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 two 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 two previous legislative referenda not dealing with state debt asked voters to approve 1) a proposed income tax rate increase (1980), and 2) proposed revisions to public utility rate procedures (1982).

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 two 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 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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Taxpayer Bill for Dissolved School District Grows

New information recently made public reveals the extent of the decades long financial problems that plagued the Buena Vista school district and that, as a result of state policy, will be passed to all taxpayers to rectify.  The district, along with the Inkster school district, was dissolved in July 2013 under a new law when the state determined that the district was no longer “financially viable.”  We now know that the district’s accumulated debt is larger than originally anticipated, the taxpayer cost of repaying the debt is greater, and the time it will take to pay off the debt is longer.

The completed 2012-13 financial audit for the Buena Vista school district was recently sent to the State of Michigan.  Nearly all other school districts submitted their audits by mid November 2013, as required by state law.  It took the Saginaw Intermediate School District (ISD) and the private accountants working with the ISD quite a bit longer to sort through, organize, and make sense of the incomplete financial records of the school district.  The audit provides a clearer picture of the final taxpayer bill associated with shuttering the 432-student district that experienced years of declining enrollment, mismanagement, and financial challenges.  Specifically, it reveals that the bill for repaying Buena Vista’s debts will be nearly ($4.0 million), approximately $1.0 more than originally projected.  Because of the way that the new state policy for school dissolutions works, these costs will be borne directly by other school districts in the state through decreased allocations from the State School Aid Fund over the next three years.

CRC analyzed the new state law allowing for school district dissolutions and discussed the specifics of the Buena Vista case in a December 2013 report.  In that report, CRC highlighted some of the problems created by the law itself and cautioned lawmakers to weigh carefully a number of issues before deciding to pursue another school dissolution.  One key aspect of the law allows an existing 18-mill, locally levied school operating tax to be used to repay school debts instead of being used to fund the per-pupil grants of former Buena Vista students.  Instead, these students’ grants will be financed entirely by state funds.  The Buena Vista district remains in existence solely as a taxing entity until the debts are repaid.  The practical effect of this provision is that fewer dollars are available to all other school districts from the School Aid Fund; the provision effectively socializes the costs of repaying a dissolved district’s debts.  Without dissolution, the district would have been forced to repay its debts from the resources it annually receives from the state, likely over a number of years.

The specifics of the Buena Vista case and the authorization to levy the debt repayment tax is another issue raised with the new law.  Currently, the 18-mill tax levied on nonhomestead (primarily business) property is authorized through 2015, meaning that both the 2014 and 2015 levies will be used to repay district debts (estimated $3.2 million).  Initially, it was estimated that the two levies would be sufficient to satisfy the total outstanding debt; however, it now appears that the tax will fall short, by about $800,000, of the $4.0 million required to repay all district debts.  By law, the Saginaw ISD will be required to ask voters in the geographic area of the former Buena Vista school district to renew the tax, or part of it, for another year to generate the needed funds to fully satisfy the district’s debts.  If the voters do not approve to renew the tax, it is unclear how the remaining debt obligation will be satisfied.

While the audit revealed the extent of the debt the Buena Vista school district accumulated, the state recently acknowledged that there will be additional costs associated with handling district property that was transferred to other school districts as part of the dissolution.  Early this month, the state legislature approved a $5 million appropriation from the School Aid Fund to help other districts with the costs of building maintenance, utility bills, insurance, and security associated with former Buena Vista capital stock.  This cost also will come at the expense of reduced state allocations to all other districts.

The completed 2012-13 audit of the Buena Vista school district reveals that the district’s finances were in more disarray than originally thought and that it will take longer to repay the district’s outstanding debts.  What has not changed with the publication of the audit is the fact that other school districts will be responsible for footing this larger bill; the state will have $9 million less in School Aid Fund dollars to allocate across all other school districts in the state.   Policymakers and others should recognize where the costs and benefits of the state’s school dissolution policy lie.  The benefits, to the degree there are any, are entirely localized; district debts are repaid and former Buena Vista students receive their public education from “better” school districts.  However, the costs of dissolving the district and repaying its debts are spread across all other districts in the state.

