Comments re: Making Sense of K-12 Funding Report

CRC recently received an email message containing a few comments about our recent report on K-12 education funding, Making Sense of K-12 Funding, issued on October 16. Below is the message along with the response provided.

Comment:

“In your recent article, “Making Sense of K-12 Funding​,” you [CRC] repeatedly made the claim that, “While total state funding is up over $1 billion from FY2011 to FY2015, the increase is almost exclusively earmarked to satisfy school employee retirement costs, specifically legacy costs arising from the financial market downturn and state retirement system reforms.” You say that the fund imbalance in MPSERS is the result of “market downturn,” portraying it as an unfortunate set of circumstances that is nobody’s fault. You fail to point out the many, many years that the state has manipulated and “dipped into” that fund, leaving it depleted (far more than any “market downturn” could have) so that it no longer had the ability to support the retired teachers WHO PAID THEIR OWN HARD EARNED MONEY to build the fun in the first place. The result is that your article makes teachers who have spent their lives serving their communities and schools appear to be the villains in this whole debate, rather than the victims.

Furthermore, you refer to “state retirement system reforms” as if to represent that the courts haven’t already found that legislation on state employee retirement systems to be unconstitutional. What about the 3% of each and every public school teacher’s paycheck that is still sitting in an escrow account while the State Supreme Court is stalling (for years) in taking up the appealed case, wherein the unconstitutionality of the “reform” will most assuredly be upheld? I would think that as an “unbiased” institution, you would seek to better represent the WHOLE story so as not to mislead the public.”

Note:  CRC withheld the name of the author.

CRC Response:

State and local government contributions to defined benefit retirement systems have been growing for a number of years.  Increasing retirement contributions are not unique to Michigan.  States and localities across the country are dealing with this fiscal problem.

Nationally, the Pew Center on the States estimates that the gap between pension system liabilities and assets across all states and local governments was $1 trillion in 2012.  This gap grew 14 percent from 2010 to 2012 in inflation-adjusted dollars.

In Michigan, all traditional public school districts and some charter schools participate in the Michigan Public School Employees’ Retirement System (MPSERS).  This system provides both financial pension benefits and subsidized health insurance benefits to covered employees.  The cost of providing these benefits is shared by school districts, school employees, and the State of Michigan.  State law caps the amount that employees pay towards future benefits (generally as a percent of their salary).  Also, state law caps the amount that school districts have to pay towards financing these benefits (expressed as a percent of covered payroll).  Specifically, districts’ contributions to meet annual unfunded accrued liability payments are capped at 20.96 percent of payroll.  Since 2012, unfunded accrued liability contributions above this cap are covered by the State of Michigan.

In a detailed 2013 report, CRC examined the escalating MPSERS costs and the impact that they have had on school funding.  The report identified unfunded accrued pension liabilities as the primary driver behind the growth in employer contributions and state contributions to MPSERS.

Combined, employer contributions for pension normal costs and retiree health benefits hovered around 12 percent of payroll each year between 2004 and 2012.  In contrast, contributions to meet unfunded accrued pension liabilities increased significantly; from 1 percent of payroll in 2004 to nearly 13 percent of payroll in 2012.  Overall, unfunded liabilities increased from $7.7 billion in 2004 to $25.8 billion in 2013.

In a separate analysis, our report identified and quantified the underlying factors behind the increased contributions for unfunded liabilities since 2004.  We examined the official MPSERS actuarial valuation reports issued by the Office of Retirement Systems to reveal that the primary cause was investment gains falling short of actuarial assumptions.  Of the cumulative $16.6 billion actuarial loss between 2001 and 2012, $14.7 billion (89 percent) was due to poor market performance relative to assumptions (i.e., 8 percent annual gain).  Specifically, the market losses of 2008 and 2009 resulting from the worldwide financial crisis were identified as the primary culprits.  Because MPSERS uses a five-year smoothing method to spread the market losses across a number of years, 20 percent of the total 2009 market loss is reflected in the 2014 valuation.

Other minor factors contributing to pension liability growth include greater pay raises than assumed by the actuaries as well as people living longer than originally assumed.  Additionally, decisions my state lawmakers in the past to make interest-only payments towards the unfunded liabilities or “mark to market” the value of the investment portfolio have helped school districts meet their MPSERS obligations in the short-term, but had longer-term consequences for the unfunded pension liabilities (e.g., extend amortization period).   The official financial statements for MPSERS do not reflect any instances where funding was diverted from the trust fund for non-pension/retiree health care costs.

As a result of the growing costs of MPSERS retirement liabilities to public schools, legislation aimed at mitigating some of the upward cost pressure was enacted in 2007, 2010, and 2012.  These reforms primarily rely on increased employee contributions, reductions in retiree health care subsidies, and/or reductions in pension benefits to offset the need for employer contributions to cover liabilities.

One aspect of the reforms enacted in 2010 included a mandatory employee three percent salary contribution towards retiree health care benefits.  This contribution was challenged in court by school employee groups and the Court of Appeals ruled in August 2012 that the contribution was unconstitutional.  The funds collected from school employees for about two years are being held in escrow until the issue is settled by the Supreme Court.  As a result, the employer contribution for retiree health was increased by three percent of covered payroll.

The Supreme Court recently heard oral arguments regarding the employee three percent contribution being held in escrow.  It is unknown, at this time, how the Court will rule.  If the Court rules in favor of the employees, the money will be returned, with interest.  However, if the contribution is ruled constitutional, then the escrowed funds will be used to reduce the amount of unfunded liabilities.

It should be noted that the three percent contribution was modified through legislation in 2012, soon after the Court of Appeals ruled.  Specifically, the law now requires that an employee’s contributions will be reserved for retiree health benefits received by the employee, as opposed to others.  This change effectively guarantees that employees will get a certain level of subsidized health care insurance in retirement.

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Today’s Student Count will Provide Districts with a Clearer Picture of Their Finances

Although school districts across the state approved spending plans for the current school year (2014-15) back in June, the October 2014 student count will reveal how much money they will have to operate this year.  This, despite the fact, that schools have been open for one month already.  For many districts, especially those battling declining enrollment, a lot is riding on the result of the student count.  Districts that overestimated enrollment gains (or underestimated enrollment losses) when preparing budgets last spring will likely have to take corrective action in the coming months to ensure budget balance.  Failure to do so will exacerbate the financial problem and cause, or add to, district fiscal stress.

By law, the first of two student count days occurs on the first Wednesday in October (October 1, 2014 for the 2014-15 school year).  The other count will take place on February 11, 2015.  The two counts (each with different weights) are blended to arrive at a total enrollment figure for purposes of distributing state aid to school districts.

