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DDDDDISTRIBUTIONISTRIBUTIONISTRIBUTIONISTRIBUTIONISTRIBUTION OFOFOFOFOF S S S S STTTTTAAAAATETETETETE A A A A AIDIDIDIDID TTTTTOOOOO M M M M MICHIGANICHIGANICHIGANICHIGANICHIGAN S S S S SCHOOLSCHOOLSCHOOLSCHOOLSCHOOLSDDDDDISTRIBUTIONISTRIBUTIONISTRIBUTIONISTRIBUTIONISTRIBUTION OFOFOFOFOF S S S S STTTTTAAAAATETETETETE A A A A AIDIDIDIDID TTTTTOOOOO M M M M MICHIGANICHIGANICHIGANICHIGANICHIGAN S S S S SCHOOLSCHOOLSCHOOLSCHOOLSCHOOLS

AAAAAugust 2011ugust 2011ugust 2011ugust 2011ugust 2011

RepRepRepRepRepororororort 371t 371t 371t 371t 371



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Board of DirectorsChairman Vice Chairman Treasurer

Eugene A. Gargaro, Jr. Jeffrey D. Bergeron Nick A. Khouri

Eugene A. Gargaro, Jr.Manoogian Foundation

John J. GasparovicBorgWarner Inc.

Ingrid A. GreggEarhart Foundation

Marybeth S. HoweWells Fargo Bank

Nick A. KhouriDTE Energy Company

Daniel T. LisKelly Services, Inc.

Sarah L. McClellandJPMorgan Chase & Co.

Aleksandra A. MiziolekDykema Gossett PLLC

Cathleen H. NashCitizens Bank

Joseph R. AngileriCompuware

Jeffrey D. BergeronErnst & Young LLP

Michael G. BickersPNC Financial Services Group

Beth ChappellDetroit Economic Club

Terence M. DonnellyDickinson Wright PLLC

Randall W. EbertsW. E. Upjohn Institute

David O. EgnerHudson-Webber FoundationNew Economy Initiative

Laura FournierCompuware

Paul R. ObermeyerComerica Incorporated

Kevin ProkopRockbridge Growth Equity, LLC

Lynda RossiBlue Cross Blue Shield of Michigan

Jerry E. RushMeritor, Inc.

Michael A. SemancoHennessey Capital LLC

Terence A. Thomas, Sr.Amanda Van DusenMiller, Canfield, Paddock and Stone, PLC

Kent J. VanaVarnum

Advisory DirectorLouis Betanzos

Board of TrusteesTerence E. AdderleyKelly Services, Inc.

Jeffrey D. BergeronErnst & Young LLP

Stephanie W. BergeronWalsh College

David P. BoylePNC

Beth ChappellDetroit Economic Club

Mary Sue ColemanUniversity of Michigan

Matthew P. CullenRock Ventures LLC

Tarik DaoudLong Family Service Center

Stephen R. D’ArcyDetroit Medical Center

James N. De Boer, Jr.Varnum

John M. DunnWestern Michigan University

David O. EgnerHudson-Webber FoundationNew Economy Initiative

David L. EislerFerris State University

David G. FreyFrey Foundation

Mark GaffneyMichigan State AFL-CIO

Eugene A. Gargaro, Jr.Manoogian Foundation

Ralph J. GersonGuardian Industries Corporation

Eric R. GilbertsonSaginaw Valley State University

Allan D. GilmourWayne State University

Alfred R. Glancy IIIUnico Investment Group LLC

Thomas J. HaasGrand Valley State University

James S. HilboldtThe Connable Office, Inc.

Paul C. HillegondsDTE Energy Company

Daniel J. KellyDeloitte. Retired

David B. KennedyEarhart Foundation

Mary KramerCrain Communications, Inc.

David LeitchFord Motor Company

Edward C. Levy, Jr.Edw. C. Levy Co.

Daniel LittleUniversity of Michigan-Dearborn

Sam LoganMichigan Chronicle

Arend D. LubbersGrand Valley State University, Emeritus

Alphonse S. LucarelliErnst & Young LLP, Retired

Susan W. MartinEastern Michigan University

William L. MatthewsPlante & Moran PLLC

Sarah L. McClellandJPMorgan Chase & Co.

Paul W. McCrackenUniversity of Michigan, Emeritus

Patrick M. McQueenMcQueen Financial Advisors

Robert MilewskiBlue Cross Blue Shield of Michigan

Glenn D. MrozMichigan Technological University

Mark A. MurrayMeijer Inc.

Cathy H. NashCitizens Bank

James M. NicholsonPVS Chemicals

Donald R. ParfetApjohn Group LLC

Sandra E. PierceCharter One

Philip H. PowerThe Center for Michigan

Keith A. PrettyNorthwood University

John Rakolta Jr.Walbridge

Douglas B. RobertsIPPSR- Michigan State University

Irving RoseEdward Rose & Sons

George E. RossCentral Michigan University

Gary D. RussiOakland University

Nancy M. SchlichtingHenry Ford Health System

John M. SchreuderFirst National Bank of Michigan

Lloyd A. SempleDykema

Lou Anna K. SimonMichigan State University

S. Martin TaylorAmanda Van DusenMiller, Canfield, Paddock and Stone PLC

Kent J. VanaVarnum

Theodore J. VogelCMS Energy Corporation

Gail L. WardenHenry Ford Health System,Emeritus

Jeffrey K. WillemainDeloitte.

Leslie E. WongNorthern Michigan University

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CRC’s education project is funded in part by grants from the W.K. Kellogg Foundation,the Frey Foundation, the PNC Foundation, Meritor, the Richard C. and Barbara C. VanDusen Family Fund, and a consortium of education groups including the Tri-CountyAlliance for Public Education, Michigan Association of School Boards, Metropolitan DetroitBureau of School Studies, Inc., Michigan Association of School Administrators, MichiganSchool Business Officials, Middle Cities Education Association, Michigan Association ofIntermediate School Administrators, Michigan PTSA, Michigan Association of SecondarySchool Principals, and the Michigan Elementary and Middle School Principals Association.

C I T I Z E N S R E S E A R C H C O U N C I L O F M I C H I G A N

BOARD OF DIRECTORS

M a i n O f f i c e

38777 West Six Mile RoadSuite 208Livonia, MI 48152-3974734-542-8001Fax 734-542-8004

L ansing O ffice

124 West AlleganSuite 620Lansing, MI 48933-1738517-485-9444Fax 517-485-0423

crcmich.org

Eugene A. Gargaro, Jr., Chair Manoogian FoundationJeffrey D. Bergeron, Vice Chair Ernst & Young LLPNick A. Khouri, Treasurer DTE EnergyJoseph R. Angileri Deloitte.Michael G. Bickers PNC Financial Services GroupBeth Chappell Detroit Economic ClubTerence M. Donnelly Dickinson Wright PLLCRandall W. Eberts W. E. Upjohn InstituteDavid O. Egner Hudson-Webber Foundation New Economy InitiativeLaura Fournier Compuware CorporationJohn J. Gasparovic BorgWarner Inc.Ingrid A. Gregg Earhart FoundationMarybeth S. Howe Wells Fargo BankDaniel T. Lis Kelly Services, Inc.Sarah L. McClelland JPMorgan Chase & Co.Aleksandra A. Miziolek Dykema Gossett PLLCCathy H. Nash Citizens BankPaul R. Obermeyer Comerica BankKevin Prokop Rockbridge Growth Equity LLCLynda Rossi Blue Cross Blue Shield of MichiganJerry E. Rush Meritor, Inc.Michael A. Semanco Hennessey Capital LLCTerence A. Thomas, Sr.Amanda Van Dusen Miller, Canfield, Paddock and Stone PLCKent J. Vana Varnum

PPPPPUBLICUBLICUBLICUBLICUBLIC K K K K K-12 E-12 E-12 E-12 E-12 EDUCDUCDUCDUCDUCAAAAATIONTIONTIONTIONTION INININININ M M M M MICHIGANICHIGANICHIGANICHIGANICHIGAN

In 2010, Michigan residents found public primary and secondary educationconfronted with a number of challenges:

• State revenues were falling;

• Local revenue growth were stagnating;

• K-12 education service providers were facing escalating cost pressures, withannual growth rates outpacing the projected growth in available resources;

• The amount of federal education funding spiked as result of the AmericanRecovery and Reinvestment Act of 2009 (ARRA) and produced a budgetary“cliff” when the additional dollars expired; and

• School district organization and service provision structures were beingreviewed with the goals of reducing costs and increasing efficiencies.

Because of the critical importance of education to the state, its economy, and itsbudget, the Citizens Research Council of Michigan (CRC) planned a long-term projectresearching education in Michigan with an emphasis on the current governance,funding, and service provision structures and their sustainability.

Public education has been governed largely the same way since its inception in the1800s. It is important to review the current organization of school districts andstructure of education governance, as well as to review new and different ways toorganize and govern public education, to determine if Michigan’s governancestructure meets today’s needs. The school finance system has been revamped on amore regular basis throughout history. Changes have been made to address a hostof concerns, including per-pupil revenue disparities, revenue-raising limitations ofstate and local tax systems, as well as taxpayer discontent with high property taxes.Michigan’s current finance system was last overhauled in 1994 with the passage ofProposal A, providing sufficient experience to reconsider the goals of the financereforms and determine whether the system has performed as originallycontemplated.

In addition to analyzing education governance and revenues, it is important toreview cost pressures facing districts and how education services are provided inMichigan. School budgets are dominated by personnel costs, the level of which arelargely dictated by decisions made at the local level. Local school operatingrevenues are fixed by decisions and actions at the state and federal levels, but localschool officials are tasked with making spending decisions and matching projectedspending levels with available resources. However, those local decisions are oftenimpacted by state laws (e.g., state law requires districts to engage in collectivebargaining, to participate in the state-run retirement system, and to serve specialeducation students through the age of 25). The freefall of the Michigan economysince the 2001 recession has impacted all aspects of the state budget, including K-12education, and requires state and local officials to review how things are done in anattempt to increase revenues and/or reduce costs.

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a nii

Citizens Research Council Education Project

In 2009, CRC was approached by a consortium of education interests and asked to take acomprehensive look at education in Michigan. CRC agreed to do this because of the importanceof education to the prosperity of the state, historically and prospectively, and also because ofthe share of the state budget that education demands. Education is critical to the state and itscitizens for many reasons: 1) A successful democracy relies on an educated citizenry. 2)Reeducating workers and preparing students for the global economy are both crucial totransforming Michigan’s economy. 3) Education is vital to state and local budgets. 4) Publiceducation represents a government program that many residents directly benefit from, not tomention the indirect benefits associated with living and working with educated people. As withall CRC research, findings and recommendations will flow from objective facts and analyses andwill be made publicly available. Funding for this research effort is being provided by theeducation consortium and some Michigan foundations. CRC is still soliciting funds for thisproject from the business and foundation communities.

The goal of this comprehensive review of education is to provide the necessary data andexpertise to inform the education debate in Lansing and around the state. This is a long-termproject that will take much of the focus of CRC in 2010 and into 2011. While an overall projectcompletion date is unknown, CRC plans to approach the project in stages and release reports asthey are completed. Topic areas CRC plans to study include education governance, K-12revenues and school finance, school district spending analyses, public school academies (PSAs)and non-traditional schools, school district service provision and reorganization, and analyses ofchanges to Michigan’s educational system.

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n iii


ContentsSummary ................................................................................................................... viiIntroduction ................................................................................................................ 1Background ................................................................................................................. 3

Models of Unrestricted State Aid .................................................................................... 3Foundation Programs ............................................................................................... 6Power Equalization Programs ................................................................................... 7

Brief History of Michigan’s Equalization Programs ............................................................ 7

Michigan’s Foundation Grant ...................................................................................... 9History of the Foundation Grant ................................................................................... 10

The Per-Pupil Funding Floor ................................................................................... 10Initial Policy Considerations and Objectives.............................................................. 10Foundation Grant Components ............................................................................... 12

Annual Adjustments to the Foundation Grant: Mechanisms and Growth ......................... 14Foundation Index and the 2X Formula ..................................................................... 15Uniform Increases and Additional Equity Payments .................................................. 18Changes from FY1995 to FY2007 ............................................................................ 19Changes since FY2007 ........................................................................................... 23

Major Factors Influencing Foundation Grant Growth ...................................................... 26Statewide Enrollment Changes: Trends and Causes ................................................. 29Enrollment Changes at the District Level ................................................................. 30Different Effects of Declining Enrollments ................................................................ 31

Local Budgets............................................................................................. 34State School Aid Fund Budget ...................................................................... 34

Characteristics of Declining Enrollment Districts ....................................................... 35Addressing Declining Enrollments ........................................................................... 40

Blended Count............................................................................................ 40Categorical Funding .................................................................................... 41

Per-Pupil Revenue Disparities .................................................................................. 42Differences at the District Level ................................................................................... 42Differences at the Student Level .................................................................................. 47Foundation Growth and District Wealth ......................................................................... 48The Achievement Gap ................................................................................................. 53

Foundation Growth and District Racial Composition .................................................. 54Total Foundation Revenue Changes by District Type ...................................................... 55Evaluation of Michigan’s Efforts to Address Funding Disparities: National Context ........... 60

Is School Funding Fair? A National Report Card....................................................... 60The Education Trust’s Funding Gaps Report ............................................................. 61

Issues to Consider Regarding Further Per-Pupil Revenue Equalization ............................. 62What Level of Equalization?.................................................................................... 63Financial Costs of Further Equalization .................................................................... 63Equalization and Student Academic Achievement ..................................................... 65

The Michigan Experiment ............................................................................ 65Performance Gains in Low-Spending Districts ................................................ 65

Conclusion ................................................................................................................. 67

iv


Illustrations

Illustration 1 Foundation Grant Calculation ............................................................................... 13

Illustration 2 Calculation of Foundation Index ........................................................................... 15

Charts

Chart A Effect of Change in Retirement System Contribution Rate on Basic Grant ......................... viii

Chart 1 Basic Foundation Grant: FY1995 to FY2007 ................................................................... 20