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Dissolve Local School Districts with Care

Reflecting on the recent dissolutions of the Buena Vista and Inkster public school districts, the Detroit News cautions state officials, acting under a new law, to take heed of problems created when the state considers future dissolutions.  These concerns were the subject of  CRC’s recent report, School District Dissolutions, and highlighted in the Detroit News’ opinion piece.  The paper recommends that the state should proceed with caution and reserve the new law’s authority for extreme emergencies only.

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“Re-voting” on Michigan’s Medicaid Expansion: What’s Behind the Medicaid Budget Shortfall?

With the legislature perhaps only days away from adjourning for 2013, legislative leaders are busy making decisions on final agenda items for the year.   One of the more significant pending matters involves a supplemental appropriation to address a budget shortfall that developed following enactment in August of legislation that expanded Michigan’s Medicaid program.

The issue first came to light in October, when the Department of Community Health (DCH) revealed that the failure to garner immediate effect on the Medicaid expansion legislation created a $70 million shortfall in the FY2014 budget.  A number of news outlets reported that the Legislature would need to “re-vote” on the contentious Medicaid expansion, and some opponents of the expansion suggested that this “re-vote” presented a second opportunity to block the expansion.

With the Senate signaling that action on the supplemental is possible this week, CRC looks at a three key questions related to the vote and what it means (and doesn’t mean) regarding the state’s Medicaid expansion.

Question 1:  What exactly happened?   Why does the Legislature need to vote again in the first place?

After contentious debate in both the House and Senate, the legislature passed House Bill 4714 in late August.   The bill authorized the expansion of Medicaid eligibility to adults less than 65 years of age with annual incomes up to 133% of the federal poverty guidelines.   The expansion is contingent on the eventual approval by the federal government of two waiver requests that would essentially: (a) require the establishment of enrollee cost-sharing account; (b) increase cost-sharing requirements for enrollees with incomes between 100% and 133% of federal poverty guidelines (with offsetting credits for meeting healthy behavior standards); and (c) require these same enrollees to either leave Medicaid and purchase health insurance through the health care exchange or face a further increase in their cost sharing once they have received Medicaid coverage for 48 months.

The bill also made adjustments to the state budget to reflect the Medicaid expansion, including $1.7 billion in new budget authorization to spend the federal funds that will cover the actual costs of the expansion as well as another $192 million in statewide GF/GP savings tied to the expansion.   These savings arise within programs that currently use state dollars to provide medical and mental health services to adults who will now be shifted into federally-funded Medicaid under the expansion.

However, both the federal costs and state savings assumed in the bill were based on 9 months of expanded Medicaid in FY2014 starting this January.   The Senate withheld immediate effect from the bill, which delayed implementation until late March.   With that, both the budgeted costs and assumed savings from the expansion were no longer accurate; thus the need for corrective action.

Question 2:  So, if there’s no “re-vote” or the “re-vote” fails, does that stop the Medicaid expansion?

No.   The actual shortfall in the budget isn’t related to the appropriation of federal dollars to support the Medicaid expansion.   In fact, there’s more than enough money appropriated to take care of the added Medicaid caseload.   With only six months of expanded enrollment during FY2014, total costs of the Medicaid expansion in FY2014 will be smaller than what were anticipated when the bill was passed by the legislature.

So, in an odd twist, the corrective action needed on the budget may well reduce the appropriations to cover Medicaid expansion, effectively eliminating the surplus appropriations that won’t be needed because the Medicaid expansion will be pushed back.  Of the $1.7 billion included in HB 4714 to finance the expansion, CRC calculations suggest that only $1.1 billion will actually be needed.  Fortunately, this surplus isn’t really much of a problem.  If these excess federal appropriations aren’t directly reduced through a supplemental, they’ll simply go unused and lapse at the end of the fiscal year.