The total amount of funding a district has to operate each year is a function of its student enrollment and its per-pupil foundation grant, which is $7,126 for the 55 percent of all districts that receive the minimum grant.  Because the October student count carries the heaviest weight (90 percent), much will be revealed about school district finances for 2014-15 with the result of the today’s count.

By law, school districts are required to adopt their budgets for the coming school year by July 1.  Districts base their initial budgets on estimates of student enrollment and their per-pupil foundation grant, which is set annually by Lansing lawmakers as part of the state budget process.  In recent years, lawmakers have completed the state budget in advance of the July 1 deadline, providing districts with certainty for the foundation grant portion of the funding equation.

With respect to the other half of the total funding equation, districts have to make estimates about student enrollment for the coming year.  In doing so, districts consider a number of factors, including past enrollment experience, birth rates, migration patterns, and competition from other public schools, both traditional public schools and charter schools.  Missing the mark on these estimates can have profound fiscal consequences for districts, especially for those that previously have had to cut programs, reduce staff, and find alternative service delivery models in response to declining enrollment.  Fewer students this year means further budget adjustments.

For many districts, budgeting for declining student enrollment is the new norm.  Two thirds of all traditional public school districts (360 of 543 districts) saw their enrollment decline from 2012-13 to 2013-14.  Overall, approximately 19,000 fewer students (a 1.4 percent decline) enrolled in traditional public schools in 2013-14 compared to 2012-13.

The statewide decline masks considerable variation among individual districts.  Enrollment declines among traditional districts topped out at nearly 50 percent (Bendle Public Schools in Genesee County), while many large, central city districts experienced declines well above 10 percent (e.g., Education Achievement Authority – 20 percent, Flint – 15 percent, Pontiac – 19 percent).

Looking at the five-year period from 2009-10 to 2013-14 reveals that over 70 percent of all districts saw some amount of enrollment decline.  Over one-quarter of all districts had declines of 10 percent or more, which is equivalent to 2.6 percent per year on average.  The causes of decline are many, including fewer births, net out-migration, and competition from other K-12 schools.

Enrollment Changes in Traditional Public School Districts and Charter Schools, 2009-10 to 2013-14*
  Traditional Public School Districts Charter Schools

Enrollment Change:  2009-10 to 2013-14

Number Share of Total Number

Share of Total

Enrollment Gain 153 28% 126 63%
Enrollment Loss
  Greater than 50% 1 0% 5 3%
  25% to 50% 16 3% 13 7%
  10% to 25% 137 25% 27 14%
  0 to 10% 235 43% 28 14%
Source:  Center for Educational Performance and Information* Enrollment data is total full-time equivalency (FTE) K-12 student count in fall of each year.

Declining enrollment has not been as pervasive in the charter school sector.  In fact, over the last five years, the opposite is true.  Nearly two-thirds of all charter schools have experienced annual jumps in student enrollment between 2009-10 and 2013-14.

Fewer students mean fewer total resources for districts, which can lead to increased fiscal stress.  Managing in an environment of declining resources, at least in the short term, can be difficult, especially when the funding reduction is sizeable.  All schools face some fixed (or semi-fixed) costs for building operations (i.e., lighting, heating), employing teachers, and staffing various non-instructional positions.  When students leave a district, many of these costs remain with the district.  The reality is that the relationship between enrollment and district costs is not completely linear, at least in the near term.

Over time, districts are able to “right size” their budget to accommodate a significantly smaller student body, for instance, by closing buildings or reducing staff.  But, in the short run, declining enrollment can increase fiscal stress associated with meeting the “sticky” fixed/semi-fixed costs.  The bottom line is that declining enrollment will continue to be a challenge requiring affected districts to think long term to effectively manage their resources without incurring undue stress.

Hopefully, as the results of the October 2014 student count become known, school officials will revisit their original budgets to see where things stand.  If the original student enrollment estimates were too optimistic, steps must be taken sooner rather than later to adjust spending to meet the new revenue projections or tap into reserves to make sure budgets are balanced.

Delaying corrective actions that are necessary to meet the new enrollment figures can contribute to fiscal stress and exacerbate financial problems.  Taking action earlier provides district officials with more time to implement requisite spending reductions and/or program adjustments.  Based on recent trends, many districts will be re-visiting their budgets to address declining enrollment revealed in the October student count.

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Revisiting Certificate of Need

On Tuesday, September 16, Michigan’s Senate Majority Leader Randy Richardville introduced a new bill that once again addresses the controversial Certificate of Need (CON) program.  Senate Bill 1073 proposes some reforms to the CON Commission, while also creating opportunities for new hospital projects that meet very specific guidelines.  The conversations around this bill are bringing to light the underlying purpose and value of Michigan’s CON program, a topic CRC thoroughly explored in a 2005 report, The Michigan Certificate of Need Program.  Although this report is nearly a decade old, the bulk of the report provides context and background for the issue, including a discussion on CON’s effectiveness in addressing health care costs, quality and access, and is still relevant to issues introduced in Tuesday’s bill.

Background
Michigan is one of 36 states with CON laws, but the stringency and scope of the laws vary by state. Michigan’s CON program was enacted in 1972, is governed by Part 222 of Public Act 368 of 1978, and is administered by the Department of Community Health. With the legislated purpose of assuring availability and access to quality health care at reasonable prices, the overall approach of Michigan’s CON program has been to regulate the utilization of facilities and equipment and the location of services. Applicants for health care service expansions, upgrades, relocations, or equipment purchases are required to demonstrate that the service is needed, that it is not duplicative, and that explorations have been made of the ways that the need can be met at the least cost. If a Michigan health care provider can effectively demonstrate need, then the CON Commission will issue a certificate.  Generally a dollar threshold is set for facility upgrades and renovations so that smaller projects do not require a CON.

The issue of how excess capacity in the health care market impacts health care costs has been long debated and is heavily tied to the discussion of regulating facility costs through CON programs.  Research on this topic dates back to at least the 1960s when states began adopting CON regulations and the federal government toyed with (and eventually mandated, then repealed) requirements for states to regulate health care facility costs.  States, which are large health care spenders because of the Medicaid program, are incentivized to reduce overall health and medical costs; CON laws are one policy mechanism states may use to achieve this.

Rationale For and Against CON Programs
Proponents of CON programs argue that traditional supply and demand theory does not work in health care because providers, typically doctors and other health care professionals through their diagnosis and treatment decisions, have the predominant role in determining the demand for medical services. These providers are also paid for supplying the services they determine people need.  Further, consumers often do not have sufficient information to make decisions based on cost and quality.  Thus, there is a market failure and government intervention is thought necessary to limit competition and spending that would lead to artificially high demand for unnecessary services.

