved its primary objectives while benefiting both schools and the taxpayers of Michigan.  Yet seven years of experience with Proposal A has revealed opportunities for improvements.  The challenge for policy-makers is to maintain a centralized, equitable school funding system that preserves and increases local and parental control and accountability.  By learning from the lessons of Michigan, Pennsylvania has the opportunity to turn Proposal A into "Proposal A-Plus."

Thank you.