Chart 2 Minimum Foundation Grant: FY1995 to FY2007 ............................................................. 21

Chart 3 Maximum Foundation Grant: FY1995 to FY2007 ............................................................ 22

Chart 4 Foundation Grant Amounts for Charter Schools .............................................................. 24

Chart 5 Changes in Inflation-Adjusted Foundation Grants: FY2000 to FY2010 ............................... 26

Chart 6 Effect of Change in Retirement System Contribution Rate on Basic Grant ......................... 27

Chart 7 Growth of SAF Revenues, Local School Operating Taxes, and Foundation Grant ................ 28

Chart 8 Annual Statewide Enrollments and Blended Foundation Pupil Memberships ...................... 29

Chart 9 Annual Enrollment Changes in School Districts: FY2004 to FY2009 ................................. 31

Chart 10 Annual Enrollment Changes in Traditional Public Schools: FY2004 to FY2009 ................... 33

Chart 11 Annual Enrollment Changes in Charter Schools: FY2004 to FY2009 ................................. 33

Chart 12 Annual Rate of Change in Enrollment by School District: FY2003 to FY2009 .................... 36

Chart 13 Declining and Growing Districts by Type: FY1995 to FY2009 ........................................... 37

Chart 14 Declining and Growing Districts by Size: FY1995 to FY2009 ............................................ 38

Chart 15 Distribution of Districts by Foundation Grant: FY1994, FY2000, FY2007........................... 46

Chart 16 Distribution of Districts by Foundation Grant: FY2007 and FY2010 .................................. 46

Chart 17 Annual Rate of Change in Total Foundation Revenue: FY1995 to FY2009 ......................... 56

Chart 18 Detroit Resident Enrollments: FY2003 to FY2010 ........................................................... 58

Chart 19 School Districts by Foundation Grant Grouping: FY1995, FY2000, and FY2009 ................. 62

Chart 20 Traditional Public School Students by FY2009 Foundation ................................................ 64

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n


Tables

Table A Enrollment Changes in Traditional Public School Districts: FY1995 to FY2009 .................... ix

Table B Changes in Enrollment, Foundation Grant, and Total Foundation Revenue by District Type:FY1995 to FY2009 ........................................................................................................ ix

Table 1 School Districts by Per-Pupil Revenue Group: FY1994 and FY1995 .................................. 12

Table 2 Select Hold Harmless Districts FY2000 Per-Pupil Increases .............................................. 16

Table 3 Minimum, Basic, and Maximum Per-Pupil Foundation GrantsFY1995 through FY2007 ............................................................................................... 19

Table 4 Minimum and Basic/Maximum Foundation Grants: FY2008 to FY2010 ............................. 25

Table 5 Enrollment Changes in Traditional Public School Districts: FY2008 to FY2009 ................... 32

Table 6 Enrollment Changes in Traditional Public School Districts: FY1995 to FY2009 ................... 35

Table 7 Lowest and Highest Foundation Grants .......................................................................... 43

Table 8 Inflation-Adjusted Average Foundation Grants by District Group:FY1994, FY2000, and FY2009 ....................................................................................... 45

Table 9 Inflation-Adjusted Average Foundation Grants by Student Group:FY1994, FY2000, and FY2009 ....................................................................................... 47

Table 10 Inflation-Adjusted Average Foundation Grant byDistrict Median Household Income: FY1994 and FY2009 ................................................ 48

Table 11 Inflation-Adjusted Average Foundation Grant byDistrict Property Wealth: FY1994 and FY2009 ............................................................... 49

Table 12 Inflation-Adjusted Average Foundation Grant byPercent of Free or Reduced-Price Lunch Eligible Students: FY1994 and FY2009 ............... 50

Table 13 At-Risk Categorical Funding History and Per-Pupil Proration ............................................. 52

Table 14 Effects of Prorated At-Risk Funding on Districts Receiving Minimum Foundation Grant ....... 52

Table 15 2010 MEAP Scores ....................................................................................................... 53

Table 16 Distribution of African American Students ...................................................................... 54

Table 17 Inflation-Adjusted Average Foundation Grants byPercent of African American Students: FY1994 and FY2009 ............................................ 54

Table 18 Changes in Enrollment, Foundation Grant, and Total Foundation Revenue by District Type:FY1995 to FY2009 ....................................................................................................... 55

Table 19 Changes in Enrollment, Foundation Grant, and Total Foundation Revenuein Select Districts within Urban Areas: FY1995 to FY2009 ............................................... 57

Table 20 Detroit Resident Enrollments: FY2003 and FY2010 ........................................................ 59

Table 21 Estimated Cost of Equalizing FY2009 Foundation Grants at Two Levels ............................. 64

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n v

CRC Report




Summary

vii

In March 1994, state voters approved a ballot pro-posal (Proposal A) to amend the 1963 Michigan Con-stitution, ushering in one of the final pieces of a newpublic K-12 education finance system. Proposal A,along with a host of statutory changes adopted inlate 1993 and early 1994, completely altered howstate and local public resources for K-12 educationare collected and distributed to public school dis-tricts. The new system shifted primary responsibil-ity for financing schools from local districts to thestate government. It decreased the role of localproperty taxes and increased the role of state taxes,primarily through an increase in the sales tax rate.School funding centralization at the state level wasaccompanied by the replacement of a power equal-ization program with a per-pupil foundation grantprogram to allocate state aid to local districts. Thefoundation grant program with its constitutional per-pupil revenue floor established by Proposal A alsocentralized decision making about the amount of per-pupil revenue that each school district receives (i.e.,its foundation grant) and the annual adjustmentsmade to each districts’ foundation grant. Thus, sincethe mid-1990s, state officials, not local voters andschool officials, determine the amount of per-pupilrevenue each district receives.

Since its implementation in state Fiscal Year 1995(FY1995), a major policy directive of the foundationgrant has been greater equity in the distribution ofper-pupil general operating revenues across schooldistricts. In this sense, equity is defined as the sameper-pupil revenue amount (total state and local) re-gardless of student characteristics (e.g., wealth,learning ability, race etc.) and/or district character-istics (e.g., geographic location, type, costs, etc.).Beginning with the initial grant amounts establishedin FY1995 and over the past 16 years, considerableprogress has been made towards the goal of greaterequity as the gap between the lowest and highestper-pupil grants has been narrowed. Despite thisprogress, absolute equity has not been achieved anda large gap still exists. Per-pupil revenue equaliza-tion gains were the greatest in the years immedi-ately following Proposal A, FY1995 to FY2000, when

state School Aid Fund revenue growth was the stron-gest. Smaller and less frequent gains have beenachieved in subsequent years.

Per-pupil revenue equalization has been achievedover the years almost exclusively through policiesdesigned to raise the floor (i.e., provide greater an-nual increases to the lowest foundation grants). InFY1995, 307 traditional public school districts re-ceived foundation grants less than the basic or tar-get amount. By FY2010, 396 districts (of 551 dis-tricts) received the target per-pupil amount. In termsof the spread between the lowest and highest foun-dation grants, equalization reduced the gap fromapproximately $6,300 per pupil in FY1995 to about$5,000 per pupil in FY2010.

Efforts to increase the funding for the lowest rev-enue districts resulted in different per-pupil revenuegrowth rates across foundation grants. Because ofthe disparate growth districts, the lowest founda-tion grants have seen growth relative to inflationsince FY1995, but the growth rates of the higherfoundation grants have trailed inflation since Pro-posal A’s implementation. However, during the lastten-year period as Michigan’s economy struggled andstate education revenue growth has been con-strained, inflation outpaced foundation grant growthfor all districts. Today, the inflation-adjusted amountof the foundation grant in many school districts isbelow where it was in FY1995, but there is muchmore equity across districts.

The purchasing power of a district’s foundation granthas been affected by the growth in the requiredemployer contributions to the retirement systemwhich finances school employee pension and retireehealth benefits. Since 1995, school districts havebeen entirely responsible for this cost and the em-ployer contribution rate has exhibited a long-termupward trend. In some years, the rate grew morerapidly than growth in the foundation grant, thusrequiring larger shares of the foundation grant to bededicated to financing the retirement contribution.The increase in the rate between FY1995 and

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a nviii

FY2010, when compared to the growth in the foun-dation grant over this period and after adjusting forinflation, effectively reduced the purchasing powerof the foundation grant (see Chart A).

Under the foundation grant program, the amount ofa district’s grant is only part of the equation thatdetermines the total general operating revenuesavailable to that district. Of equal, if not greater,importance is the number of students enrolled inthe district. At the district level, declining enroll-ment trends, both in the near- and long-term, canhave profound effects on the amount of overall re-sources available. Enrollment levels are affected bymany things, including the broad demographic and

economic factors affecting statewide enrollmentnumbers, the competition for students from othertraditional public schools and charter schools, andthe alternatives to public education, such as privateschools and homeschooling. Over 60 percent ofschool districts have experienced some degree ofenrollment decline between FY1995 and FY2009,with a good portion of these seeing enrollment de-clines of 10 percent or more (see Table A). InFY2009, nearly as many children were educated indeclining districts as growing districts when com-pared against enrollment levels of FY1995. Statepolicies intended to help districts cope with the fis-cal challenges resulting from declining enrollments(e.g., supplemental grant funding and changes to

Chart AEffect of Change in Retirement System Contribution Rate on Basic Grant

$8,012

$7,029

$7,180$7,899

$7,162

$6,500

$7,000

$7,500

$8,000

$8,500

FY19

95

FY19

96

FY19

97

FY19

98

FY19

99

FY20

00

FY20

01

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

Change No Change

* Basic grant adjusted using U.S. Consumer Price Index (state fiscal year basis) and MPSERS contribution rate

Source: Senate Fiscal Agency; Office of Retirement Services, US Bureau of Labor Statistics

DISTRIBUTION OF STATE AID TO MICHIGAN SCHOOLS


Table AEnrollment Changes in Traditional Public School Districts: FY1995 to FY2009

Number of Percent of Total Percent ofEnrollment Change Districts Districts Enrollment StudentsDecline >33% 50 9.1 141,553 9.4Decline 10% to 33% 186 33.8 339,183 22.4Decline 0.1% to 10% 98 17.8 245,087 16.2 Subtotal 334 60.7 725,823 48.0

Increase 0% to 10% 87 15.8 283,431 18.7Increase 10% to 33% 83 15.1 293,493 19.4Increase > 33% 47 8.5 210,857 13.9 Subtotal 217 39.3 787,781 52.0

Source: Center for Educational Performance and Information

enrollment counts) have had little impact becauseof the great, and growing, number of districts thatexperience enrollment losses each year and, in somecases, the magnitude of the issue in districts hard-est hit by year-over-year declines.

Combining the inflation-adjusted growth in districts’foundation grants with enrollment changes since Pro-posal A reveals the effects of both factors on totaloperating revenues. Table B provides a summaryof the interaction of enrollment changes and foun-dation grant changes from FY1995 to FY2009 andtheir cumulative effect on the growth in total foun-

dation revenue by type of traditional public schooldistrict. When enrollment and foundation grantchanges are combined, a total of 273 districts, nearlyhalf of all traditional public school districts, have seena decline in their inflation-adjusted total foundationrevenue between FY1995 and FY2009.

The near-singular pursuit of per-pupil revenue equal-ization as the primary policy objective of policymakersin implementing the Proposal A financing system hasmeant that other policy goals have been largely un-addressed. Greater amounts of funding have beendirected to districts with low per-pupil revenues be-

Table BChanges in Enrollment, Foundation Grant, and Total Foundation Revenue by District Type:FY1995 to FY2009(FY2009 Dollars)

Real Per-Pupil TotalEnrollment Foundation Grant Foundation Revenue

Decline Gain Decline Gain Decline GainCity 18 8 19 7 18 8Suburban 47 102 93 56 56 93Rural 269 107 80 296 199 177Total 334 217 192 359 273 278

Source: Center for Educational Performance and Information; Senate Fiscal Agency; U.S. Bureau ofLabor Statistics, Consumer Price Index (state fiscal year basis); CRC calculations.

ix

CRC Report


fore Proposal A; however, these were not the poor-est districts as measured by average household in-come and/or per-pupil property wealth. Thus, thepoorest districts did not benefit the most from thepolicies intended to address equity.

In addition to district wealth, annual foundation grantadjustments ignored other important district char-acteristics, such as racial composition. Districts withhigh concentrations of minority students, which alsostruggle academically, did not receive the greatestpercentage increases under Proposal A. Further-more, the overall finances in many of these districtshave been adversely affected by significant enroll-ment declines over the years.

Have Michigan’s efforts to equalize per-pupil fund-ing resulted in improved academic performance?This is a question that academicians and research-ers looking at school finance reforms in many stateshave sought to answer for some time. Generally,such inquiries have struggled to establish a long-term and definitive connection between financialresources (inputs) and student academic perfor-mance (outputs), especially when examining changesto school finance systems. Proposal A provided anopportunity to examine this relationship in a newlight because of the dramatic changes involved.Michigan State University economist Leslie Papke’s,Ph.D. on-going research suggests that students inschool districts that benefited the greatest from per-pupil revenue equalization (i.e., received the great-est revenue increases) saw larger increases on stan-dardized tests than students from like districts thatreceived fewer resources over time. Furthermore,the observed improvements were greatest for dis-tricts with lower test scores initially. Dr. Papke’s re-search adds evidence to counter the popular con-tention that simply adding more resources to schoolswill not yield significant student improvements. Itshould be noted, however, that this research alsorevealed that the resources needed to effect rela-tively modest changes in student performance aresubstantial.

Funding for public K-12 education under ProposalA’s school finance system is entering a new phase.In the near-term, this new phase is characterized bya reduction in the aggregate state revenue base in

FY2009 and FY2010; revenue growth that trails theprojected growth in spending each year; and an in-creasing number of students being educated in de-clining enrollment districts. At the same time and inthis era of resource constraints, public schools arebeing asked to educate children to a higher stan-dard, to improve student outcomes, to increasegraduation rates, and to prepare kids for success ina globally-competitive workforce or post-secondaryeducation. Over the long run, state policymakersmust decide whether the current finance system willenable schools to meet specified performance bench-marks and ensure a competitive state well into thefuture.