Opponents of CON programs argue that they artificially increase costs and shield health care providers from making costly investments that they might be more inclined to make in a more competitive environment.  Some researchers and health care stakeholders believe that by shielding existing hospitals from new competitors, health care service supply is reduced to below competitive levels, thus increasing costs.  Additionally, because CON programs block entry of new hospitals, incumbent hospitals may delay the adoption of new and improved technology or treatments because they may be more costly.  New, higher quality service providers are locked out of the market which reduces competitive incentive to improve service quality.

Another argument deals with health care access.  Without CON, health care providers can choose to reduce or eliminate health care service facilities in poorer, high need areas that may be less profitable because of higher rates of both uninsured patients and patients covered by insurance with low reimbursement rates such as Medicaid.  Instead, health care service supply will move to low need areas with a higher number of patients insured by higher paying private insurance.  If this occurs, then health care services will be available based on ability and willingness to pay and rather than the likelihood of medical need.

CRC’s report, The Michigan Certificate of Need Program, provides a state, national, and historical context for CON programs and details the coverage and scope of Michigan’s program, application process, and review standards.  Finally, it discusses the issues of costs, quality, access, and other highly pertinent issues of the CON program, all of which are still being discussed today.

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Solving Michigan’s Obesity Problem with Physical Education Programs

In 2013, just over one-quarter of Michigan children ages 6 to 17 participated in vigorous physical activity every day, despite the federal recommendation for 60 minutes of physical activity daily.   Not only are children not engaging in vigorous physical activity, but they are engaging in high amounts of sedentary activity.  Over one-third of Michigan high school students played video or computer games or were on a computer for three or more hours per day.  Over one-quarter of high school students watched television for at least three hours per day.  And while these figures are at or below national averages, they are not exactly worth bragging about.

Physical inactivity is a risk factor for obesity and regular physical activity is linked to improved student concentration, cognitive functioning, and classroom behavior as well as improved academic and standardized test performance.  If public policy is to be used to effectively prevent obesity and treat it in children, it needs to address both diet and physical activity, as both of these factors influence health.  Schools have a long history of providing health and physical education curricula and now, more than ever, these two subjects are needed.

The Revised School Code mandates that, “Health and physical education for pupils of both sexes shall be established and provided in all public schools of this state. . . .Each pupil attending public school in this state who is physically fit and capable of doing so shall take the course in physical education.”  When the school code was first drafted in 1976, authors understood the importance of health and physical education, though obesity was not yet a looming issue.

While this statute is specific about the need for health and physical education, it does not specify how this mandate must be carried out.  The Michigan Merit Curriculum requires that high school students complete 0.5 credits in each physical education and health education in order to graduate.  However, state statute allows for several exemptions for this requirement, including an allowance of credit for participation in extracurricular activities.  This unfortunately waters down much of the benefit of the original requirement since students are better off if they engage in physical activity both during the school day and afterward.

While some health and physical education criteria is spelled out for high school students, Michigan statute does not similarly provide companion law or rules for grades K-8.  The Grade Level Content Expectations developed by the Michigan Department of Education and approved by the State Board of Education set out learning and activity objectives but do not specify how much time children must spend in physical activity. Importantly, the content and frequency are recommendations, not requirements.

Schools are also not required to provide a recess, though the State Board of Education recommends that public schools provide opportunity for 30 minutes of physical activity outside of physical education, including at least 20 minutes of scheduled recess.

According to a 2012 nationwide survey, fewer than 60 percent of school districts required that elementary schools provide students with regularly scheduled recess and only 11 percent required middle schools to provide physical activity breaks outside of physical education class.  To help Michigan’s children develop to the fullness of their potential, these statistics are just not good enough.  While school, state, and local leaders are engaged in this process, more still needs to be done to generate noticeable results that improve individuals’ quality of life and the economic status of families and communities.

For more information about Michigan’s health and physical education programs and how public policy can improve these courses, see Citizens Research Council’s new report Addressing Michigan’s Obesity Problem.

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The IBM Ruling: Could the State Have Avoided a Potential $1 Billion Problem?

The state’s budget outlook just got significantly cloudier with a July ruling by the Michigan Supreme Court that the state must refund to the IBM Corporation around $4.7 million in Michigan Business Tax (MBT) payments made in 2008. The court agreed with IBM that the corporation had the legal authority to calculate its liability under the MBT using a three-factor formula as allowed for within the state’s Multistate Tax Compact Act.

Compared to a $53 billion state budget, $4.7 million is little more than a rounding error. However, IBM is not the only out-of-state corporation standing in line for a refund. According to court documents, the state is involved in 134 other open cases regarding this same issue and acknowledges the potential for many other claims. Extrapolating the IBM settlement to a few other multistate corporations easily gets us to a number that represents a very significant one-time hit to the state budget. The Department of Treasury’s Office of Revenue and Tax Analysis currently estimates the potential revenue impact on the state to be around $1.1 billion plus interest.

However, the state has appealed to the Supreme Court to rehear the case, a request that is still pending. A review of the legislative history of the related legislation, however, raises another question: Could the Legislature have avoided this problem altogether back in 2011? It appears an 11th-hour language change may have contributed to the current problem.

Background on Tax Apportionment: the MBT and the Multistate Tax Compact
In 2008, the state legislature made sweeping changes to Michigan’s system of business taxation by replacing the often-criticized Single Business Tax with a new Michigan Business Tax, which itself was composed of separate taxes on both business income and on gross receipts.

All forms of state business taxation have to deal with an important question: How should tax liability be allocated to a firm that operates across many states? For instance, IBM is an international corporation with both physical offices and product sales spread across the globe. What portion of their business activity should be subject to taxes in Michigan? Typically, this question is addressed through the establishment of an “apportionment” formula contained in state law.

The new Michigan Business Tax created its own apportionment formula. Businesses were required under the new law to apportion both their income and gross receipts to Michigan based on a single factor: their gross sales within Michigan. So, if 10 percent of a firm’s gross sales were within Michigan, 10 percent of their income and gross receipts were to be apportioned to Michigan for the purposes of paying the MBT.

However, while enacting the MBT changes in 2008, the legislature made no changes to another state law relevant to business taxation – the Multistate Tax Compact (MTC) Act. Michigan established the MTC Act in 1969 as part of a joint effort by states to coordinate their tax policies and fend off federal efforts to preempt some state control over business tax provisions that were the subject of debate at that time. Michigan is one of 16 states and the District of Columbia that are currently members of the compact – all of these jurisdictions having enacted a MTC Act into their state laws.

