School Budgets: A Crisis of Management, Not Finance

Lansing these days is full of talk from budget experts and tax-hike lobbyists bemoaning a "school finance crisis," and an "unsustainable, broken school financial model."

These "experts" are wrong about Michigan’s "school finance model" being broken. What is broken is the school management model.

The state doles out more than $12.5 billion each year for schools — a minimum of $6,700 per student — and a great deal of local money finances them, too. The state School Aid Fund, from which most of this money is distributed, is enjoying solid revenue growth, projected to be 2.5 percent this year and 3.9 percent next year. Gov. Jennifer Granholm has proposed using this growth to finance a per-pupil state aid increase next year.

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However, schools will continue to feel an economic pinch. Excessive employee pension and health care packages now consume some 14.9 percent of school payroll expenses, according to recent figures produced by the Citizens Research Council. This portion is expected to jump to 20 percent of payrolls by the 2007-2008 school year. Were the state to boost the minimum $6,700 per-pupil grant by $200 in each of the next few years, the rising costs of providing these generous benefits would gobble up most or all of the increases.

Those who complain about a "broken school finance model" talk as if these health and pension liabilities are an act of God. But they aren’t: They did not descend upon the public school system like a plague of locusts. Instead, they are the product of school boards that have been either too cozy with employee unions or too timid to stand up to tough union bargaining tactics. Michigan’s school boards have given away the store in contract negotiations over the years, and union representatives on the other side of the table have happily carted it off. This is the management model that is broken.

What does "given away the store" mean? The "defined benefit" pension plans that the school unions have fought to preserve are Exhibit A. Under these plans, the employer periodically pays out benefits in predefined amounts to retired employees for as long as they live.

In much of the private sector, employers have shifted away from these defined benefit plans to "defined contribution" plans, such as 401(k) accounts. With defined contributions plans, regular deposits are placed in a tax-deferred private account that is owned by the employee and that becomes the "nest egg" that funds the worker’s retirement. In return for owning this account and being able to take it from job to job, the employee forgoes the right to a pension benefit of a predefined size; he or she instead receives the market return on the savings in the account (a very good return over long periods of time). The employer does not assume huge pension liabilities like the ones that are now stressing public schools.

In 1996, an effort was made to shift new teachers — not teachers already employed — to a defined contribution system. From the reaction of the school employee unions, you would have thought that they were about to be drowned. Tremendous pressure was brought on state legislators, who quickly backed off. The result is the escalating pension funding "crisis" that schools are now facing.

Exhibit B is school employee health insurance coverage. These aren’t just Cadillac health plans — they are veritable Rolls-Royces. It is estimated that schools could save approximately 25 percent on health insurance costs if they just offered the same coverage given to state employees. This is a startling amount, given that state employees are not known for suffering under stingy benefits!

All of these bad management decisions have turned public school employee benefits into a house of cards. Now that this house is looking shaky, the government school establishment is running back to Papa Taxpayer, hoping that he will pull out his checkbook without examining how the schools got into these financial straits in the first place.

Some of the schools’ apologists are straightforward about their demand for higher taxes, proposing a 33 percent increase in the 6-mill state school property tax. Others are more subtle, suggesting a state constitutional amendment that would require the state to increase school aid funding by 5 percent or the rate of inflation, whichever is less.

Either way, taxpayers should hang on to their wallets.


Jack McHugh is a legislative analyst for 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.