The period from 1995 to 2010 provides an opportu-nity to take stock and evaluate how the state’s schoolfinance system responded to major changes affect-ing the state’s population and economy. This ex-amination is particularly important given the currentfiscal challenges facing the state budget and the al-location of scarce resources among competing ser-vices and programs, including funding for K-12 pub-lic education. Given the fiscal realities of today andthe evidence provided by the past 16 years underProposal A, the timing may be right to consider schoolfinance reform.

Further, school finance reform is unlikely to occur onits own; rather it is likely to be paired with a muchbroader education agenda, such as governance/man-agement reforms; a renewed focus on student per-formance; and/or efforts to provide greater and morediverse educational choice. It is also very likely thatschool finance reform will accompany changes in an-other public policy arena, such as state and localtaxes, akin to Proposal A’s objective to reduce prop-erty taxation. Regardless of the motivation for re-form or how changes to the state’s school financesystem are packaged, some key questions arisingfrom the experiences under Proposal A will help guidethe debate and discussions about possible modifica-tions or alternatives to the current system.

Contemplating changes to the system, policymakersand voters likely will face some fundamental choicesthat touch upon the issues of local control, intergov-ernmental fiscal matters, state and local tax policy,and the relationship between funding and student

x



performance. Examples of the choices thatpolicymakers and voters might consider include:

Should the degree of funding centralization atthe state level be reduced to allow some amountof local control over the amount of operating rev-enues available each year to educate children?Given the recent cuts in state aid to all schooldistricts in response to the economic downturn,should districts at least have the ability to re-place these resources locally?Does it make sense to prevent higher revenuedistricts from raising additional revenue to sup-port more spending in order to further enhanceper-pupil revenue equity on a statewide basis?In a revised system, should the basic formulafor distributing general operating revenues to dis-

tricts include an adjustment to mitigate the ef-fects of declining student enrollments?Should this basic formula take into account theadded costs of educating certain student popu-lations as opposed to addressing these coststhrough categorical grants?Should policymakers and voters pursue furtherreductions in the per-pupil funding gap betweenlower- and higher-revenue districts? If so, howlong should it take to achieve these equity gains?What is a reasonable cost?Should additional funding, when it becomes avail-able, be targeted towards low-performing dis-tricts, where the gains might be greater? Alter-natively, should additional funding go to thosedistricts already performing at the top?

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CRC Report


C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n 1


Introduction

benefit of substantial amounts of federal funds tomitigate the reduction in state tax revenues. Whilesome state budget cutting did take place over therecent period, the full effects of the Great Recessionhave not been incorporated into the state budget.Entering FY2012, however, these temporary re-sources are exhausted and revenues have not re-bounded to their pre-recessionary levels. Thus, fur-ther budget modifications are necessary to align statespending with available resources.

Michigan continues to grapple with the fiscal aftereffects of the worst economic decline since the GreatDepression – state tax revenues witnessed two con-secutive years of decline in Fiscal Year 2009 (FY2009)and FY2010 in response to massive employment andpersonal income losses. These revenue declines andtheir impacts on the state budget were made worseby the effects of previously agreed-to tax policychanges that came on-line simultaneously. Fortu-nately, over the near-term, policymakers had the

Concurrently, a new cohort of state lawmakers anda new governor are assuming control over the state’sfinances, including financing public K-12 educationservices provided to approximately 1.5 million schoolchildren in 775 independent school districts acrossthe state. These decision makers inherit a public K-12 education finance system that dates back to themid-1990s and the major statutory and constitutionalchanges enacted at the time. While significant eco-nomic and demographic changes have occurred sincethat time, the state’s financing system has remainedlargely intact – the major sources of revenues andthe primary method of distributing those revenues

have undergone few structural modifications. De-spite the dearth of systemic changes, K-12 finances,whether measured in the aggregate or at the per-pupil level, have been noticeably affected by thechanges in the state’s population and its economicwell-being. Also, funding for individual school dis-tricts (and school children) has been affected by re-forms in policy and law.

Funding for public K-12 education under the schoolfinance system created by 1994’s statewide ballotProposal A is entering a new phase. In the near-term, this new phase is characterized by a reduction

Part of a Series on Public Education in Michigan

This report is part of a series on public education in Michigan and the second in the series on the wide-reachingtopic of school finance. In September 2010, CRC issued its first finance report, State and Local Revenues forPublic Education in Michigan, explaining Michigan’s school finance structure and analyzing potential reforms.This report, a follow-up to that report, focuses on the distributional effects of the state and local revenues raisedand dedicated to K-12 education.

Other reports include the primer in the series released in January 2010, Public Education Governance in Michigan,which describes the complex governance structure and functions carried out by all three levels of government:federal, state, and local. Since January 2010, CRC has released the following reports: Nontraditional K-12Schools in Michigan, which explores the role of charter, parochial, and other means of educating children outsideof the public school system; Early Childhood Education, which discusses the value of investing in preschool andkindergarten programs; Child Care and the State, which describes child care options and average costs andreports what is known about the effects of various child care arrangements on children’s development; andReform of K-12 School District Governance and Management in Michigan, which analyzes different models forgoverning education systems. Future papers will discuss education policy issues, such as school district organizationand responses to districts that find themselves in deficit, in more detail.

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n2

in the aggregate state revenue base of dedicatededucation taxes; revenue growth that trails the pro-jected growth in spending each year; and an increas-ing number of students being educated in decliningenrollment districts. At the same time and in thisera of resource constraints, public schools are beingasked to educate children to a higher standard, toimprove student outcomes, to increase graduationrates, and to prepare kids for success in a globally-competitive workforce or post-secondary education.Over the long run, state policymakers must decidewhether the current finance system will enableschools to meet specified performance benchmarksand ensure a competitive state.

The period from 1995 to 2010 provides an opportu-nity to take stock and evaluate how the state’s schoolfinance system responded to major changes affect-ing the state’s population and economy. This ex-amination is particularly important given the currentfiscal challenges facing the state budget and the al-location of scarce resources among competing ser-vices and programs, including funding for K-12 pub-lic education. Given the fiscal realities of today andthe evidence provided by the past 16 years underProposal A, the timing may be right to consider schoolfinance reform. Further, school finance reform isunlikely to occur on its own; rather it is likely to bepart of a much broader education agenda, such asgovernance/management reform, efforts to providegreater and more diverse educational choice, or an-other policy-related subject, such as Proposal A’sreduction in property taxes or broad state/local tax

restructuring. Regardless of the motivation for re-form, much can be gleaned from the current financesystem when changes in per-pupil funding are ex-amined through a variety of lenses.

In a previous report CRC examined the performanceof the resources, in the aggregate and individually,dedicated to finance education since enactment ofProposal A and the prospects for growth, stabilityand adequacy.1 As a follow up, this report looks atthe distribution of those resources to school districtsat the per-pupil level. The primary focus of this pa-per is the main allocation method used to distributegeneral operating revenues (state and local) to schooldistricts for serving general education students – thefoundation grant program. Although very important,this report gives less attention to how state dollarsare targeted for specific educational purposes (i.e.,categorical funding). It examines the history andorigins of the foundation grant and the major publicpolicy goals it was intended to address. It evaluatesthe progress made towards these goals and identi-fies other common public policy objectives not di-rectly addressed by the state’s foundation program.Attention is paid to the secondary effects, perhapsunintended, resulting from the singular pursuit ofthe stated policy goals. It discusses what would beinvolved in future efforts to further narrow the per-pupil revenue gap between lower- and higher-rev-enue districts. The report also examines evidencethat per-pupil funding increases have resulted inhigher student achievement in those districts thatbenefited the most from funding equalization.



Over the last 200 years, the role of state govern-ments in financing K-12 education has expanded dra-matically. Early on, the role of state governmentswas simply to authorize schools to generate theirown local support, primarily through the propertytax. State responsibility for financing public educa-tion grew incrementally over the years as statesendeavored to make sure that all schools providedat least a minimal program. The role of state fi-nances in local public education expanded furtherwhen it became clear that the locally dominated sys-tem, financed by property taxes, produced extremevariations in support for schools at very different lev-els of tax effort (i.e., property tax rates). In theearly part of the 20th century, state aid to local schoolsincreased with efforts to equalize per-pupil revenueacross district.

In the 1920s, states accounted for 17 percent oftotal education revenues while local sources ac-counted for 83 percent. State governments’ rolecontinued to increase and reached nearly 50 per-cent by the mid 1980s, while the local share de-clined to 44 percent (with federal funding contribut-ing roughly 6 percent). The pattern changed duringthe late-1980s and early-1990s, when the state sharedeclined slightly and the local share increased. Sincethat time, the state/local shares have fluctuatedsomewhat, with the state regaining the primary roleand local revenues assuming a slightly smaller role.Throughout the most recent period, the federal shareshowed consistent annual growth in response to thepassage and implementation of the No Child LeftBehind Act of 2001.2

In 2008 (the latest nationwide data available), pub-lic elementary and secondary school districtsthroughout the United States spent $506.8 billionfor current operations and $68.7 billion for capitalpurposes (capital outlay and debt financing). Of the

total revenue used to finance education outlays (op-erations and capital), the states accounted for 48percent, local school districts 44 percent, and thefederal government 8 percent.3 There was somevariation among the states in terms of relative shares;however, generally, states are responsible for nearlyhalf of all school revenues. Although local sourcesaccount for substantial amounts, in many cases, thestates largely control these resources through limi-tations placed on the type(s) and amount of localtaxes available to finance schools. State financingcontrol of K-12 public education, whether by director indirect means, is a modern reality in the UnitedStates.

Models of Unrestricted State Aid

States primarily distribute state-raised revenues toschool districts, with minor amounts being directlyallocated to individual schools, teachers, or otherentities. States employ a number of methods toallocate revenues to individual districts and in manycases, state school-aid systems consist of multiplecomponents designed to serve different purposes.Depending on the state, local districts can receivestate support through a mix of different programs,creating a complex system of intergovernmental rev-enue sharing. Each program can have its own uniquefunding source, eligibility criteria, and allocationmethod.

Today, there are two primary methods to distributestate aid: general (block) grants and categoricalgrants. General grants are provided to local dis-tricts with few strings attached, allowing districts toallocate funds as they see fit. These funds are usu-ally used to support school districts’ general opera-tions. With categorical grants, the state specifieshow the funds it distributes are to be used. Whilesome states distribute a large portion of state aid on

Background

CRC Report


a categorical basis (because state aid plays a rela-tively minor role compared to the role played by lo-cal revenue sources), Michigan relies heavily on theconcept of general assistance. In state FY2011 nearly90 percent of the total state-source School Aid Fundrevenue is distributed to local districts through thefoundation program. The balance of state schoolfunding allocated through the state School Aid Fundbudget, and all federal funding, isdistributed as categorical grants todistricts.

States use three models to distrib-ute unrestricted resources to localschool districts: flat grants, fullstate funding, and equalization pro-grams. These broad categoriza-tions can be further refined intosubcategories, which can hide con-siderable variation among thestates. The diversity observedamong individual financing systemsresults from the various economic,cultural, political, and demographicdifferences among states and thefact that these public financing sys-tems are not developed, and do notoperate, in a vacuum. Instead,each state’s unique system is verysensitive to these factors, both at inception andthroughout the life of the system. Each system hasits own set of advantages and disadvantages.

As the name implies, a flat grant system provides allschool districts in a state with a fixed amount ofstate aid per pupil. This is one of the oldest formsof state aid; however, its use today is limited to afew states. In such a scheme, the state determinesthe resources for distribution and makes a simplecalculation dividing the resources by the number ofpupils to arrive at an equal per-pupil grant. Thisstraightforward mathematical calculation does nottake into account local revenue or unique needs ofthe students in each district.

By design, a flat grant system does not seek to equal-ize the property wealth disparities that exist across

districts. These wealth disparities, when paired withthe property tax as the major revenue source forschools, result in per-pupil property tax revenue dis-parities among districts, which, in turn, contributeto spending disparities. Under a flat grant system, adistrict with a high property tax base per pupil orhigh tax effort would receive the same per-pupil grantfrom the state as a low wealth or low effort district.

Hawaii is the only state that oper-ates a true full state funding sys-tem. The premise of such a sys-tem is that education is a stateresponsibility and funding shouldcompletely fall to this level of gov-ernment. Technically, becausethere is only a single school dis-trict in Hawaii, there is no stateaid distribution formula. Otherstates are divided geographicallyinto multiple, distinct local schooldistricts, thereby necessitating useof a formula. Because of its singleschool district, full funding respon-sibility falls to the state level inHawaii and there is no need toequalize the amount of fundinggenerated at the individual schooldistrict level.

The third broad category of state aid programs,equalization programs, is the most widely used inthe United States. (See Objectives of FiscalEqualization on page 5.) These programs are char-acterized by an effort to equalize per-pupil revenuedisparities between high propertywealth districtsand low property-wealth districts. Equalization oc-curs through two distinct methods of distributingstate aid or some combination of the two: founda-tion programs and power equalizing programs. Whileequalizing property wealth disparities across districtsis a key objective of each program, these programscan be designed to pursue other goals, such as pro-viding every student with revenue sufficient to pro-vide an adequate education based on a fairly spe-cific definition of the term “adequate”.

In state Fiscal Year 2011nearly 90 percent of thetotal state-source SchoolAid Fund revenue is distrib-uted to local districtsthrough the foundation pro-gram. The balance of stateschool funding allocatedthrough the State SchoolAid Fund budget annually,and all federal funding, isdistributed as categoricalgrants to districts.



While there have been many changes in the fiscalrelationship between state government and local schoolsover the years, local property taxes have always playeda role in education finances. Faced with few other optionsto generate sufficient revenues locally to satisfy theirportion of the total, schools historically relied upon theproperty tax as the major own-source revenue. Otherminor local-source revenues help finance schooloperations to varying degrees, but at much lower levels.The property tax has served as the primary funding sourcefor all types of local governments, including schools, inthe United States for years.