Significantly, the MTC Act has its own provision regarding apportionment. The act allows multi-state firms that operate in two or more compact states to elect, at the firm’s discretion, to apportion any “income tax” imposed by the state according to a three-factor apportionment that includes sales, property, and payroll. Clearly, this holds an advantage over the sales-only approach of the MBT to any firm that sells in Michigan but does not retain a significant business presence in terms of offices, equipment, and employees.

This advantage was not lost on IBM as the corporation in 2008 asserted its authority under the MTC Act to apportion its income and gross receipts using the three-factor approach rather than the MBT Act’s sales-only approach when it filed its first MBT return. The Michigan Department of Treasury, however, rejected IBM’s election, asserting that the newly enacted MBT Act precluded the firm from this option by specifically requiring the one-factor method under the MBT. This dispute precipitated the court action on which the Supreme Court issued its July ruling.

Michigan Supreme Court’s Finding: IBM Prevails
After losing in the lower courts, IBM’s contention prevailed before Michigan’s Supreme Court. In a split 4-3 ruling, the court agreed that both the income and gross receipts components of the MBT represented an “income tax” subject to the apportionment option under the state’s MTC Act and that the elective three-factor apportionment was available to IBM. The lead opinion in the case rejected the state’s arguments that the strict one-factor apportionment language contained in the MBT Act effectively repealed the MTC’s apportionment provisions by implication.

The swing vote in the court’s decision was Justice Brian Zahra. In a separate concurring opinion, Justice Zahra indicated the question of whether the new MBT law repealed the MTC’s elective apportionment provision was “a very close question” but one that he did not have to reach. His opinion was based specifically on actions taken by the legislature in 2011 when the Michigan Business Tax itself was repealed and replaced by the state’s new Corporate Income Tax – part of major tax restructuring that also involved changes to the treatment of pension and retirement income under the state’s Personal Income Tax.

As part of that package, changes were made to the MTC Act to eliminate the three-factor apportionment option for businesses subject to either the MBT or the new Corporate Income Tax. However, the legislation did not apply this change retroactively. Instead, it specifically eliminated the option “beginning January 1, 2011”. Justice Zahra’s opinion points to that language from Article III of the MTC Act:

“…except that beginning January 1, 2011 any taxpayer subject to the Michigan business tax act, 2007 PA 36, MCL 208.1101 to 208.1601, or the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.697, shall, for purposes of that act, apportion and allocate in accordance with the provisions of that act and shall not apportion or allocate in accordance with article IV.” (Emphasis added)

Thus, the inclusion of this date in the MTC Act appears to have played a very significant role in Justice Zahra’s legal thinking on the matter. In effect, he states the legislature intended to create a window from the initiation of the MBT in tax year 2008 through tax year 2010 during which the election provision would still apply; otherwise, the legislature would not have included this specific starting date.

But, what prompted the legislature to include the date? That’s not clear. What is clear is that this date was added very late in the legislative process. House Bill 4479 was introduced on March 23, 2011, was reported from the House Tax Policy Committee on April 27, and was passed by the Michigan House on April 28. At no time during the House’s consideration of the bill did Article III include the date reference pointed to in the court opinions. The bill moved to the Senate and was reported favorably without amendment by the Senate Reforms, Restructuring, and Reinventing Committee on May 12, 2011 – again, with no date reference. Later that same day, during Senate floor deliberations, the Senate adopted a substitute bill, and that substitute was the first instance in which House Bill 4479 contained the January 1, 2011 starting date for the elimination of this tax apportionment option. Neither the analysis of the bill nor the record of the debate elaborate on the rationale for this new language. Shortly thereafter, the bill was passed by the Senate. It was then re-transmitted to the House, where it was concurred in on the same day. The bill was enrolled, and Governor Snyder signed it into law on May 25, 2011.

Is there a remedy?
Attorney General Bill Schuette has already filed a motion with the Supreme Court to stay the July 14 decision and to grant a re-hearing of the case, citing the potentially significant revenue implications. In the meantime, the legislature is pondering its own next steps.

Media reports suggest the legislature may move to undo what the legislature did in 2011 and strip away the January 1, 2011 starting date on the statutory elimination of the elective apportionment provision in the MTC Act. That would appear to address a key concern of Justice Zahra, perhaps in a manner which would cause him to rule in favor of the state in a future hearing on this issue. Still, his opinion called the broader question of whether the new apportionment language of the MBT Act implied a repeal of the MTC provisions a “very close” – but not a settled – question.

Even if this legislative fix succeeded with the Michigan Supreme Court, it may not put an end to the legal wranglings. The California Court of Appeals in a similar case involving the Gillette Corporation found that the Multistate Tax Compact represented a binding contract to states; in their opinion, only a withdrawal from the compact would negate issues such as the MTC’s apportionment option. That case is now pending before California’s Supreme Court. So, in the end, a favorable decision for the state by the Michigan Supreme Court on re-hearing may simply move the question into the federal courts.

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Why Obesity is Michigan’s Problem

The scales have tipped and Michigan can no longer afford to ignore its costly weight problem.  With nearly one in every three adults classified as obese, Michigan is one of the heaviest states in the nation.   The primary cost of obesity is higher medical spending: research has shown that obesity accounts for roughly 10 percent of medical expenditures in the state.  Other research shows that average annual medical costs for a severely obese individual are nearly twice that of a healthy weight individual.  Obesity is especially costly to the state’s Medicaid program where obesity is more prevalent than among enrollees of other types of insurance.

Obesity also adds costs to employers through higher health, disability, and life insurance premiums, more employee absences, and reduced employee productivity when employees are present.  A 2002 study calculated that physical inactivity, a risk factor for obesity, results in 20 days of lost work annually, costing Michigan employers $8.7 million.  Obesity also limits the number of people who are physically able to serve in the military, police and fire positions, and jobs requiring manual labor.

Roughly 15 percent of Michigan’s children are classified as obese, putting them on target to add to the obesity problem when they reach adulthood.  Childhood obesity comes with its own set of problems.  Obese children miss more days of school, have higher dropout rates, and are more likely to complete fewer total grades in school.  Obesity among children as young as two and three years old is associated with lower functioning in verbal, social, and motor skills.

While problems related to this excess weight are shared by all Michigan residents, the problem itself is not evenly distributed across the state.  Some counties, namely Washtenaw and Ottawa, have below average rates of obesity; only one-quarter of their residents are obese.  Conversely, nearly 40 percent of Saginaw County’s residents are obese.

What is driving obesity and what should be done to fix it are certainly interrelated but neither the cause nor the solution are clear.  Starting in early childhood, child care facilities in Michigan are not required to provide physical activity opportunities to children in their care and only some child care facilities are subject to nutrition rules.  When children enter school, they are required to receive health and physical education, but the content, frequency, and quality of these courses is not specified and therefore varies across the state.  It isn’t until high school that state policymakers have set minimum time requirements for physical education, though the standards are below federal recommendations.  Additionally, most schools, but not all, are required to adhere to federal nutrition standards for school meals, and those that do not contribute to varying access to nutritious foods.