The real budget problem isn’t the excess federal appropriation; it is the lost state GF/GP savings from the delayed expansion.   As illustrated in the table below, House Bill 4714 assumed $168 million in net savings within the DCH budget and another $24 million in savings within the Corrections budget.  The bulk of the savings in the DCH budget is related to adults who receive state-funded mental health services, who will now instead be eligible for Medicaid services funded with federal dollars.   Likewise, the costs of off-site medical services for prisoners as well as substance abuse and other health services provided on behalf of parolees exiting the correctional system will now be met using federal funds under Medicaid, reducing GF/GP costs within the Corrections budget.   With only six months of expansion, however, these savings are reduced by $73 million in total according a recent House Fiscal Agency memo.   It is this GF/GP shortfall that must eventually be addressed to put the state budget back into balance.

Medicaid savings 2

But the key fact is this:   Regardless of whether or when any budgetary adjustment is implemented, there is more than enough appropriation authority to facilitate the added spending of federal funds that will be needed to cover the new Medicaid enrollees under the expanded eligibility provisions.

Question 3:  If the Medicaid expansion isn’t at risk, what’s the hurry on “re-voting”?

Strictly from a budgeting standpoint, there is no particular hurry.   The Legislature had added intent language to HB 4714 earmarking the expansion-related GF/GP savings to a new Roads and Risks Reserve Fund to help finance road repairs.   While the reduced savings mean less will be available in the fund, it also means other program cuts won’t be needed in order to fill the budget hole.   In the end, budget adjustments of some form to clear up the GF/GP shortfall are needed prior to the end of the fiscal year.  Technically, action could wait until closer to book closing next fall.

However, from a political perspective, action this year has one important advantage: an immediate effect vote is no longer relevant to passing the budget legislation.   If a supplemental appropriation bill is passed this week without immediate effect, it will still become effective in late March, well before the end of FY2014.   However, if the budget adjustments are implemented next year through an appropriations bill, immediate effect will become necessary once again.   Without it, the supplemental budget act wouldn’t actually become effective until late March 2015, months after state closes its books on FY2014.

If both the House and the Senate are prepared to grant immediate effect to whatever corrective action hits their desks, then the “hurry” goes away.   But if proponents of Medicaid expansion still have reason to worry about getting the votes needed for immediate effect, they’d be well advised to take care of this issue in 2013.

 

 

 

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The Role of Cost Shifting in No-Fault Policy Reforms

The Citizens Research Council of Michigan recently released the report Medical Costs of No-fault Automobile Insurance, which identifies a number of reform options policymakers could use to address medical prices and usage rates associated with auto accidents in Michigan.  The reform options presented in the paper range in how they impact the current features of no-fault and whom will be most affected.  Several policy options would reduce the prices paid by auto insurers and, if prices are set at reasonable levels, should not impact auto accident victims’ access to medical benefits in addition to maintaining most, if not all, of the other major features of Michigan’s current no-fault system.

However, even though the major features of no-fault are not impacted by some of these reform options, there will still likely be repercussions elsewhere in the health care system.  Reductions in prices would reduce the revenues received by providers, including hospitals.  The majority of health care claims are not due to auto accidents and the portion of revenues provided by auto insurance reimbursement will vary considerably by provider type and other factors.  How providers respond to reduced revenues will vary by provider but may include several scenarios.

First, in response to lower revenues from auto insurers, providers could reduce capacity which may include layoffs of staff, service reductions, or reductions in staff wages.  The scale of these reductions will be determined by the degree to which providers’ revenues are affected by lower prices or other policy reforms.

Second, providers may attempt to replace lost revenues through other means.  Cost-shifting, the practice of charging some customers more in order to cover lower rates paid by other customers, is often borne by private health insurers.  Providers are often unable to collect higher prices from public health insurers, such as Medicare and Medicaid, and from other insurers that pay according to a fee schedule, such as workers’ compensation.  Therefore, they may look to private health insurers as an avenue for recouping lost revenues.  If costs are shifted to private health insurers then it is possible that private health insurers will in turn raise premiums resulting in increased costs for employers and employees.  Each health insurer will have a different response based on their unique circumstances.

Policymakers should be aware of these potential impacts should they consider reforms to Michigan’s no-fault insurance.

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Public Sector Employment Trends In Michigan and the U.S.

Following the publication of our most recent report, Michigan’s Single-State Recession and its Effects on Public Employment, we received an inquiry about Michigan public sector employment trends compared to the trends in other states.  Although there is a brief mention in our report about Michigan’s public sector employment trends relative to the nation, we believe a more thorough look is warranted.