Heavy reliance on the property tax as the primary fundingmechanism for schools has disadvantages becauseindividuals will sort themselves by income (reflected inproperty wealth), resulting in communities that aresegregated by property wealth. Such stratification canbe stark at the extremes, resulting in very wealthyneighborhoods and very poor neighborhoods. Under sucha scenario, property taxes levied at uniform rates acrossvastly different tax bases will generate major revenuedisparities at the per-pupil level and result in inequitiesin service provision among school districts.

The school funding systems in some states that generatesubstantial funding disparities have been challenged instate courts and declared unconstitutional based on equalprotection language contained those states’ constitutions.The first such case arose in California in 1971.a

Legal challenges and the threat of such challenges haveresulted in state governments playing a larger role ineducation finances since the early 1970s. A primaryobjective of changes to state aid programs over the last40 years has been to temper, or equalize, the inequitiesthat develop from a system of heavy property tax reliance.This is commonly referred to as wealth neutrality.

In addition to the primary goal of wealth neutrality, schoolfinance equalization has other objectives.• A common goal is to achieve greater taxpayer equity,

defined as the equal treatment of taxpayers. Equityis achieved when state school aid programs provideequal per-pupil revenue amounts to local schooldistricts with the same property tax rates, but withmuch different property wealth. Taxpayer equity doesnot require districts to choose a specific tax rate anddoes not guarantee equal per-pupil revenues, but itdoes treat taxpayers equally.

• Equalization also can seek to provide a certain levelof education (defined by a specific per-pupil revenue

Objectives of Fiscal Equalization

amount) in each school district. Equalization in thismanner will consider the jurisdictional differences inthe costs of providing services to the studentpopulation and the school finance system will bestructured to provide the resources to accommodatethe specific education level (e.g., what might betermed adequate or reasonable).

• Another goal of equalization can be absolute equity– the same level of education to all students in astate. If costs of education are uniform acrossdistricts, this goal can be achieved by ensuring equalper-pupil revenue in all districts throughout a state.However, because the costs of educating children canvary considerably based on student characteristics,local labor markets and other relevant factors,absolute equalization may require that some districtsreceive more state aid than others to ensure that allstudents receive the same education.b

Regardless of the ultimate goal, equalization isaccomplished through weakening the relationshipbetween district property wealth and per-pupil resourcesavailable at the individual district level. This is achievedthrough state aid systems financed by state taxation.These systems achieve equalization by providingproportionately more assistance to lower-wealth districtsthan they provide to wealthier districts. Systems alsocan be designed to constrain the revenue-raising abilityof wealthier districts.

If wealth neutrality is the ultimate public policy goal, thiscan be achieved by way of full state funding of publiceducation (Hawaii example). Under such a model, perfectequality in per-pupil spending can be achieved bycompletely removing the fiscal capacity of local districtsfrom the school finance system. The need for state aidto equalize local fiscal capacity is negated when the stateassumes the entire responsibility for funding education.The disadvantage of such a financing model is that it isinefficient because it eliminates any local discretion overthe educational services (in the form of per-pupilspending) provided in each local community based onthe community’s preferences. Under systems in whichabsolute equality exists in per-pupil spending, sometaxpayers will have to consume more educational servicesthan they desire, while others will consume less thantheir preferred level.

a Serrano v. Priest (5 Cal.3d 584; 1971)b Andrew Reschovsky, Fiscal Equalization and School Finance,National Tax Journal, March 1994.

CRC Report


Foundation Programs

Most states tend to favor the foundation programapproach as the primary method for distributing stateaid. In 2007, 42 states and the District of Columbiaused some form of foundation program as the basisof their school funding system.4 In its simplest form,the program sets a target amount of resources perunit (teacher, classroom, or pupil) and a requiredlocal property tax rate. Foundation programs effec-tively set a revenue floor for each school district.State aid is then distributed to lo-cal districts to fund the differencebetween the state-determined tar-get and the revenue that the state-required local property tax gener-ates. As a result, state aidamounts vary from district to dis-trict based on each district’s tar-get and the property wealth of theindividual community. In thissense, state aid equalizes revenuebecause it is both sensitive to theeducational needs of individual districts and to varia-tions in property wealth. At this point, the similari-ties in states’ foundation programs cease.

Foundation programs across the United States varyin terms of the specifics of the different programs.First, states differ on how they set the main featureof the foundation program, the revenue target. Thismight be an amount determined by the state to rep-resent an adequate education or it might be basedon a particular rationale (e.g., pupil-teacher ratio andsalaries, actual spending by school districts, or pastspending by districts). States generally express thefoundation target as an amount per pupil. States canvary in how they count pupils. For example, Michi-gan uses a blended count based on the current year’sfall student enrollment figure (75 percent) and theprevious year’s February enrollment figure (25 per-cent). Other states employ multi-year averaging anddifferent weightings for certain students to arrive atenrollment counts used in their foundation programs.

A second difference among the states has to do withadjustments applied to the foundation target to en-sure that districts with greater need receive a largerfoundation grant. States vary in the different fac-tors used and the weights applied to each. Differ-

ent weights are based on the costs associated withcertain pupils, services, or district characteristics.Michigan does not address differences across pupilsand districts through its foundation program, butinstead it uses categorical grants in an attempt tomeet such differences.

Third, states measure local fiscal capacity differentlyin order to equalize state aid under their foundationprograms. Because the primary local revenue source

is the property tax, per-pupil as-sessed property value is the metricthat generally describes fiscal capac-ity. While there is some consistencyin the revenue source, the structureof the property tax (e.g., differentassessment methods, exemptions,rates, credits, etc.) in individualstates differs. In addition to prop-erty wealth, some states use incomeas a measure of local fiscal capac-ity.5 Michigan school districts do nothave access to local income taxes

to finance K-12 education, but Ohio uses a local in-come tax to partially support school districts.

States also differ in the degree to which they makelocal-option taxes available to their local school dis-tricts. In some cases, individual districts are allowedto levy additional taxes to augment resources receivedthrough the foundation grant. Most often, some kindof cap is associated with the ability to supplementthe foundation grant with locally-raised revenues.Michigan’s finance system provides two local-optionproperty taxes, but only one is available to all dis-tricts. One option is the hold harmless tax that onlyallows districts with per-pupil revenue above $6,500in FY1995 to levy supplemental taxes to maintain theirprevious spending levels. The second option, opento all districts, involves a regional property tax. Atthe request of one or more of its constituent districtsand after approval by the electors in the intermediateschool district, an intermediate school district can levyan additional property tax up to three mills, the pro-ceeds of which are shared, on a per-pupil basis, witheach constituent district to augment the revenues re-ceived via the foundation grant. Few intermediatedistricts levy the tax because it requires tax base shar-ing among the participating districts.

Michigan does not addressdifferences across pupilsand districts through itsfoundation program, butinstead it uses categoricalgrants in an attempt tomeet such differences.



A less common feature associated with local-optiontaxes is a recapture provision that requires some orall of the supplemental local revenue to be returnedto the state for distribution among other districts.In some states, recapture provisions are part of thebase foundation program. In these cases, districtsthat are able to satisfy their foundation targets witha local tax effort below the minimum level are stillrequired to levy, at the full rate, the state-requiredminimum tax; however, they are not able to retainthe resources for use at the local level. Instead, theexcess local resources (above the target) are sharedwith the state and distributed to other districts.Michigan’s foundation program does not contain arecapture component. In Michigan, to qualify forthe full foundation amount the minimum requiredtax effort is the lesser of 18 non-homestead mills or the millage lev-ied by the district in 1993 and insome districts.

Power Equalization Programs

In contrast to a foundation programthat sets a minimum revenue tar-get, a power equalization programguarantees that each district willhave the ability to generate thesame revenue per pupil from a giventax rate, regardless of the districtsproperty wealth. A primary goal ofthese programs is wealth neutral-ity, whereby the goal of the state aid is to level theplaying field between low-wealth and high-wealth dis-tricts by guaranteeing an equal tax base. The statedoes not require a specific tax rate, but instead eachdistrict sets its own rate. The state guarantees acertain amount of revenue (combined state and lo-cal) per mill levied. Districts determine the amountof per-pupil revenue they will have, based on the taxrate their voting constituency chooses and given theadjusted tax base. Local control and taxpayer equityare key goals of power equalization programs.

State aid is provided to subsidize locally generatedrevenue by way of a formula that takes into accountlocal tax effort. In most cases, the state determinesa guaranteed yield for each mill levied locally (up to amaximum tax rate) based on a statewide average of

property wealth per pupil. State aid payments aremade in an amount equal to the difference betweenthe guaranteed yield and the actual yield in the indi-vidual district. As such, power equalization programsuse variable matching rates to provide larger matchesto districts with lower per-pupil property wealth.

Brief History of Michigan’sEqualization Programs

Michigan’s long history of providing state aid to localschool districts began in the early years of state-hood. For a good portion of its history, the stategovernment provided aid to equalize local propertywealth across districts. The unevenness in propertywealth across the state led to unevenness in per-

pupil revenues available to educateK-12 students. Greater amountsof state aid were provided to thosedistricts with lower property wealthto help address these per-pupilrevenue disparities.

Since 1970, Michigan has em-ployed both major forms of equal-ization systems for distributingstate aid to local school districts.Michigan has gone from the foun-dation model (used until the early1970s) to the power equalizationmodel (used from the mid-1970sto the mid-1990s) and back to a

foundation model (in use since 1995). Changes fromone method to the other have been accompaniedby statutory and constitutional changes. In somecases, court decisions prompted school finance sys-tem changes. At other times, changes resulted frompolitical pressure applied to state policymakers.

Prior to the 1973-1974 school year (state FY1974)state aid was distributed to local districts by meansof a conventional deductible millage formula, a typeof foundation model.6 This system provided eachdistrict with a specific foundation grant if local vot-ers approved a school operating property tax rateno less than the deductible rate.7 Under this sys-tem, the state and local districts shared in financingeducation up to a given amount, with local taxpay-ers paying the entire cost beyond this amount. The

The unevenness in propertywealth across the state ledto unevenness in per-pupilrevenues available to edu-cate K-12 students. Greateramounts of state aid wereprovided to those districtswith lower property wealthto help address these per-pupil revenue disparities.

CRC Report


required rate was very low and for districts choosingto exceed the rate, final per-pupil revenue was largelydetermined by local property wealth, regardless ofthe tax effort. Under this system, state aid did notdo a sufficient job of equalizing per-pupil propertywealth disparities, and in 1972 the Michigan SupremeCourt found the system in violation of the 1963Constitution’s equal protectionclause (Article I, Section 2).8

Prompted by the Michigan Su-preme Court’s initial decision inGovernor v. State Treasurer(1972), the legislature enacted anew school aid formula, based onthe power equalization concept.9The new guaranteed tax base(GTB) formula marked a shift awayfrom the foundation model forproperty wealth equalization pur-poses. During its lifespan, the GTBformula had varied success inachieving its primary goal of neu-tralizing property wealth acrossdistricts.10

Initial progress in addressing prop-erty wealth disparities through theGTB formula was aided by a strongstate economy and robust state revenue collectionsfrom FY1974 to FY1979. This period was followedby a period of rapid decline in the property wealthequalization gains made earlier. Efforts to furtherequalize per-pupil expenditures under the GTB for-mula stalled and reversed course during the early1980s because of the weak economy and slowdownin state revenue growth. The efficacy of the GTBformula and state aid payments were seriously re-stricted by the severe recession in the early 1980sand escalating property assessments. Coming outof the economic downturn in the mid-1980s and

despite a slow recovery, gains in wealth neutralitywere achieved with the help of additional state rev-enues resulting from a temporary state income taxincrease and state budget decisions to increase fund-ing for K-12 education.

Although components of the power equalization for-mula were tinkered with over theyears, the GTB formula was the pri-mary method used by the state todistribute general assistance to lo-cal districts for 21 years, fromFY1974 through FY1994. Majorpolitical pressure to do somethingabout per-pupil resource disparitiesand the tax burden associated withpublic education finances in theearly 1990s ultimately led to aban-donment of the GTB formula. Ashift back to a foundation programfor distributing state aid and equal-izing local property wealth in pub-lic education finances was a keycomponent of Proposal A of 1994and related school finance reforms.

The Proposal A school finance re-forms had a number of objectives,one of which involved switching the

method used to distribute general state aid to localdistricts. At its core, this change shifted the basisupon which the state distributed unrestricted oper-ating dollars to local districts from the property taxrate to the number of pupils in each school district.The GTB formula was replaced with a per-pupil foun-dation formula that more heavily relied on state taxesto finance school operations. Michigan first usedthe current foundation grant in FY1995. While thishas been the primary mechanism used for the past16 years, the intricacies of the foundation programhave changed over time.

The Proposal A school fi-nance reforms had a num-ber of objectives, one ofwhich involved switchingthe method used to distrib-ute general state aid to lo-cal districts. At its core, thischange shifted the basisupon which the state dis-tributed unrestricted oper-ating dollars to local dis-tricts from the property taxrate to the number of pu-pils in each school district.



Michigan’s 775-plus school districts (traditional publicschools and charter schools) receive the majority oftheir operating revenue through a formula allocationgenerally referred to as the foundation grant.11 Rev-enues school districts receive through the foundationgrant can be used for general operating purposes,such as paying salaries and benefits of school em-ployees, utility bills, and purchasing classroom sup-plies, to name a few items. These resources are fun-damentally different from those received viacategorical programs, also appropriated through thestate School Aid Fund budget, which include restric-tions on their uses (e.g., special education, at-riskstudent funding, district-specific grants). As generaloperating revenue, the foundation grant is not used

to support debt service costs. Instead, traditionalpublic school districts may levy a separate propertytax, subject to voter approval, to finance debt costs.

Foundation grants are based on a complex set offormulas and are commonly reported on a per-pupilbasis. There is a common misperception, perhapsbecause of the term “foundation”, that all school dis-tricts receive the same amount. The reality is thatfoundation grants vary in size across school districtsin the state, which has been the case since the imple-mentation of the foundation program. Through di-rect efforts of state policymakers over the years, thedifference between the highest foundation grant andthe lowest foundation grant has been reduced sub-

Michigan’s Foundation Grant

Proposal A: What Are We Talking About Here?