In adulthood and for families, low access to grocery stores that carry a variety of fruits and vegetables is a problem in some of Michigan’s urban and rural areas.  More children and adults are consuming excess calories from sugar-sweetened beverages such as soda and many of Michigan’s communities were not designed for active transportation such as biking and walking, reducing opportunities for residents to engage in physical activity.

In a recently released paper, the Citizens Research Council of Michigan has considered these risk factors and identified roughly a dozen potential policy actions that could be implemented at the school, state, and local levels of government to reverse this course.  Instituting required comprehensive physical and health education programs that meet federal recommendations, increasing state-level public health funding, mandating nutrition and activity standards for all child care facilities, helping to make fruits and vegetables more accessible and affordable, and focusing resources on community-level programs that can better target specific obesity risk factors are all solutions that have proven to be effective in preventing and, in some cases, reducing obesity.  Obesity is not a problem that only impacts 31 percent of the Michigan’s population; it impacts every child, family, and business, and is too costly to ignore.

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Huh? Why am I Voting to Modernize the Tax System?

“What is Proposal 14-1 and why am I voting to modernize the tax system?”  This might be the response many voters have when they enter the voting booth at the August 5 primary election and confront the one and only statewide ballot question.  While a number of voters will prepare in advance by reviewing the actual ballot language and/or consulting CRC’s impartial summary of the proposal, others will be seeing the language for the first time on August 5.  For voters reading the ballot language for the first time, it may be difficult to understand; and for some, it may be downright confusing.

Part of the reason for this confusion lies in the unusual method by which the question is appearing on the ballot.  The vote serves two distinct purposes; it is the result of a unique combination of 1) the constitutional requirement to get voter approval of a new local tax, and 2) the legislature’s decision to subject a recently passed law to a vote of the people.  While legislative referenda have occurred in the past, they are extremely rare.  Voter approval of new or increased local taxes occurs frequently at the city, township, and school level; however, Proposal 14-1 represents the first time a statewide vote is required to authorize such a local tax.  Below is an explanation of the “why” associated with the question posed above.  For a detailed explanation of the substance, or the “what,” behind Proposal 14-1, read CRC’s analysis of Proposal 14-1.

Two Reasons Why a Vote is Required

There are two reasons why voters are being asked to vote on Proposal 14-1.  First, the vote is required because of a tax limitation contained in the state constitution.  Article IX, Section 31 of the Michigan Constitution requires that any new local tax, or increase to an existing tax, first gain approval from the voters.  Section 31 is part of the 1978 Headlee Amendment to the Michigan Constitution and since its adoption, local votes to approve new taxes or increased taxes have been commonplace for local governments, such as cities, townships, schools, etc.  However, because of the way the legislature has proposed to modify the state use tax, Proposal 14-1 represents a first-of-its-kind Headlee vote; it is a statewide vote to authorize a local tax.

Public Act 80 is one piece of a package of laws enacted in 2012 and 2014 that is designed to provide substantial personal property tax relief to Michigan businesses.  Specifically, Public Act 80 redirects a portion of the state’s current use tax to create a new local tax (note: the combined rate of the two taxes will not exceed the current 6 percent rate), the proceeds of which would be used to reimburse local governments for lost personal property tax revenues.  The conversion of a portion of the existing state use tax to a new local tax must comport with the Section 31 constitutional provisions of the Headlee Amendment that require voter approval.

The second reason for the statewide vote is because the legislature has asked the people of the State of Michigan to approve legislation it recently passed.  Without this approval, the legislation will not take effect.  Article IV, Section 34 of the Michigan Constitution permits the legislature to ask voters to approve legislation via such a referendum.   While the legislature could have enacted personal property tax reforms on its own, it has asked voters to weigh in.

Specifically, Proposal 14-1 is a legislative referendum on Public Act 80; however, because the other pieces of legislation needed to implement the personal property tax reforms are “tie-barred” to Public Act 80, the public vote on Public Act 80 effectively serves as a referendum on the entire package of personal property tax reforms.  In a nutshell, the legislature is asking voters, via the legislative referendum, to decide the ultimate fate of the 2012/2014 personal property tax reforms.  A “yes” vote would enact the package of tax reforms, while a “no” vote would reject all the tax reforms.

Although legislative referenda are allowed by the 1963 Constitution, they are a rare occurrence.  Since the adoption of the Constitution, electors have been asked to vote on specific legislation only on 13 occurrences; however, in all but three of the occurrences, voter approval was requested for the state government to issue general obligation long term debt.  The issuance of debt is something for which the drafters of the 1963 Constitution thought voters should have a direct say and therefore they required a public vote (Article IX, Section 15).  The three previous legislative referenda not dealing with state debt asked voters to approve 1) a proposed income tax rate increase (1980), 2) proposed revisions to public utility rate procedures (1982), and 3) granting exclusive authority for hunting regulations to the Natural Resources Commission.

The Result:  Confusing Language

Many people have pointed out that the ballot language (see below) is complex and confusing.  This stems, in part, from the fact that the subject material is technical in nature and difficult to comprehend.  Another reason for this is because the legislature decided to prescribe the specific ballot question language to be used, bypassing the normal process for crafting language.  While nothing in state law prohibits the legislature from doing so, the legislature did not offer precise ballot language for the previous three legislative referenda that did not deal with debt issuance.  Instead, in each case, the legislature allowed the language to be drafted through the standard process spelled out in state law regarding proposed amendments to the state constitution or special questions.

Both the Michigan Constitution and the Michigan Election Law (PA 116 of 1954) contain provisions related to the processes, criteria, duties, and responsibilities associated with the development of ballot question language, both for constitutional amendments and special questions such as Proposal 14-1.  The Secretary of State is the agent normally responsible for drafting ballot question language.  Article XII, Section 2 of the Constitution requires that questions pertaining to proposed constitutional amendments be described in not more than 100 words and “consist of a true and impartial statement of the purpose of the amendment.”  Further, Section 485 of the Michigan Election Law states, “The question shall be clearly written using words that have a common everyday meaning to the general public.  The language used shall not create prejudice for or against the issue or proposal.”

While the proposal is not a constitutional amendment but rather a special question, the legislature attended to the 100-word limit for constitutional amendment questions when it drafted the Proposal 14-1 language.  However, the drafters seem to have paid less attention to the other provisions of the law.  For example, the proposal does not mention the main topic of the tax changes, specifically the personal property tax reforms that are at the center of the package of laws tied to the referendum on Public Act 80.  While the language discusses the state use tax changes contemplated, it contains nothing about how the personal property tax would be affected.

