Michigan’s 20-year-old school funding system, based on the passage of Proposal A, is unique in the nation and came about after a political game of chicken. Michigan had a long tradition of local control of education, relying on local elections to set millage rates for property taxes, which in turn provided most of the funding for local school districts.
But by the early 1990s, taxpayers’ cries for property tax relief reached a fever pitch. A dozen ballot proposals to improve the system had failed over the years. The result was a lose-lose proposition for Michigan: residents were frustrated by high property taxes, and funding for local school districts varied enormously across Michigan based on each district’s location and level of affluence.
In July 1993, the legislature passed and the governor signed a law that eliminated all property tax paid for schools. It cut about 64 percent of the $10 billion statewide school budget, effective in 1994-95 school year. The move forced the legislature to come up with a new way to fund schools. Or else.
OK, so what is Proposal A?
In March 1994, voters approved a new system for funding schools known as Proposal A. It led to three key changes:
- Eliminated the use of local property taxes as a source of school funding and created a new state education tax. School districts began to get per-pupil payments from the state.
- The state sales tax increased from 4 cents to 6 cents on the dollar. The extra two cents was to go to the school aid fund, the state budget for schools.
- Required the state’s lowest-funded school districts to receive a basic level of education funding, which raised the amount they received and significantly closed the gap between low-funded schools and others.
State education tax
After Proposal A, a new state education tax was created – 6 mills assessed on state equalized value (half of market value) of all property. Proposal A also capped how much this tax can go up. Growth in taxable value is capped at 5 percent or the rate of inflation, whichever is less. The major point to remember is this: Proposal A means taxpayers can no longer vote to tax themselves extra to pay for ordinary school operations for their local schools. Michigan is the only state in the nation to fund schools with a state property tax and cap local property tax payments for school operations, according to the Education Commission of the States, a Denver-based research organization.
Proposal A also created a new transfer tax of .075 percent on the sales price of real estate that is to go to the state school aid fund. In addition to the 6 mills, non-homestead properties (businesses, rental property and vacation homes) can be assessed an additional 18 mills to go to schools, but local residents must vote periodically to renew this tax.
The "foundation allowance," also known as the foundation grant, is the per-pupil amount of money given to each school district based on the number of students enrolled. It became the primary means to distribute state funding to school districts and accounts for about 67 percent of the state school aid fund. The first foundation allowance paid to school districts was based on the amount of revenue per pupil that district received just prior to the approval of Proposal A. Because schools had been mostly locally funded with property taxes, the initial foundation allowances varied, largely reflecting the variances in local property values and taxes that had existed from district to district.
Payments not created equal
Over the years, increases in school funding were distributed in a way that gave double increases to lower-funded schools in an attempt to continue to close the funding gap among districts. In 1995, the lowest-funded schools received $4,200 per pupil and higher-funded schools received $6,500 per pupil. By 2013-14, the lowest-funded schools reached $7,026 per pupil while higher-funded schools received $8,049 per pupil.
You can still vote to tax yourself for schools...sort of
Proposal A took away taxpayers’ ability to vote to increase their taxes to put money in their schools’ general fund for operations. However, local taxpayers may vote to approve new taxes to fund construction, technology, land purchases or for an Intermediate School District. Michigan, unlike some other states, does not have a state fund for school construction, so this provision allows taxpayers to fund improvements to their local school buildings. Charter schools are not allowed to ask local voters to approve additional taxes for any reason.
School districts where local taxpayers contributed more than $6,500 per pupil prior to Proposal A’s passage in 1994 are called hold-harmless districts. These districts (50+ of the state’s 549 school districts in 2013-14) tended to be wealthier and were allowed to continue to pay additional local property taxes for their schools' operations, exceeding the maximum foundation allowance. The hold-harmless designation allowed those districts to continue to reach pre-Proposal A funding levels and avoid drastic cuts to fit under the state’s Proposal A per-pupil funding.
Why Proposal A has haters
A host of financial problems has led to cries for a Proposal A overhaul. Schools rely on state sales taxes, putting them at the mercy of a state economy that has seen tremendous upheaval since the 1990s. Slumps in sales taxes due to the recession and unemployment have meant less money for schools.
Schools statewide have experienced declining enrollment and therefore declining state funding under the per-pupil funding formula. Cutting costs when students leave is easier said than done, school officials complain. After losing small percentages of students, schools find it difficult to quickly cut budgets or staff because when a district loses a small percentage of students (and the revenue they bring), that doesn’t mean costs to run the district decline.
What’s more, Proposal A was designed to cut taxes and fund schools at a basic level, but was never designed to fund large-scale school reforms, which carry additional, sometimes expensive price tags.
Sources: “The Basics of the Foundation Allowance,” House Fiscal Agency; “The Basics of School Funding,” Senate Fiscal Agency, staff research.