On December 24, 1993 the legislature adopted a complex plan to restructure the funding of public K-12 education.The plan consisted of a ballot proposal to amend the 1963 Constitution, together with implementing legislation,and an alternative statutory plan which would take effect if the ballot proposal was rejected. Voters cast a singlevote to choose between two similar reforms, neither of which involved a continuation of the current educationfinance system. The ballot proposal (designated as Proposal A by state election officials) was submitted to votersat a special election on March 15, 1994, amending several constitutional provisions:

• Permit school operating taxes to be imposed on a non-uniform basis.• Limit assessment increases on individual parcels of existing property to the lesser of five percent or inflation

beginning in 1995. Property would be reassessed at 50 percent of true cash value upon transfer in ownership.• Increase the sales tax rate from 4 to 6 percent, beginning May 1, 1994. The additional revenue from the

sales tax would be dedicated to the School Aid Fund.• Require that the state guarantee each local school district in FY1996 and thereafter at least as much combined

state and local operating revenue per pupil as in FY1995.• Require a three-fourths vote of the legislature to increase school operating taxes beyond those in effect

February 1, 1994.

The major difference between the two approaches was that Proposal A and its implementing legislation reliedprimarily on a sales tax increase, while the statutory alternative plan relied primarily on increases in the individualincome tax and the Single Business Tax. The proposed sales tax increase required voter approval because therate is limited in the state Constitution, while the legislature was authorized to increase the income tax and theSingle Business Tax rates statutorily.

The term “Proposal A” and references to it can lead to confusion because of the different ways in which the termis employed. In a strictly historical context, Proposal A refers to the March 1994 statewide ballot proposal toamend the 1963 Constitution to implement certain components of the new K-12 education finance system. Forthe purposes of this report, the term “Proposal A” is used more generically to describe the entire educationfinancing system created as a result of both the constitutional amendment and the related statutory changes.The term also is synonymous with the period 1993 - 1994.

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stantially; however, absolute equity (i.e., same per-pupil revenue for all children) has not been achieved.

While the foundation grants create most of the per-pupil revenue disparities among school districts to-day, they are not the only factor creating variation.Schools also receive varying amounts of state cat-egorical aid according to specific state and federalrules and guidelines. Both state and federal re-sources support categorical funding that account forthe per-pupil revenue differenceseven among districts with exactlythe same foundation grants. Inmost cases, this targeted aid isbased on district-specific criteria(e.g., declining enrollments) andstudent-specific criteria (e.g., spe-cial education, at-risk). In very rarecases, school districts also receivediscretionary local enhancementrevenue that is derived from a lo-cal property tax levied on a regionalbasis. Thus, a host of factors canexplain why two districts with thesame foundation grant have differ-ent total per-pupil revenueamounts. The scope of this report is limited to theprimary operating resource for schools – the per-pupil foundation grant.

History of the Foundation Grant

Michigan returned to a foundation grant program todistribute resources to school districts as a result ofstatutory and constitutional changes approved in late1993 and early 1994. Proposal A of 1994 amendedArticle IX, Section 11 of the 1963 Michigan Constitu-tion by establishing the constitutionally-required, per-pupil revenue floor. Specifically, Section 11 provides:

Beginning in the 1995-96 state fiscal year andeach state fiscal year after 1995-96, the stateshall guarantee that the total state and local perpupil revenue for school operating purposes foreach local school district shall not be less thanthe 1994-95 total state and local per pupil rev-enue for school operation purposes for that localschool district, as adjusted for consolidations,annexations, or other boundary changes.

In addition to setting this minimum level, the newconstitutional language and the related implement-ing statutory law addressed other policy objectivescentral to school finance reform.

The Per-Pupil Funding Floor

This new section in the Constitution was not self-implementing. The legislature was required to takesteps to effect the initial per-pupil funding floor for

each district. Mathematically, thelanguage required the legislatureto come up with each district’scombined (state and local) oper-ating revenue for FY1995. Relatedto this, but not required by the con-stitutional language, the legislaturehad to articulate a policy of how itwas going to approach the revenueinequities that existed at the timeof Proposal A’s adoption.

The most influential factor in de-termining a district’s initial foun-dation grant was the amount ofper-pupil revenues it received just

prior to the implementation of the foundation grant;the total (state and local) per-pupil revenue eachdistrict received in FY1994.12 The per-pupil revenuein FY1994 reflected the property wealth disparitiesthat existed at the time and the distribution of stateaid through the GTB formula. This formula directlyrelied upon a district’s property wealth and tax ef-fort to determine the amount of state aid.13 To ad-dress some of these existing disparities within theconstructs of the new financing system, a series ofadjustments were applied to the FY1994 per-pupilrevenue numbers based on explicit policy directivescontained in state law.14

Initial Policy Considerations and Objectives

A key policy directive of the school finance reformsrelated to reducing per-pupil revenue disparities mosteffectively. Funding at the average was seen as anunacceptable proposal for a variety of reasons. Useof an average per-pupil revenue figure to achieveequity would cause a reduction in the amount of

The most influential factorin determining a district’sinitial foundation grant wasthe amount of per-pupilrevenues it received justprior to the implementationof the foundation grant, thetotal (state and local) per-pupil revenue each districtreceived in FY1994.



revenue received for a significant number of stu-dents in the state. Parents in these high-revenuedistricts were unwilling to accept reductions for theirchildren and the education community would nottolerate the staff and budget reductions necessaryto balance a school budget based on reduced rev-enues. Thus, leveling down was not consideredpolitically feasible. A more acceptable approach in-volved raising the revenue provided to districts atthe bottom of the per-pupil revenue spectrum byincreasing revenues to these districts by the great-est amounts.

Pursuing a policy of “raising the floor” required aseries of decisions. The initial decision involved cre-ating a system to bring the lowest revenue districtsup to some minimum level. It was decided that alldistricts would receive at least $4,200 in total per-pupil revenue in FY1995, effectively setting thisamount as the new constitutional funding floor. Toeffect this change, all districts below $4,200 wereraised to this amount or received a $250 per-pupilincrease, whichever was greater.15 This policy af-fected the 105 lowest revenue districts.

Another policy directive involved setting a target of$5,000 per pupil in FY1995, commonly called the

“basic grant.” This was the amount of revenue thatpolicymakers hoped all districts would eventually re-ceive. In a related policy decision, the legislaturechose to move districts toward this amount in phasesrather than a single adjustment. The decision touse a phased-in approach was largely related to costconsiderations and the limited ability of state re-sources to get all districts to the basic grant with asingle annual adjustment. To move districts towardthe basic grant amount, a sliding scale was employed.This mechanism provided larger increases to grantscloser to the minimum amount than grants closer tothe basic amount.

Another objective involved setting a maximum per-pupil amount which the state would guarantee un-der the new foundation program. Initially, this wasset at $6,500 per pupil, $1,500 above the basic grant.the foundation grant for FY1995.

Despite its name, the maximum grant did not repre-sent the highest per-pupil revenue amount underthe foundation program because some districts wereable to receive combined state and local revenue inexcess of this amount in order to maintain their pre-Proposal A higher revenue amounts. Rather, themaximum grant represented the amount at which

All Foundation Grants Are Not the Same

Under the Proposal A reforms, the amount of each district’s initial foundation grant (FY1995) was largely determinedbased on the amount of per-pupil revenue (combined state and local) a district received in FY1994. Using acalculated FY1994 base revenue amount for each district, state law provided adjustments of varying amounts toarrive at each district’s initial foundation grant. Despite the variation among districts, there were three keycategories created with the initial foundation grants; the minimum, the basic, and the maximum grants. Thesecategories are commonly used to describe where districts are on the spectrum of foundation grants across thestate. Furthermore, these amounts determine the annual adjustments made to each grant in terms of themethod used and the amount. This report uses these three descriptions to show growth in the foundation grantsince Proposal A’s implementation.

The minimum grant was set at $4,200 per pupil in FY1995. This is the constitutional minimum grant that eachdistrict is guaranteed.

The basic grant was set at $5,000 per pupil in FY1995, $800 above the minimum grant. This was the initial“target” amount that the state wanted all districts to receive.

The maximum grant was set at $6,500 per pupil in FY1995, $1,500 above the basic grant and $2,300 above themaximum grant initially. This was the maximum amount that the state would participate in the foundationprogram, not the largest grant. Some districts, with the assistance of additional locally-raised revenue, were ableto maintain their higher pre-Proposal A per-pupil revenue amount.

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the state would participate in funding a district’s foun-dation grant. Districts above $6,500 per pupil wererequired to raise the difference entirely from a sepa-rate millage, called a hold harmless tax that wassubject to voter approval.

Finally, a hold harmless provision was included tosafeguard districts from having to reduce funding toachieve the stated goal of equaliz-ing per-pupil revenues. Thus, thestate participated in the foundationprogram for those districts up to$6,500 in total state and local rev-enue for FY1995. Anything abovethat amount, local districts were re-quired to fund entirely from thehold harmless tax. For example, adistrict with total per-pupil revenueof $8,000 in FY1995 had to raisethe additional $1,500 ($8,000 foundation grant mi-nus $6,500 state maximum grant) from a supple-mental local property tax, above the required 18 millnon-homestead tax. The hold harmless millage islevied on homestead property before being leviedagainst the non-homestead tax base.16

Table 1 summarizes the initial effects of the earlypolicy changes affecting per-pupil funding of districtsin FY1994 and FY1995. The initial effects of fundingequalization efforts are seen in the lowest-revenuedistricts being raised to at least the minimum per-pupil amount in FY1995. These districts receivedthe largest annual increases, in both dollar and per-

centage terms. Forty of these districts, previouslybelow the $4,200 per-pupil level, were raised to theminimum grant level in FY1995, while the remain-der received increases that caused their per-pupilgrant to exceed the new minimum.

Foundation Grant Components

For nearly all school districts, theper-pupil foundation grant consistsof two components: a local rev-enue piece and a state revenuepiece.17 A small number of dis-tricts (29 in FY2010), commonlyreferred to as “out of formula,” areable to fully finance their founda-tion grants from the local propertytax component and subsequentlydo not receive a state aid payment

related to their foundation grant. The local revenuecomponent of the foundation grant comes from thelocal school operating property tax levied on non-homestead property, which is 18 mills for most dis-tricts.18 For hold harmless districts, the revenuesfrom the non-homestead school operating tax aresupplemented by the revenues from the hold harm-less tax. The proceeds of the non-homestead prop-erty tax (and hold harmless tax) are dedicated tolocal school operating purposes and these dollarsare the first resources applied to each district’s per-pupil foundation grant. While local tax effort is nottechnically required to receive state aid, the State ofMichigan assumes that the local districts are levying

The initial effects of fund-ing equalization efforts areseen in the lowest-revenuedistricts being raised to atleast the minimum per-pu-pil amount in FY1995.

Table 1School Districts by Per-Pupil Revenue Group: FY1994 and FY1995

Per-Pupil Number of Districts Revenue FY1994 FY1995 Changeless than $4,200 105 0 -105at $4,200 0 40 40$4,200 to $5,000 256 266 10$5,001 to $6,499 144 194 50$6,500 and above 46 51 5

* Only districts in operation in both years are included in the comparison.

Source: Michigan Department of Education



the local tax at the maximum rate allowed and ad-justs the amount of state aid accordingly. Illustra-tion 1 provides a general mathematical descriptionof each component of the foundation grant for ahypothetical school district, based on an assumedfoundation grant amount.

The second component of eachdistrict’s foundation grant is stateaid, which is the difference be-tween the district’s foundationgrant and the local per-pupil rev-enue generated by the 18-mill non-homestead tax levy. The totalamount of general state assistancea district receives each year is calculated by a rela-tively straightforward mathematical operation. Af-ter determining each district’s per-pupil state aid pay-ment, this figure is multiplied by the number ofstudents in the district. Since its inception, the foun-dation program has used a blended count of thenumber of students that takes into account the ac-tual pupil enrollment figures of the current schoolyear and the previous school year. This count isreferred to as “pupil membership.”

State aid payments are made monthly, 11 timesthroughout the state fiscal year with the first pay-

ment in October and no payment in September. Thefinal two payments (July and August) are made af-ter school districts end their fiscal years on June 30.Revenues from the 18-mill non-homestead tax arereceived by districts when distributed by their local

taxing jurisdiction (city or town-ship), usually in February and Sep-tember.

The local component of the foun-dation grant can be altered withchanges in the tax rate and the taxbase of the 18-mill local tax. Be-cause the 18-mill tax is subject toHeadlee millage rate rollbacks re-

quired by the Michigan Constitution (Article IX, Sec-tion 31), a rate reduction will reduce the tax yield,all else being equal.19 As a result of previous Headleerollbacks, a number of districts each year do notlevy the full 18 mills. A district that has had a Headleerollback will not receive the full amount of the localcomponent of its foundation grant. A shortfall inthe local component is not compensated for by anincrease in the state component as state law as-sumes that all districts levy the entire 18 mills. Thus,if a Headlee rollback is in effect, a school district willreceive less than the full amount of its per-pupil foun-dation grant.

A district that has had aHeadlee rollback will not re-ceive the full amount of thelocal component of its foun-dation grant.

Illustration 1Foundation Grant Calculation

Hypothetical district foundation grant: $7,300Non-homestead value of property in school district (taxable value)*: $250,000,000Non-homestead school operating property tax rate*: 18 millsPupil membership used for foundation program: 3,000

Local Component:( Taxable value (school district) * Rate ) / Membership = Local amount

( $250,000,000 * 0.018) / 3,000 = $1,500 per pupil

State Component:Foundation grant – Local component = State component

$7,300 – $1,500 = $5,800 per pupil

* Under state law changes enacted in 2007, industrial personal property is entirely exempt from the 18-mill school operating tax and commercial personal property is exempt from 12 of the 18 mills.