Also, one phrase in the language could be interpreted to advocate for passage of the proposal, “. . . modernizing the tax system to help small business grow and create jobs in Michigan.”  Further, some people have pointed out that this phrase is not entirely clear and vague.  It is not clear the phrase comports with the “common everyday meaning” requirement of state law.

Additionally, the language does not make it clear that this is a Headlee vote pursuant to the Michigan Constitution.  While the language mentions that the proposal would “reduce” a state tax and “replace” it with a local share of the same tax, it does not reference the constitutional requirement that such a conversion must be approved by the voters.

Finally, the language states that there is a constitutional 6 percent cap on the state use tax.  This is incorrect.  While there is such a cap on the state sales tax, the use tax is a different tax and no such cap exists.  Both taxes consist of two separate pieces; constitutional rates and a statutory rates.  The sales tax is comprised of a 4 percent rate, which is established in law within the confines of a 4 percent limitation placed in the Michigan Constitution (Article IX, Section 8), and a 2 percent rate added as part of the Proposal A school finance reforms in 1994.  The Constitution states that the additional 2 percent tax “shall be imposed.”  Thus, the legislature must impose a sales tax at a rate at least equal to 2 percent, but no more than 6 percent under the Constitution.

The use tax is comprised of a statutory 4 percent rate, and, similar to the sales tax, a constitutional 2 percent rate.  While the total use tax rate is currently set at 6 percent to mirror the sales tax, there is no maximum cap on the tax rate like there is for the sales tax.  The 2 percent use tax rate was added as part of Proposal A and must be levied by the legislature.  The Use Tax Act (Public Act 94 of 1937) authorizes the additional 4 percent rate, but the legislature could increase this without violating the Constitution.

Summary

Through Proposal 14-1, voters are being asked to approve major tax policy changes for the entire state.  This proposal is on the ballot because the legislature, while within its authority to enact these changes on its own, has deferred responsibility for such statutory changes to the citizens of Michigan through a legislative referendum.  The proposal also serves a second purpose.  Ultimately, voters must approve, or reject, new local taxes as required under the Headlee Amendment to the Michigan Constitution and the new use tax will be levied and revenues distributed by a special authority created as a unit of local government.  The 1963 Constitution provides citizens with avenues for direct democracy (e.g., initiative and referendum) and the ability to control the size of government through certain tax limitations (e.g., Headlee Amendment).  Proposal 14-1 encapsulates a rare opportunity for voters to do both at the same time; however, the ballot language is likely to confuse many voters.  This confusion stems, in part, from the complex nature of the subject material but also because the legislature drafted specific language instead of allowing the Secretary of State to draft the language as has happened with all other statewide ballot questions.

PROPOSAL 14-1

APPROVAL OR DISAPPROVAL OF AMENDATORY ACT TO REDUCE STATE USE TAX AND REPLACE WITH A LOCAL COMMUNITY STABILIZATION SHARE TO MODERNIZE THE TAX SYSTEM TO HELP SMALL BUSINESSES GROW AND CREATE JOBS

The amendatory act adopted by the Legislature would:

1. Reduce the state use tax and replace with a local community stabilization share of the tax for the purpose of modernizing the tax system to help small businesses grow and create jobs in Michigan.

2. Require Local Community Stabilization Authority to provide revenue to local governments dedicated for local purposes, including police safety, fire protection, and ambulance emergency services.

3. Increase portion of state use tax dedicated for aid to local school districts.

4. Prohibit Authority from increasing taxes.

5. Prohibit total use tax rate from exceeding existing constitutional 6% limitation.

Should this law be approved?

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Student Assessment Merry-Go-Round

Deliberations between members of the Michigan Legislature and officials from the Michigan Department of Education (MDE) over the future of student assessments, including the decision about which specific test to administer next year, have reached somewhat of a boiling point in recent days.  The ongoing debate about MDE’s plans to implement new state assessments aligned with the Common Core State Standards (adopted by the state in 2010) has led some lawmakers to call for a fundamental shift in the responsibility for administering these assessments by transferring authority out of MDE.

Interest in the administrative organization of state education functions is not new.  The current legislative proposal can be seen as another installment in a much longer running discussion about education governance and functions.  Our 2003 report, Organization of State of Michigan Education Functions, explored some of the issues currently being debated and recommended that, with respect to K-12 education functions handled by the state, accountability and efficiency are best served when certification/accreditation, evaluation, and curriculum leadership and development are housed within the same organizational structure.  While other policy goals may be achieved if these functions are organizationally separated, some degree of accountability and/or efficiency is likely to be sacrificed.

Background

The crux of the current debate and apparent stalemate between lawmakers and MDE over student assessments lies in the state’s governance structure of K-12 education and its basic organization of education functions.  Although K-12 education is delivered by local school districts, state level officials provide policy direction, determine funding, and exercise oversight.  Michigan’s system entrusts the legislature, the Governor, the State Board of Education, and the Superintendent of Public Instruction with different, but sometimes overlapping, roles and responsibilities.  The potential for disagreement among these actors in carrying out their duties has its roots in the organizational structures established in the 1963 Michigan Constitution.

Many education functions, including student assessments currently, are carried out by MDE, an executive branch department headed by the Superintendent of Public Instruction, a constitutional officer (Article VII, Section 3). Unlike other department heads that are appointed by the Governor, the Superintendent is appointed by the eight-member State Board of Education, which is elected at a statewide election.  The Governor serves on the Board as an ex-officio member without the right to vote.  Michigan is one of seven states where the state board of education is elected and the chief state school officer (Superintendent in Michigan’s case) is appointed by the board.  Under this arrangement, the Superintendent does not directly report to the Governor, but instead is tasked with carrying out the policy directives established by the Board.

The legislature plays an important role too.  While Section 3 grants MDE constitutional status, its powers and duties are to be provided by law.  The current proposal to transfer assessment functions to the Department of Treasury is contemplated in amendments to the Revised School Code (House Bill 5581).

It is worth noting that the Governor, through his executive branch reorganization powers (Article V, Section 2), also can effect changes to MDE’s responsibilities.  In fact, between 1993 and 2001, Governor Engler invoked these powers numerous times to remove primary responsibility for various educational functions from MDE and move those functions to other state agencies.

Recommendations for Organizing Education Functions

CRC’s 2003 report, Organization of State of Michigan Education Functions, examined the organization of state education functions and made a number of reorganization recommendations.  This report was requested by the Superintendent of Public Instruction.  At the time, various K-12 education functions were not housed at MDE, but scattered throughout the executive branch in a number of state departments.  This disorganization of education functions was the result of a period of intense efforts by Governor Engler throughout the 1990s to shrink the role of MDE.  Of particular note, the report argued that the administration of student assessment functions should be returned to MDE from the Department of Treasury.  This recommendation remains relevant today.