A report from The Nelson A. Rockefeller Institute of Government sheds some light on the question we received, but it did not go into the level of detail requested about Michigan’s experience relative to other states.  The Rockefeller Institute’s report looks at trends in total employment by level of government (state and local) and by broad category (education and non-education) in the wake of the Great Recession. The report also highlighted total public sector employment changes for each state from August 2008 to November 2012 (August 2008 was chosen because it was the peak employment level).  The CRC report focused on changes in public sector employment over a longer period, going back to early 2001.

Over the nearly four and one-half year period examined by the Rockefeller Institute, Michigan had the third largest slide in public sector employment (7.4 percent), behind Nevada (10.1 percent) and Rhode Island (8.3 percent).  In percentage terms, Michigan’s decline was nearly three times as large as the total U.S. public sector employment decline over this period (2.7 percent).  As documented in the CRC report, and confirmed by the Rockefeller Institute, job losses in the local government sector (11.4 percent – second largest decline behind Nevada) fueled the overall public sector decline in Michigan, as was the case for the nation as a whole (3.2 percent).  The local government sector is generally two to three times as large as state government in most states.

Changes in public sector employment by level of government for Michigan and the nation as a whole are shown in the chart below.  The chart displays the total change in monthly employment compared to the December 2007 (official start of the Great Recession) employment level for state and local government.

State and Local Government Employment: MI and U.S.

Slide1

Comparing Michigan’s experience with that of the U.S. public sector as a whole yields a few noteworthy observations.  First, for the U.S. public sector, state and local government employment trends behaved remarkably similar throughout the time period.  In the case of Michigan, the trends followed completely opposite paths from the start; state government employment increased while local government decreased. For the U.S., employment levels in both sectors increased following the onset of the Great Recession and peaked in August 2008.  Since that time, both sectors have continuously shed jobs at more or less the same rate, hitting pre-recession levels in mid-2009 and then falling even more through April 2013.  Compared to the start of the Great Recession, state employment across the U.S. is down about 1.9 percent and local employment is down almost 3.0 percent as of April 2013.  In Michigan, state employment is up almost 7.0 percent, but local government employment is down nearly 13.0 percent.

The second observation has to do with the magnitude of the employment changes in Michigan compared to the U.S.  In the case of state government employment, what accounts for Michigan substantial increase?  And, for local government employment, why did Michigan realize such a massive percentage decline vis-à-vis the U.S. as a whole?  Some insights to these questions can be gleaned from disaggregating the data by sector and by broad category, which is done for state government in the chart below.

State Government Education and Non-Education Employment: MI and U.S.

Slide1Non-education state employment in Michigan (about one-third of the total state category) and in the U.S. overall, responded similarly during economic downturn with a few minor exceptions. Although the Michigan pattern was a little more up and down initially, both Michigan and the U.S. trends have shown steady declines in non-education employment since mid-2009.  As of April 2013, both are roughly five percent below their pre-recession levels.

The changes in education employment at the state level differ significantly.  With 15 public universities, and three of them very large institutions, the Michigan higher education segment represents a larger share of total state employment than in the U.S. as a whole.  Michigan’s employment rise in this sub-sector has been meteoric, increasing non-stop since December 2007 and landing at a level 13.5 percent above its pre-recession level.  CRC attributes the increase in higher education employment to ballooning enrollments, increases in part-time workers, and expanding budgets.  For the U.S., state education employment increased initially following the onset of the economic downturn, but unlike Michigan, remained at this level (between two and three percent above the December 2007 level) for the entire period.  Because of its minority role in the U.S. state education sector, the added education jobs were not sufficient to offset the non-education job losses; therefore, overall state government employment in the U.S. declined slightly since December 2007.