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Holding all other factors constant in the foundationgrant calculation (e.g., membership, millage rate,foundation target), changes in the local tax base willalter the yield of the 18-mill tax. However, unlikethe levy reduction that results from a Headlee roll-back, the per-pupil foundation grant is not nega-tively affected. Under such a scenario, the amountof state aid is adjusted to compensate for changesin the local school operating property tax yield. Thus,on an annual basis and assuming all else equal, theamount of state revenue provided to each districtchanges with changes in the local property tax base– a base increase reduces state aid while a basereduction increases state aid.

Annual Adjustments to the FoundationGrant: Mechanisms and Growth

Various methods have been employed to increasethe foundation grants of school districts each year,including the use of:• The automatic foundation index to adjust the

basic grant;• The 2X formula sliding scale used for districts

below the basic grant;• Equal per-pupil adjustments for all districts;• Separate equity payments; and• Categorical payments for hold harmless districts.

The use of these methods has varied by year and,depending on the method employed, affected dis-tricts differently based on the amount of their foun-dation grant at the time of adjustment.

Is the Non-Homestead School Operating Tax Really a Local Tax?

The non-homestead school operating tax is a local tax; however, the revenues from the tax are effectively staterevenues for purposes of the per-pupil foundation grant distributed to local districts. The tax is levied by localschool districts and retained by districts to be applied toward their foundation grants. Furthermore, the proceedsfrom the tax are not applied against the constitutional state government revenue limit (Article IX, Section 26 ofthe 1963 Constitution). While technically a local tax, the revenues from the tax are effectively state revenueswhen it comes to school operating revenues because of the state limitations on rate and tax base growth(constitutional and statutory) and how it operates as a component of the foundation grant.

State law strictly controls the rate and base of this tax. The maximum rate allowed is capped at the lesser of 18mills or the district’s 1993 operating levy. Furthermore, the tax, like all local property taxes, is subject to thevarious property tax limitations of the Michigan Constitution. Local school operating tax revenue growth iseffectively controlled by both the unit-wide revenue limitation contained in Article IX, Section 31 (part of theHeadlee Amendment to the Michigan Constitution approved in 1978) as well as the per-parcel limitation containedin Article IX, Section 3 (approved as part of Proposal A of 1994).

While a school district had a vested interest in the growth of its property tax base prior to Proposal A, in thecurrent foundation grant system, the 18-mill tax and the various state levied taxes dedicated to the School AidFund all contribute equally to calculations of the amount of revenue available for distribution for school operations.The performance of the local property tax is immaterial when it comes to determining per-pupil operating revenuesfor individual school districts because state aid from the other sources (6-mill State Education Tax, Sales and UseTax, and tobacco taxes) will be used to make up the difference between what the local tax generates and whatthe Michigan legislature sets as each district’s foundation grant. Thus, while the 18-mill tax is a local tax forpurposes of constitutional property tax limitations and state revenue limitations, the revenues it generates arepractically indistinguishable from the various state tax revenues used to provide state aid to local districts throughthe foundation program.



Foundation Index and the 2X Formula

The school finance reforms that accompanied theadoption of the foundation grant included statutorychanges that were designed to adjust the founda-tion grant for each district annually. Initially, annualincreases varied based on whether the district wasreceiving the minimum grant, thebasic grant, or the maximum grant.Despite the different grantamounts established at the outsetof the foundation program, futureannual adjustments for each dis-trict were directly tied to changesmade to the basic grant. Thus, thebasic grant, and changes made toit, became the primary mechanismfor determining the annual changesto each district’s per-pupil funding.

The State School Aid Act includes a formula to de-termine annual changes to the lowest grant basedon annual changes to resources in the School AidFund and annual statewide enrollment changes. Thisfoundation index, which took effect in FY1996, is aproduct of two ratios, a revenue adjustment factorand a pupil membership adjustment factor. Statelaw requires that the index will be calculated at each

state revenue estimating conference (January andMay) in order to “assist the legislature in determin-ing the basic foundation allowance for the subse-quent state fiscal year.” (Note: State law does notrequire the index to be used to adjust the basic grant,but it must be calculated twice a year.) Illustra-

tion 2 describes the calculation ofthese two ratios and their product,the foundation index.

The revenue ratio is structuredsuch that year-over-year increasesin state dedicated revenues trans-late into a higher index value andtherefore an increase in the basicgrant. Conversely, a decline in rev-enues will produce a reduction inthe basic grant. The revenue fac-

tor, however, is combined with the enrollment factorto calculate an index value which may be used toadjust the foundation grant each year. The enroll-ment ratio is designed to temper revenue increaseswhen statewide enrollments are rising. In otherwords, the enrollment factor recognizes that withincreasing enrollments (and rising revenues), the per-pupil grant cannot rise as much because there aremore pupils participating in the foundation program.

Illustration 2Calculation of Foundation Index

Revenue Adjustment Ratio:

(Next year School Aid Fund revenue + Current year School Aid Fund revenue)———————————————————————————————————————- = Revenue adjustment factor

(Current year School Aid Fund revenue + Previous year School Aid Fund revenue)

Pupil Membership Adjustment Ratio:

Current year statewide pupil membership————————————————————— = Pupil membership adjustment factor

Next year statewide pupil membership

Revenue adjustment factor * Pupil membership adjustment factor = Foundation index

Increase in Lowest Foundation Grant:

Current year’s lowest foundation grant * Foundation index = Next year’s lowest grant

Note: Section 20 of The State School Aid Act of 1979, as amended, describes the calculation of the two ratiosand the index.

The revenue ratio is struc-tured such that year-over-year increases in state dedi-cated revenues translateinto a higher index valueand therefore an increasein the basic grant.

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Section 20j of the State School Aid Act:A Budgetary Solution to a Statutory Problem

Table 2Select Hold Harmless Districts FY2000 Per-Pupil Increases

FY1999 Statutory Sec. 20j FY2000Foundation Per-Pupil Per-Pupil Per-Pupil

Districts Grant Increase* Payment IncreaseTop 5 Hold Harmless Districts Bloomfield Hills $10,916 $174 $64 $238 Birmingham City $10,839 $173 $65 $238 Jefferson Schools $10,121 $162 $76 $238 Southfield $9,920 $159 $79 $238 Oneida Twp. $9,643 $155 $83 $238

Bottom 5 Hold Harmless Districts East Lansing $7,094 $113 $125 $238 Livonia $7,066 $113 $125 $238 Clarenceville $7,036 $113 $125 $238 Northville $7,011 $113 $125 $238 City of Harper Woods $6,946 $112 $126 $238

* Statutory increase (inflationary) allowed under The Revised School Code. For FY2000 the inflationadjustment was equal to 1.6 percent.


the same per-pupil dollar increase that the basicfoundation grant received in FY2000. Rather than amendthe Revised School Code to address the challenge posedby the inflationary cap, the state chose to provide asupplemental payment to hold harmless districts via thestate budget. If the state had decided to amend thesection of the Revised School Code to deal with theinflationary cap to allow districts to increase hold harmlessmillage rates, it would have required an affirmative votefrom three-fourths of the members in each house of thelegislature pursuant to Article IX, Section 3 of the MichiganConstitution.b Instead of a statutory fix, the state chosea budgetary fix to address the inflationary cap, whichrequired a simple majority vote.

The supplemental payment was effectively a newcategorical grant contained in the School Aid Fund budget(Section 20j) for FY2000. Under this budgetary solution,each district’s supplemental payment was equal to thedifference between the $238 basic foundation grantincrease and the amount of the inflationary increaseallowed under the Revised School Code. Technically, theSection 20j payment is not part of a district’s foundation

Hold harmless districts received annual per-pupil revenueincreases equal to the basic foundation grant increaseeach year through FY1999. For FY2000, statepolicymakers decided to increase the basic grant by $238per pupil. However, providing this dollar increase to thefoundation grants of hold harmless districts triggered theinflationary growth cap contained in the Revised SchoolCode (described above). Therefore, the cap resulted inthese districts receiving only an inflationary increase intheir foundation grant in FY2000.a The dollar increaseeach district received from this inflationary adjustmentwas different because it was based on each district’sFY1999 foundation grant. The inflationary increase didnot apply to the basic foundation grant from the previousyear, which would have resulted in each district receivingthe same annual increase. As a result, the inflationaryincrease was less than the $238 per-pupil bump providedto the basic foundation grant (see Table 2). In somecases (e.g., the bottom five districts in the group), theinflationary increase was less than one-half of the increaseprovided to the basic grant.

In keeping with prior policy, the state desired to ensurethat all districts received at least



However, in an environment of falling enrollments(and rising revenue) the index value would riseslightly more than it would have if enrollments wererising.

Despite the calculation of the index coming out ofthe revenue estimating conference, in many yearsthe legislature set the index to 1.0. This allowedthe legislature to determine the amount of any ba-sic foundation grant increase for the subsequent year,independent of the automatic index.

Once determined (either by the formula or by thelegislature), state law requires that, at a minimum,the foundation index is applied to the current year’slowest foundation grant to determine next year’slowest grant amount. The automatic index mecha-nism was used each year through FY2000, with the

exception of FY1999 (see box FY1999 Founda-tion Grant Adjustments: Durant and MPSERSon page 23).20 For example, in its first year of use,the index yielded a value of 1.0306 or an increase of3.06 percent (at least) to the lowest foundation grantin FY1996.

In addition to providing a method for increasing thebasic grant, state law also prescribed annual adjust-ments for those districts below the basic grantamount, commonly referred to as the “2X formula.”These districts received per-pupil annual increasesgreater than the annual increase in the basic grant.The objective was to gradually move these districtsto the basic grant level over a period of years byproviding larger annual increases to districts withrevenues below the basic grant level. ThroughFY2000, the minimum grant level was increased by

grant; however, these dollars are indistinguishable toschools in terms of general operating revenues.

Because of the mechanics of the inflationary cap, holdharmless districts with foundation grants closer to themaximum received smaller per-pupil increases in dollarterms (i.e., their base was lower). These districts receivedlarger supplemental payments from the state to ensurethey received the full $238 per-pupil increase in FY2000.A district’s total Section 20j amount under the State SchoolAid Act was based on its general pupil membership countand the amount of the state supplemental payment.

The basic foundation grant increase in FY2001 ($300)and FY2002 ($300) exceeded the inflationary cap for anumber of the hold harmless districts. In each year thestate again authorized another budgetary patch,effectively adjusting the previous years’ Section 20jpayment amount as part of the State School Aid Act.Section 20j appropriations were necessary every year tomaintain the per-pupil revenues in these districts eventhough the per-pupil foundation grant increases in theyears since FY2002 did not trigger the inflationary cap.

The state’s decision to address the inflationary cap viathe annual appropriations process rather than through apermanent amendment to the Revised School Code meantthat this supplemental payment would be subject toannual legislative review and open to gubernatorial lineitem veto. Because of resource constraints, Governor

Granholm vetoed the Section 20j payment contained inthe FY2010 budget, effectively reducing 39 hold harmlessdistricts’ foundation grants.

The gubernatorial veto reduced the foundation grants ofsix school districts (Avondale, Clarenceville, East Lansing,Harper Woods, Livonia, and Northville) below the basicgrant amount ($8,489) for FY2010. These districtsreceived less per-pupil funding, despite the fact that theylevy the additional hold harmless tax. To address thetaxpayer equity issue with this situation, state law waschanged in 2010 to prohibit these districts from levyingthe hold harmless tax effective with taxes collected in2011 (FY2012). In effect, these districts will no longerbe hold harmless districts. In lieu of the foregone localproperty tax, the State School Aid Act was amended toprovide these districts with enough state aid so that theirfoundation grants will be equal to the basic grant forFY2012; however, the grants will0 be less than they werebefore the veto.

a The inflationary increase for the year was 1.6 percent underthe provisions of The Revised School Code.b Section 3 was amended as part of Proposal A and required asupermajority vote to increase the statutory tax limits for schooloperating taxes (e.g. the hold harmless tax) in effect onFebruary 1, 1994.

Section 20j of the State School Aid Act (continued)

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twice the amount of the basic grant and districtsbetween the two levels received varying amountsbased on a sliding scale. For example, in FY1996,the basic grant was increased $153 per pupil (usingthe foundation index) and the minimum grant bytwice the amount ($306 per pupil). Through theuse of this sliding scale mechanism, the original policygoal of raising all districts to at least the basic foun-dation grant was achieved inFY2000.

Finally, the Revised School Codealso addresses the treatment of an-nual increases for hold harmlessdistricts by capping the maximumper-pupil increase allowed. Thesedistricts are eligible to receive thelesser of: 1) the increase in thebasic grant, or 2) the prior year’s foundation grantincreased by the rate of inflation. If an increase inthe basic grant exceeds inflation, a high-revenuedistrict is required to reduce its hold harmless mill-age to provide only enough revenue to allow for aninflationary increase in its foundation grant from itsprior year amount. Capping growth in the founda-tion grant at the rate of inflation was designed tocomplement the stated policy of “raising the bot-tom” in the effort to close the gap between low- andhigh-revenue districts.

Uniform Increases andAdditional Equity Payments

After all districts were raised to at least the basicgrant amount in FY2000, the 2X formula was aban-doned. Beginning in FY2001, all districts began re-ceiving the same dollar increase in their foundationgrant based on the adjustment made to the basicfoundation grant. As opposed to using the founda-tion index formula to determine annual adjustments,state policymakers determined the annual increasesto the basic grant, after taking into account projec-

tions of state and local education revenues and en-rollments. The decision to abandon the sliding scaleeffectively created a fixed dollar difference betweenthe basic grant and the maximum grant – a $1,500per-pupil spread. For each year that the same dol-lar increase was provided to all foundation grants,the original $1,500 per-pupil spread was maintained.These adjustments had a range-preserving effect,although, mathematically, the uniform annual in-

crease resulted in a larger percent-age increase for low-revenue dis-tricts compared to high-revenuedistricts. Despite the same abso-lute $1,500 per-pupil spread be-tween grant amounts, the ratio ofthe maximum grant to the basicgrant shrank and greater per-pu-pil equity was achieved.