In making our recommendations for reorganizational changes, we opined that justification for any change in government organization should be premised on two principles, efficiency and accountability.  We reasoned that changes to educational functions should provide an opportunity to improve efficiency, increase accountability, or both.  We also made it clear that changes must comport with existing constitutional provisions, as these represent the will of the people.  Our recommendations were informed by other states’ organizational structures, but cautioned that each state’s situation is unique.

With respect to assessment functions strewn about state government, the report argued that locating education-related functions in the MDE improves accountability and efficiency by grouping like functions together where they can be more readily coordinated and where a single entity can be held responsible.  Specifically, we called for the creation of the Office of Standards, Assessment and Accreditation Services under the MDE Chief Academic Officer to align the responsibilities for three functions: certification, evaluation, and curriculum leadership.  Further, we argued that this office should be in charge of all educational (non-financial) aspects of the MEAP.

We recommended that assessment functions housed within Treasury be transferred back to MDE.  Administration of student assessments requires staff with educational development, test development, and other skill sets conducive to measuring the educational progress of children.  MDE, not Treasury, staff possessed these skills.  We found that this recommendation would align with the experience in other states.  At the time, of the 31 other states examined, primary responsibility for devising and administering statewide assessment programs was universally housed within state departments of education.  Compared to these other states, Michigan was an outlier.  It was the only state where primary responsibility for assessments was located outside the education department.

In 2003, Governor Granholm acted on our recommendations and issued an executive order (EO 2003-20) to return assessment administration to MDE under the direction of the Superintendent of Public Instruction.

Conclusion

Legislators and MDE agree that the current iteration of state assessments, the MEAP, is not aligned to the Common Core State Standards and that a replacement is needed.   There is very little agreement, however, about what should replace the MEAP.  Whether the replacement will be the Smarter Balanced assessment that the MDE has been working towards, a re-vamped MEAP, or some other assessment is presently unknown.  One thing is clear; the policy debate in Lansing about the future of student assessments has hit a stalemate and the state needs a new test for next spring to comply with its current waiver from the federal No Child Left Behind law.  Some lawmakers would like to break the logjam and achieve their policy goals by moving control of state assessment functions away from MDE and place it in the hands of the Department of Treasury.  While this proposed solution may serve as an expeditious policy response and meet other priorities, it most likely would come at a cost of less efficiency and accountability in carrying out state education functions.

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May Revenue Estimates: Downward Revisions Create New Budget Challenges, but Growth Continues

New revenue estimates from state economists are likely to make things much tougher for lawmakers as they attempt to wrap up deliberations on the state’s FY2015 budget.   The annual Consensus Revenue Estimating Conference was held in the Capitol yesterday, and economists from the Department of Treasury and the legislative fiscal agencies agreed on revised revenue forecasts which are down significantly from their previous estimates in January.   However, while most press accounts have highlighted the downward revenue revisions, there was a silver lining as well: revenue growth is expected to continue to be healthy over the forecast period.

The January forecasts lead to headlines about expectations of a $1 billion state surplus.  Unfortunately, as shown in the table below, the new estimates will offset much of those projected gains.

Consensus May 2014

State general fund/general purpose (GF/GP) revenues – essentially the state’s base of discretionary revenues that drive budget decision-making – are now forecast to be $253 million lower than expected in the fiscal year that ends September 30.   Further, these revenues are estimated to be $221 million and $290 million lower than expected in FY2015 and FY2016, respectively.   Estimates of the amount of tax revenues deposited into the School Aid Fund – the state’s second major fund which is the backbone of K-12 education financing – are down $64 million from earlier estimates in the current fiscal year and down by close to $80 million in each of the two following years.

However, while the results of the revenue estimating conference will make matters more difficult for state policymakers as they attempt to wrap up FY2015 budget deliberations, the one positive that comes out of the conference is that future revenue growth remains strong.  The revenue revisions are largely due to adjustments to income tax projections tied to investors’ responses to proposed tax changes that were part of the federal “fiscal cliff” deliberations back in 2012.  After making this one-time adjustment, annual revenue growth is still anticipated to be in the neighborhood of 4 to 5 percent for the general fund and just over 3 percent for the School Aid Fund, consistent with the growth rates projected in January.

Adjusting the Budget to Reflect Revenues

That, however, won’t take the sting out of the budget adjustments that will be necessary to bring things back into balance for FY2015.   As lawmakers in Lansing attempt to conclude their deliberations on the FY2015 budget, the revisions create a new GF/GP budget hole for FY2015 that lawmakers will need to address.

The lower-than-expected revenues won’t pose an immediate problem for the FY2014 budget year that ends in September.   A $1.2 billion GF/GP balance coming into FY2014 will provide a buffer.   That balance was expected to decline to around $600 million by the end of FY2014 even before these revenue revisions.   Now, with lower revenues, current year spending will eat away a little further on this balance, with the year-end balance falling into the $350 to $400 million range depending on final state spending figures for the current year.

But that leaves less revenue to carry into FY2015, and this is where the new budget challenges begin.   Both the House and Senate have already passed their budgets based on the earlier revenue estimates.   Now, the FY2015 budget takes two hits based on these new estimates: (1) a loss of around $200-250 million in the state’s GF/GP “bank account” coming into the new fiscal year; and (2) the loss of $221 million in anticipated revenue for FY2015.   That means revenue resources for FY2015 are suddenly down by over $400 million.

CRC estimates that the GF/GP appropriations contained in House and Senate bills exceed available revenues for FY2015 by somewhere around $350 million – equivalent to roughly 3.5 percent of those totals.  That means some combination of difficult choices for lawmakers, including:

    • Raising revenues – Never popular in an election year, but an option nonetheless.   Among the options, a package of Senate bills to reinstate a use tax levy on Medicaid managed care organizations is currently before the House and would generate more than $150 million in additional net GF/GP revenue as well as over $190 million in new revenue for the School Aid Fund.
    • Cutting spending – The House budget exceeds the Governor’s original proposal by $115 million; the Senate budget is $92 million above the Governor’s proposal.   Lawmakers may need to give back some of these budget enhancements.  On the House side, however, that increase above the Governor’s proposed budget is driven largely by new GF/GP road funding.
    • Using “Rainy Day” revenues – The state’s Budget Stabilization Fund balance currently sits at $508 million with an additional $75 million deposit planned for the current year.   Both the House and Senate FY2015 budgets contain additional pay-ins of $100 million.  Eliminating (or reducing) these new deposits would free up revenue to address the looming shortfall.   However, with the potential for $192 million of the existing BSF balance being used as part of the Detroit bankruptcy deal, this would mean at least pausing the recent trend of building up rainy day reserves.