A third and final observation relates to the magnitude of Michigan’s local government employment losses and its potential causes.  Michigan’s job losses in this sector have been much more severe (more than a factor of four) compared to the U.S. total during the Great Recession.  As shown in the chart below, the losses have been fueled by the consistent plunge in education jobs (primarily K-12 education).  Education employment for the U.S. declined more than non-education, but the difference between the two sub-sectors was not as significant as the decline in Michigan.  For the U.S., education lost about 3.5 percent of the jobs in existence in December 2007, compared to a loss of about 2.0 percent of the non-education jobs.  Michigan, in stark contrast, shed over 17.8 percent of the jobs in education compared to the December 2007 level.  Non-education local government employment, which is dominated by public safety, is 6.8 percent below the December 2007.  This job loss is nearly three times as large as the loss in the U.S. for this sector.

Local Government Education and Non-Education Employment: MI and U.S.

Slide1

There is little doubt that Michigan’s public sector has contracted substantially in the wake of Great Recession. What is striking from analyzing the data is the fact that Michigan’s employment contraction in this sector has well exceeded the contraction experienced in the U.S. overall.   The job losses have been most acute in the local government sector, especially education.  The local government slide, which began in the early 2000s and accelerated through the Great Recession, shows little sign of changing course without policy changes at the state level.  Local governments may begin adding jobs with the gradual improvement in property values in the state (local governments depend largely on property tax); however, given the significant employment losses and the dim prospects for rapid improvement in local government budgets, regaining pre-recession employment levels is unlikely for some time, if ever.

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Higher Education Employment Bucking the Trend in Michigan

The Citizens Research Council of Michigan recently published Michigan’s Single-State Recession and its Effects on Public Employment, an in-depth analysis of private and public sector employment levels since 2001.  In particular, the report examines employment changes since the end of the 2008-09 Great Recession.  A key finding about recent job activity is that while private sector employment has enjoyed a moderate rebound from the trough of the Great Recession in June 2009 (nearly 9 percent increase), public sector employment has declined by nearly six percent over the same period.  The slide in public sector employment has been fueled by job losses in the local government sub-sector, which has been shedding jobs continuously since early 2002, with the job losses accelerating prior to the onset of the Great Recession.  These losses show few signs of abating.  On the other hand, state government, which is about one-third the size of the local government sector, experienced an upsurge in employment coinciding with the beginning of the Great Recession and has seen additional job gains in the time since (see Chart below).

HE employ chart 1The public sector is not a monolith, as evidenced by the differences observed in state and local government employment.  Further disaggregating public sector employment by category reveals even more contrasts in the data.  Specifically, the CRC report segregates the employment data by various education categories, breaking it down into two broad categories across both levels of government; K-12 and higher education.  The results are presented in the chart below, which tells two very different stories.

HE employ chart 2Employment in higher education, which includes staff at Michigan’s 15 public universities and 28 community colleges, increased by almost 23 percent since March 2001. The story for K-12 education is completely the opposite; employment in this sector fell by 27 percent over the same period.

The CRC report offers three factors to account for the differences.  First, enrollments at Michigan community colleges and universities ballooned during this period causing institutions to grow with the increased demand.  In contrast, statewide K-12 enrollments have declined each year since 2003.  Second, higher education institutions have access to revenue sources (e.g., dedicated property tax for community colleges and tuition for both colleges and universities) that K-12 districts don’t.  These sources helped higher education institutions shore up their budgets (i.e., maintain or increase personnel levels) when state aid was rolled back or held constant.  Finally, data from the Integrated Postsecondary Education Data System points to a change in employment composition over this period; a shift from full-time to part-time employees at both the college and university level.  Because the Bureau of Labor Statistics data counts the number of jobs and not full-time equivalents, the shift away from full- to more part-time workers drove overall growth in the sub-sector.

The CRC report clearly shows that employment levels in all sectors of the state’s economy do not move in lockstep with the ups and downs of the business cycle.  Private sector employment has seen marked improvement since the end of the Great Recession in June 2009, increasing by nearly nine percent.  Over the same period, overall public sector employment has experienced a decline, led by huge losses in the local government arena, particularly the large sub-sectors of K-12 education (55 percent of local government sector) and public safety (11 percent of local government sector).  Within the public sector, wide variations exist, such as the education sector generally.  At the same time that the K-12 education sub-sector shed jobs, the higher education sub-sector (both the local and state government components) bucked the overall public sector trend and increased after the 2001 recession and again, much more significantly, during the Great Recession.

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