To further reduce per-pupil revenue disparities, thestate adopted a policy of providing separate equitypayments to lower-revenue districts. Unlike the slid-ing scale increases of the 2X formula which reliedon a range of annual increases to foundation grants,the equity payment approach provided all districtsbelow the maximum grant amount with the samedollar increase in their foundation grant. While thisapproach did reduce the spread between the lowestgrant and maximum grant, it did nothing to reducethe per-pupil funding differences of districts belowthe maximum amount, but only the spread betweenthe lowest and the maximum grant amounts.21

Per-pupil equity payments were made in FY2002,effectively raising the basic grant from $6,300 to$6,500 per pupil. In FY2007, districts below themaximum grant amount received another equity pay-ment ($23 per pupil). The combined effect of thesetwo equity payments was to reduce the spread be-tween the basic and maximum grants by $223 perpupil, from $1,500 in FY2001 to $1,277 per pupil inFY2007.

The equity payments had arange preserving effect onper-pupil funding disparitiesamong the non-hold-harm-less districts.



Changes from FY1995 to FY2007

Changes to the foundation grant since FY1995 andthrough FY2010 are examined below, breaking theentire period into two sub-periods. The paper dis-cusses changes from FY1995 to FY2007 first, fol-lowed by a examination of the changes from FY2008to FY2010.

For the period FY1995 to FY2007, Table 3 providesa history of the minimum, basic, and maximum grantamounts and annual changes for each. Annualchanges in the amount of the minimum, basic, andmaximum grants varied considerably over the entireperiod. The difference between the maximum andthe minimum grants in each year shows that thegap, initially at $2,300 in FY1995, decreased to$1,277 by FY2007. The effects of using the slidingscale can be seen in the annual increments to the

minimum grant in FY1996 through FY1998 and againin the changes for FY2000, when compared to theannual changes to the basic grant.

Examining the entire 13-year period, a sub-periodof consistent and steady growth is seen from FY1995through FY1998, followed by a year of no across-the-board increases. Only the minimum grant wasincreased in FY1999 as part of the state’s responseto the settlement in the Durant court case (see boxon page 23). The period from FY2000 throughFY2003 is characterized by substantial annual in-creases, with annual growth in the basic grant top-ping 8 percent in FY2002. For two years, FY2004and FY2005, districts received no or very small in-creases in the foundation grant. In FY2006 andFY2007, moderate growth in the foundation grantoccurred, 2.6 percent and 3.4 percent, respectively.

Table 3Minimum, Basic, and Maximum Foundation Grants: FY1995 through FY2007

Minimum Grant Basic Grant Maximum GrantFiscal Annual Annual Annual MinimumYear Amount Change Amount Change Amount Change DifferenceFY1995 $4,200 $5,000 $6,500 $2,300FY1996 $4,506 $306 $5,153 $153 $6,653 $153 2,147FY1997 $4,816 $310 $5,308 $155 $6,808 $155 1,992FY1998 $5,124 $308 $5,462 $154 $6,962 $154 1,838FY1999 $5,170 $46 $5,462 $0 $6,962 $0 1,792FY2000 $5,700 $530 $5,700 $238 $7,200 $238 1,500FY2001 $6,000 $300 $6,000 $300 $7,500 $300 1,500FY2002* $6,500 $500 $6,500 $500 $7,800 $300 1,300FY2003** $6,626 $126 $6,626 $126 $8,000 $200 1,374FY2004** $6,626 $0 $6,626 $0 $8,000 $0 1,374FY2005 $6,700 $74 $6,700 $74 $8,000 $0 1,300FY2006 $6,875 $175 $6,875 $175 $8,175 $175 1,300FY2007*** $7,108 $233 $7,108 $233 $8,385 $210 1,277

* The minimum/basic grant included a $200 per pupil equity payment subsequently built into the base; basic grantamount was $6,300 in FY2002.** The foundation grant was effectively reduced for all districts when a $74 per-pupil proration was required.*** The minimum/basic grant included a $23 per pupil equity payment subsequently built into the base; basic grantamount was $7,085 in FY2007.Source: Senate Fiscal Agency, School Aid Funding Formula: Further “Closing of the School Aid Equity Gap”, December2007.

CRC Report


Growth in the basic grant from FY1995 to FY2000matched the growth in the U.S. Consumer Price In-dex over the same period (seeChart 1). The sizeable annualgrant increases between FY2000and FY2003 exceeded the growthin inflation during these years, ac-counting for real growth in thebasic grant. However, this periodof real improvement was nearlywiped out when the sizeable in-creases in the grant were halted

in FY2004 and FY2005. While the nominal grantwas basically held constant during this period, the

value of the real grant declined.Over the entire 13-year period, thebasic grant increased at an aver-age annual rate of 2.97 percent,slightly higher than the annualizedgrowth rate of the U.S. CPI (2.57percent). In inflation-adjusteddollars, the grant grew by $328from FY1995 to FY2007.

Chart 1Basic Foundation Grant: FY1995 to FY2007

$5,000

$7,108$6,780

$4,000

$6,000

$8,000

FY19

95

FY19

97

FY19

99

FY20

01

FY20

03

FY20

05

FY20

07

nominal dollars FY2007 dollars

* Basic grant adjusted using U.S. Consumer Price Index (state fiscal year basis).

Source: Senate Fiscal Agency; US Bureau of Labor Statistics

The sizeable annual grant in-creases between FY2000 andFY2003 exceeded the growthin inflation during theseyears, accounting for realgrowth in the basic grant.



On the other hand, the minimum grant grew fasterthan changes in inflation because it received sub-stantially larger annual increases, especially mea-sured against the increases pro-vided to the basic grant, early on.Whereas the basic grant generallytracked the changes in prices, theminimum grant grew at a ratemore than double the rate ofchange in inflation betweenFY1995 and FY2000 (see Chart 2).During this period, these low-rev-enue districts benefited from the2X formula and received annual in-creases equal to two times the in-crease provided to the basic grant.

Over the entire period, FY1995 to FY2007, the aver-age annual growth rate of the minimum/basic grantwas 4.48 percent, almost twice as large as the an-

nualized growth rate of inflation(2.57 percent). In real dollarterms, the grant increased a totalof $1,413, from $5,695 in FY1995to $7,108 in FY2007.

In contrast, the 51 hold harmlessdistricts (as reflected in the changesto the maximum grant) did not fareas well as other districts in termsof foundation grant growth. Thesedistricts experienced similar periods

of growth and stagnation as the basic grant, with a

Chart 2Minimum Foundation Grant: FY1995 to FY2007

$4,200

$7,108

$5,695

$4,000

$6,000

$8,000

FY19

95

FY19

97

FY19

99

FY20

01

FY20

03

FY20

05

FY20

07


* Minimum grant adjusted using U.S. Consumer Price Index (state fiscal year basis).


Over the entire period,FY1995 to FY2007, the aver-age annual growth rate of theminimum/basic grant was4.48 percent, almost twice aslarge as the annualizedgrowth rate of inflation.

CRC Report


Chart 3Maximum Foundation Grant: FY1995 to FY2007

$6,500

$8,385$8,814

$4,000

$6,000

$8,000

$10,000

FY19

95

FY19

97

FY19

99

FY20

01

FY20

03

FY20

05

FY20

07


* Grant adjusted using U.S. Consumer Price Index (state fiscal year basis).


couple notable differences (see Chart 3). The over-all growth of this grant from FY1995 to FY2007 didnot benefit from the separate equity payments pro-vided to the basic grant in FY2002 ($200 per pupil)and FY2007 ($23 per pupil). These payments effec-tively increased the overall and annual growth ratesof the basic grant and decreased the spread between

the basic and maximum grant from $1,500 per pupilin FY2001 to $1,277 per pupil in FY2007. Becausethe annualized growth rate of the maximum grant(2.14 percent) was less than the annual growth rateof the U.S. CPI (2.57 percent) from FY1995 to FY2007,the grant realized an inflation-adjusted reduction of$429 per pupil.



Changes since FY2007

In FY2008, the state again changed the method usedto annually increase the foundation grants of dis-tricts and how much state aid each district receives.After abandoning the sliding scale in FY2001 in fa-vor of an approach that treats all districts equally,

state policymakers returned to the 2X formula toprovide larger annual increases to those districtsreceiving less than the maximum grant and smallerincreases to those districts at or above this level. Toeffect this policy change, a two-part adjustment wasemployed for FY2008. The first step provided all

FY1999 Foundation Grant Adjustments: Durant and MPSERS

With the exception of the lowest-revenue school districts, FY1999 foundation grants were frozen at their FY1998levels despite the fact that Michigan’s economy was performing very well and state School Aid Fund revenue growthwas very strong. Only those districts receiving the minimum grant received an increase, albeit a very small one ($46per pupil). The decision to hold the line on foundation grant increases in FY1999 was influenced by the State ofMichigan’s resolution of the Durant lawsuit.a Furthermore, instead of providing foundation grant increases, thestate made adjustments to the required employer contribution to the Michigan Public School Employee’s RetirementSystem (MPSERS) in FY1998. Both the lawsuit settlement and the retirement system changes had the combinedeffect of providing additional budgetary resources to local school districts outside of the foundation program. Theretirement system changes set up the system to be more sensitive to changes in market performance becausethe full effect of recent investment gains were reflected in the value of the investment portfolio and the five-yearsmoothing of investment earnings was reset.

The Michigan Supreme Court decided the Durant lawsuit in July 1997 in favor of 84 plaintiff school districts andawarded them $212 million in damages. At issue in the case was the proper level of state funding provided toschool districts for special education and if Section 29 of Article IX of the 1963 Constitution (prohibition on unfundedmandates) was violated. Recognizing that districts not part of the lawsuit might sue, the State of Michigan agreedto make payments to both plaintiff and non-plaintiff districts. Plaintiff districts shared in a lump sum payment ($212million), which represented an amount of underfunding for three fiscal years (FY1992 through FY1994). Non-plaintiff districts shared $636 million through a series of annual payments over 15 years. The state’s settlementwith both plaintiff and non-plaintiff districts also resulted in changes in how special education payments to districtswere to be made, prospectively. Based on the court’s ruling, the state was responsible for a set percentage ofgeneral special education and special education transportation costs, 28.6 percent and 70.4 percent respectively.The Durant settlement was part of a broader set of financial decisions by the state and local school districts thatgenerated a larger favorable financial effect on districts’ budgets than the Durant-related payments.b

In addition to the direct financial provisions from Durant benefiting districts, districts also benefited from adecision by the state to decrease the required employer contributions to the state-managed MPSERS, effective inFY1998. The retirement savings were achieved by fully reflecting the significant increase in the value of theretirement fund portfolio through FY1997 and changing certain actuarial assumptions (e.g., future wage escalation)that had the effect of holding down the increase in the employer contribution. These changes helped reduce theemployer contribution to the system for the pension benefit from 10.97 percent of payroll in FY1997 to 6.7percent of payroll in FY1998. The resultant savings, estimated at $300 million, were passed along to districts inthe form of cost reductions to their annual retirement funding bill.

Thus, because of the financial settlement in Durant and the changes involving MPSERS, the foundation grants forall but the lowest-spending districts were held at their FY1998 levels in FY1999. In lieu of directing stateresources to the foundation program in FY1999, additional funding was provided to special education and at-riskprograms ($100 million).

a Durant v. State of Michigan, 238 Mich App 185 (1999).

b Citizens Research Council of Michigan, The Durant Decision, Memorandum 1048, February 1998.

CRC Report


The authorization of charter schools was a key compo-nent of the education quality and accountability reformsthat accompanied Proposal A and the related school fi-nance reforms of the mid-1990s. Charter schools arepublic schools under both the Revised School Code andthe State School Aid Act of 1979 and the Michigan Su-preme Court has confirmed that charter schools are publicschools for the purposes of Michigan constitutional pro-visions dealing with school funding (Article VIII, Section2 and Article IX, Section 11). As public schools, charterschools are prohibited from charging tuition. Also, be-cause charter schools lack taxing authority, they do nothave access to the local property tax revenues that tra-ditional public school districts have to support schooloperations. Therefore, without access to local propertytaxes or tuition resources, the foundation grants of allcharter schools are entirely financed by state School AidFund resources. Like traditional public schools, estab-lished charter schools use the blended student enroll-ment count to determine pupil membership under thefoundation grant calculation.

Until FY2008, the foundation grant of a charter schoolcould not exceed the lesser of 1) the amount received bythe traditional publicschool district inwhich the charterschool is located or2) the minimumfoundation grantplus $300. Over theyears, the charterschools have re-ceived the same an-nual grant adjust-ments as their hostresident district.Thus, if the host dis-trict received a largerincrease under the2X formula then sodid the charterschool located in thetraditional publicschool district.

In FY2008, state lawwas changed to al-low charter schoolsto receive a founda-tion grant equal to

the lesser of 1) the amount received by the traditionalpublic school district in which the charter is located or 2)the maximum grant received by any charter school inthe state (which was $7,580 in FY2010). This change isdesigned to allow charter schools residing in higher-rev-enue traditional public districts to eventually receive afoundation grant equal to their host district, based onthe continued use of the 2X formula to provide annualfoundation grant increases.

Chart 4 presents the maximum, minimum, and averagefoundation grant received by charter schools in Michiganfrom FY1995 to FY2009 and the effects of per-pupil rev-enue equalization. The difference between the maxi-mum ($5,500 per pupil) and minimum ($4,497 per pupil)grants was a little more than $1,000 in FY1995 whenProposal A took affect and 11 charter schools were inoperation. By FY2000, 162 charter schools operated andthe spread between the maximum and minimum foun-dation decreased to $500, when all districts in the statereceived at least the basic grant amount ($5,700). Sincethat time, the spread has been reduced further to $264in FY2009.

Foundation Grants for Charter Schools

Chart 4Foundation Grant Amounts for Charter Schools

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

FY19

95

FY19

96

FY19

97

FY19

98

FY19

99

FY20

00

FY20

01

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

Foun

datio

n G

rant

Maximum Average Minimum

Source: Senate Fiscal Agency



districts with the same per-pupil increase. The sec-ond step involved an equity payment to those dis-tricts below the maximum revenue level. The dis-tricts below the maximum received a supplementalpayment based on a sliding scale with the largestincrease being twice the amount of the maximumgrant.