Next Steps

Legislative leaders are likely meeting even today to work out a “target agreement” for the state budget – essentially a road map for each budget subcommittee which sets a limit on GF/GP funding for each department.   If the Legislature is to meet it’s goal of completing the budget by June 1, that agreement will need to be completed soon, and it will tell the story as to how policymakers have decided to tackle this new budget hole.

Stay tuned.

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Charterized School District Needs State Loan to Avoid Mid-Year Deficit

UPDATED:  May 7, 2014 (see below)

It appears that a state-appointed emergency manager and private management of an academically and financially struggling school district has not been the answer in the Muskegon Heights community.  The chronically ailing school system will need additional financial resources in the form of an emergency state loan to remain open for the rest of the 2013-14 school year and repay its management company for services already rendered.  This new episode for the Muskegon Heights education community raises issues about the structure of Michigan’s school finance system, the operational and academic difficulties involved with managing declining student enrollment, and the policy options available to the state to deal with failing school districts.

In 2012, the Muskegon Heights School District emergency manager simultaneously converted the entire district into a charter school district (Muskegon Heights Public School Academy System).  The emergency manager selected Mosaica Education, Inc., a for-profit education service provider, to operate all four schools of the former Muskegon Heights Public School District.  The original public school district in Muskegon Heights remains in existence solely for the purpose of collecting a dedicated local school operating millage, which is used to eliminate the outstanding deficit and legacy costs of the former district instead of financing the local share of the district’s per-pupil foundation allowance.  Under this arrangement, the revenue from the local tax is replaced, dollar-for-dollar, with funds from the School Aid Fund such that state dollars finance 100 percent of the district’s foundation allowance.

On April 28 of this year, the Muskegon Heights School District received a $1.4 million emergency loan from the State of Michigan to avoid the possible mid-year closure of the Muskegon Heights Public School Academy System and to avoid a projected year-end operating deficit.  At the same time that the loan was approved, the emergency manager terminated the 5-year operating agreement with Mosaica Education, Inc., two years early.  As a result, students of the charter district will experience their second educational transition (i.e., new personnel, new curriculum, etc.) in the last two years.

The new loan represents the third emergency loan made to the financially and academically struggling school district in less than two years.  The first two were made to settle the district’s $12 million accumulated deficit and allow the new charter school district to start with a “clean slate.”  The recent loan is the first emergency loan effectively made to help balance the books of a charter school.  All previous loans were made to traditional public school districts.  Emergency loans to Muskegon Heights now claims over 25 percent of the maximum amount of loans ($50 million) allowed under state law.

Financial problems are not new for the charter school district.  The district ended its first year in operation (2012-13 school year) with a $500,000 deficit in its capital projects fund.  This year, despite receiving two advances totaling more than $400,000 earlier in April, it became clear in late April that the Muskegon Heights Public School Academy System would be unable to correct its finances to avoid ending the 2013-14 year with a general fund deficit.  The prospect of closing early or not being able to pay employees necessitated the new $1.4 million emergency operating loan.

One look at the district’s approved budgets for 2013-14 provides a clear indication of a major cause of the continued financial bleeding.  Even before being charterized, the district was plagued by constant annual student enrollment declines (i.e., enrollment declined by 273 students, or 15 percent, between 2007-08 and 2011-12) as students and families sought different educational options.  Michigan’s school finance system ensures that money follows the student; as Muskegon Heights students left for other schools they took their funding with them.  For years, the district was unable to keep up with the annual revenue reductions and shed costs fast enough.  As a result, the district was constantly operating in the red and had an accumulated general fund deficit of $12 million as of June 30, 2012, before being turned over to the emergency manager.

The declining enrollment trend continued under the emergency manager’s watch, but his original budget did not reflect this reality (and the amended budget does not either).  The district had 1,130 students in the 2012-13 school year.  This year, enrollment fell to 902 students, 20 percent lower.  More important to the current situation is the fact that the original spending plan for the current year was based on increase of 198 students for a total enrollment of 1,328 students.  Missing the enrollment estimate by this much (426 students) directly translated into a discrepancy in state revenue equal to nearly $3 million (based on $7,168 per pupil), requiring a budget adjustment in December of 2013 for the current year, six months into the fiscal year.  Effecting the appropriation reductions of this magnitude necessary to balance the budget, in a condensed time period, was deemed nearly impossible.

The Local Financial Stability and Choice Act (Public Act 436) requires that an emergency manager conduct “all aspects of the operations of the local government within the resources available. . .” The new emergency loan signals that the Muskegon Heights emergency manager is unable to manage the district within the resources available to him.  In light of the broader discussion of school finance statewide, this situation raises very important public policy questions.  If an emergency manager is unable to manage the affairs of the school district in accordance with the mandates of state law and within the resources available, should we expect the same of all other school districts?  Should all school districts be afforded the additional resources available to the Muskegon Heights emergency manager to help them with their finances?

As with the previous $11 million in loans made to the district, the cost of bailing out the charter school district this year will be spread across all other districts in the state.  The loan will be repaid over the next 30 years by diverting the local 18-mill property tax that is intended to finance the district’s per-pupil foundation grant.  Because these funds will be used to repay the loan, the state School Aid Fund will be responsible for covering the full amount of the foundation grant obligations.  As a result, there will be $1.4 million fewer state resources to share with other districts, including those that are financially struggling.

The academic and financial problems in the Muskegon Heights school district are not new.  Many had tried to address these problems and did not succeed.  Now, the emergency manager and his hand-picked educational service provider, while able to slightly improve the learning culture and academic performance in the district over the last two years, have been unable to fix the district’s finances.  It appears that the emergency manager was unable to address a key driver of the financial problem; declining student enrollment.  It is likely that until the manager can stabilize the loss of students, deficits will continue and additional emergency loans required.  Unfortunately, the Muskegon Heights school district is not alone; many more districts are finding it increasingly difficult to effectively manage through the fiscal effects of persistent declining enrollment.

May 7, 2014 UPDATE

At the time of posting (April 30), CRC did not have the documentation related to the $1.4 million emergency loan made on April 24.  According to the information provided by the State of Michigan and received on May 7, the $1.4 million loan will accrue interest over a 30-year period at the rate of 3.45%.  Based on the term and interest rate, the total cost of repaying the loan (principal and interest) will be $2.5 million.  Therefore, the State School Aid Fund will be shorted a total of $2.5 million (not $1.4 million cited in the original post) as the 18-mill local school operating tax is used to repay the loan and not finance the per-pupil foundation allowance.

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