The return to the 2X formula re-sulted in districts receiving per-pu-pil foundation grant increases rang-ing from $48 to $96 in FY2008.The level at which districts did notreceive additional funds above thebase $48 per-pupil adjustment was$8,433 per pupil. With the returnto the 2X formula, the new targetfoundation grant was set equal tothe maximum amount, in a man-ner very much similar to the op-eration of the foundation programimmediately following the adoption of Proposal A.In other words, the maximum grant amount becamethe new basic grant for purposes of further narrow-ing the per-pupil funding disparities. For FY2008,the minimum grant that was guaranteed to all dis-tricts was increased by $96 to $7,204 per pupil, anincrease of 1.4 percent compared to a 4.4 increasein the U.S. CPI for the same period. The state usedthe 2X formula again in FY2009 with increases rang-ing from $56 per pupil to $112 per pupil (See Table4). These annual increases surpassed the changein U.S. CPI, which declined 0.3 percent in FY2009.

The national recession of 2008 and 2009 reducedstate revenues in FY2009 and FY2010, includingtaxes dedicated to schools. State School Aid Fundrevenues declined by 5.1 percent in FY2009 and 1.0percent in FY2010; however, the full effect of thesedeclines were not reflected in the per-pupil funding

amounts because of the availabil-ity of discretionary federal fundingallocated through the AmericanRecovery and Reinvestment Act of2009. These resources were dis-tributed to districts as a partial re-placement of state aid resources.

Despite the use of $450 million intemporary federal funding, theFY2010 School Aid Fund budget re-quired a $154 per-pupil cut to fi-nance foundation grants in re-sponse to the first-ever two-yeardecline in dedicated School Aid

Fund revenues. While districts had some discretionwhere to apply the per-pupil cut, the reduction ef-fectively reduced the foundation grant for all dis-tricts (see Table 4). The $154 per-pupil reductionwiped out 75 percent of the combined increase tothe minimum/basic grant from the previous two years(FY2008 and FY2009). It also reduced the maxi-mum grant to below the FY2007 level by completelyeliminating the combined $104 total increase pro-vided in FY2008 and FY2009. In inflation-adjusteddollars, the FY2010 per-pupil cut caused the basicgrant in FY2010 to be $93 less than it was in FY2000,

Table 4Minimum and Basic/Maximum Foundation Grants: FY2008 to FY2010

Fiscal Annual Basic/ Annual Year Minimum Change Maximum ChangeFY2008 $7,204 $96 $8,433 $48FY2009 $7,316 $112 $8,489 $56FY2010* $7,162 ($154) $8,335 ($154)

* Although a district’s foundation grant was not reduced statutorily, the $154 per-pupil reduction instate aid contained in the State School Aid Act for FY2010 had the same effect and is reflected as suchfor purposes here.


The full effect of the de-clines were not reflected inthe per-pupil fundingamounts because of theavailability of discretionaryfederal funding allocatedthrough the American Re-covery and ReinvestmentAct of 2009.

CRC Report


a decrease of 1.3 percent (see Chart 5). The FY2010per-pupil cut to the maximum grant in FY2010 causedthe grant to be $829 below where it was in FY2000($9,164 per pupil) in real terms, equating to a totalreduction of 9.0 percent over the 10-year period.

Major Factors InfluencingFoundation Grant Growth

Until recently, two primary factors simultaneouslyinfluenced the annual changes observed in theamount of the basic foundation grant over time. Thefirst factor is the amount of state and local revenueavailable for distribution. All else being equal, addi-tional resources will allow the grant to increase year-over-year. The amount of resources available to thefoundation program in any given year can be af-fected by various things. Most obvious is the growthin dedicated K-12 revenues at the state and locallevels.22 Similarly, a shift in the amount of state re-

sources away from categorical assistance to the foun-dation program can result in proportionately moreresources being available to distribute through theper-pupil grant. These additional resources will per-mit the foundation grant to increase year-over-year.

The second factor influencing annual changes in thefoundation grant is the number of students partici-pating in the foundation program. When statewideschool enrollments increase, the limited resourcesavailable each year have to be spread across moreindividuals, driving the foundation grant down. Al-ternatively, shrinking enrollments effectively free upresources at the state level, allowing these dollars tobe used to increase the foundation grant. Generallyspeaking, these two main factors -- amount of moneyavailable and number of students – combine to de-termine the amount of the foundation grant each year.Changes in one factor that might allow the grant toincrease independently can be offset by changes in

Chart 5Changes in Inflation-Adjusted Foundation Grants: FY2000 to FY2010(FY2010 dollars)

$7,162$7,255

$8,335

$9,164

$4,000

$6,000

$8,000

$10,000FY

2000

FY20

02

FY20

04

FY20

06

FY20

08

FY20

10

basic maximum

* Grant adjusted using U.S. Consumer Price Index (state fiscal year basis).




Foundation Growth after Required MPSERS Contribution

clining payroll. Increased required contributions for retireehealth care benefits also contributed to the retirement sys-tem contribution rate rising. These costs, unlike the pen-sion benefits promised under MPSERS, are funded on a pay-as-you-go basis. The retiree health care component rose inreaction to health care costs and the number of retired schoolemployees/beneficiaries receiving benefits.

Over the entire 16-year period, the real value of the grant,adjusted for the employer contribution increase, rose from$7,180 in FY1995 to $8,012 in FY2002, before falling to$7,029 in FY2010. This is $133 less than the value of theper-pupil grant adjusted by inflation alone ($7,162). Theemployer contribution rate to MPSERS rose again in FY2011and in FY2012, while the basic grant was held constant inFY2011 and reduced by $470 in FY2012. These changesfurther reduce the real value of the grant.b

a Citizens Research Council of Michigan, Financing MichiganRetired Teacher Pension and Health Care Benefits, Report337, September 2004.b The MPSERS employer contribution rate may be adjusteddownward if the Michigan courts find that a recent lawrequiring school employees to contribute three percent oftheir pay towards retiree health insurance is legal (McMillanv. MPSERS).

Prior to the implementation of Proposal A in 1994, the State ofMichigan and public school districts shared in the financing ofthe employer contributions to the Michigan Public School Em-ployees Retirement System (MPSERS) for public school dis-tricts. Those contributions, expressed as a percentage of ac-tive employee payrolls, prefunded the actuarial costs of thedefined benefit plan provided to public school employees plusthe costs of health benefits for retirees on a pay-as-you-gobasis. After Proposal A, full responsibility for financing theemployer contributions passed to the school districts, whichfinanced the required annual contributions from their founda-tion grants. Since 1995, the annual contribution rate has fluc-tuated, but the general long-term trend has been an increase.In some years, the rate grew more rapidly than growth in thefoundation grant, requiring larger shares of the foundation grantto be dedicated to financing the retirement contribution.a Theincrease in the rate between FY1995 and FY2010, when com-pared to the growth in the foundation grant over this periodand after adjusting for inflation, effectively reduced the pur-chasing power of the foundation grant.

The required contribution rate was 14.24 percent of payrollin FY1995, when Proposal A took effect. In FY2010, the ratewas 16.94 percent of payroll, a change of 2.7 percentagepoints or nearly 19 percent over the 16-year period. Thiscompares to a decline of 0.2 percent in the inflation-adjustedvalue of the basic grant over thesame period. The effects of theannual changes in the retirementrate on the real value of the grantare reflected in Chart 6.

The chart compares growth in theinflation-adjusted basic grantwith changes in the inflation-ad-justed basic grant after account-ing for the increase in the em-ployer contribution rate toMPSERS. In other words, the realvalue of the basic grant is re-duced to reflect the changes inthe required retirement contribu-tion rate since FY1995.

While the employer contributionrate fell in the late 1990s in re-sponse to the growth in the valueof the investment portfolio, itbegan rising steadily and consis-tently in the early 2000s. Thisgrowth was a function of poor in-vestment performance relative toactuarial assumptions, the deci-sion to “mark to market” the in-vestment portfolio, and the de-

Chart 6Effect of Change in Retirement System Contribution Rate on Basic Grant

$7,029

$8,012

$7,162$7,899

$7,180

$6,500

$7,000

$7,500

$8,000

$8,500

FY19

95

FY19

96

FY19

97

FY19

98

FY19

99

FY20

00

FY20

01

FY20

02

FY20

03

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06

FY20

07

FY20

08

FY20

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FY20

10

Change No Change

* Basic grant adjusted using U.S. Consumer Price Index (state fiscal year basis)and MPSERS contribution rateSource: Senate Fiscal Agency; Office of Retirement Services, US Bureau of LaborStatistics

CRC Report


the other factor that might result in a grant to de-crease. Thus, it is important to understand what isgoing on with both factors at the same time.

During the first 13-year period operating under Pro-posal A and until the Great Recession of 2008, theobserved changes in the different foundation grantlevels occurred for two different reasons. ThroughFY2003, annual foundation grant increases were fu-eled by relatively strong growth in dedicated local andstate revenues, as reflected in Chart 7. DedicatedSchool Aid Fund revenue, as well as the local 18-millnon-homestead property tax for school operations,showed strong growth throughout the early 2000s.During this period, student enrollments in Michiganpublic K-12 schools rose fairly consistently. To somedegree, this enrollment growth tempered the annualgrowth in the foundation grant made possible by theincrease in state and local tax revenues.

Beginning in FY2000, growth of the major founda-tion funding source, dedicated School Aid Fund rev-

enue, slowed. By FY2003, revenue growth stag-nated while local property tax revenues continuedto exhibit strong annual growth. As a result of theslowdown in the School Aid Fund growth, annualincreases to the foundation grant ceased in FY2003.The foundation grant was saved from the full ef-fects of the state resource declines during this time,in part because of changes in statewide enrollmentsthat took hold around the same time. Since FY2003,statewide enrollments have exhibited an unabateddecline. This demographic trend allowed the foun-dation grant to remain basically constant for a pe-riod (FY2003 through FY2005), despite the very weakrevenue growth during the time. Declining enroll-ments allowed the grants to increase moderately(FY2006 and FY2007), despite the continued lag-gard growth in state resources.

Changes to the foundation grant since FY2007 havebeen influenced in a number of ways. First, growthhas been affected by a clear policy shift toward fur-ther narrowing the gap between the lowest- and

Chart 7Growth of SAF Revenues, Local School Operating Taxes, and Foundation Grant

100

110

120

130

140

150

160

170

180

190

FY19

95

FY19

96

FY19

97

FY19

98

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99

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00

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01

FY20

02

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03

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04

FY20

05

FY20

06

FY20

07

Inde

x (F

Y199

5 =

100

)

State SAF Revenue

Non-Homestead TV

Basic Grant

Sources: Michigan Department of Education; State Tax Commission



highest-revenue districts. This policy change is re-flected in the return to the 2X formula for providingannual per-pupil revenue increases.

Second, since FY2008, dedicated state school aidtaxes have been negatively affected by the reces-sion and its impacts on the Michigan economy. Mea-ger baseline School Aid Fund revenue growth inFY2008 (less than one percent) followed by two con-secutive years of revenue declines in FY2009 (5.1percent) and FY2010 (1.0 percent) has constrainedthe growth of the foundation grant. Some of therecent revenue declines were partially offset by theavailability of temporary federal resources that wereused to provide a grant increase in FY2009 and miti-gate the size of the effective reduction in FY2010.

Third, and most recently, foundation grantadjustments have been influenced by budgetdecisions having to do with the state’s General Fund.As state policymakers grapple with ongoing GeneralFund budget deficits, they have required the SchoolAid Fund to pick up costs previously borne by the

General Fund. Initially, most of these fundingdecisions involved shifting K-12 education programsor services previously financed with General Fundrevenue to the School Aid Fund budget. Beginningin FY2010, and again in FY2012, the use of SchoolAid Fund revenue was expanded to finance post-secondary education (community colleges and highereducation) appropriations; a break with past budgetpolicy precedent. The recent policy change has theeffect of re-directing resources previously availablefor K-12 education to other state budget priorities.For example, the FY2012 budget finances almost$400 mill ion in post-secondary educationappropriations from the School Aid Fund, amountingto nearly $267 per pupil.

Statewide Enrollment Changes:Trends and Causes

Statewide K-12 enrollments in the 10 years prior toProposal A were fairly constant, although in the fouryears prior to adoption of the foundation grant an-nual enrollments increased each year. After enact-

Chart 8Annual Statewide Enrollments and Blended Foundation Pupil Memberships

1,654

1,751

1,629

1,500

1,550

1,600

1,650

1,700

1,750

1,800

FY19

95

FY19

96

FY19

97

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98

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99

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00

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01

FY20

02

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03

FY20

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05

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06

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07

FY20

08

FY20

09

enrollments memberships

(000)

Source: Michigan Department of Education, Bulletin 1014 and Financial Status Reports

CRC Report


ment of the school finance reforms, annual state-wide enrollments (traditional public school districtsand charter schools) continued to climb throughFY2003 and reached 1,750,000 before changingcourse (see Chart 8). Since FY2003, however, state-wide annual enrollments and the pupil membershipcount used in the foundation program have enteredan era of decline. Since then, total statewide fig-ures for enrollment and membership have declinedeach year, equating to a total decline of 7.0 percentand 5.5 percent, respectively.

After peaking in FY2003, enrollments fell, on aver-age, 1.0 percent per year between FY2003 andFY2009. The corresponding annual declines in thepupil membership counts have been slightly moregradual (0.7 percent) due to the fact that these fig-ures use a blended count that incorporates both

current- and previous-year enrollment figures (seebox below), which has the effect of dampening year-over-year enrollment declines.

Declining statewide enrollments during the past sixyears are primarily the result of a reduction in Michi-gan-based births. The peak in Michigan-based birthsoccurred in 1990. To a lesser extent, declining state-wide enrollments are caused by out-migration stem-ming from the economic conditions in the state andfamilies pursing alternative forms of education, suchas private schools and homeschooling. The state-wide trend of year-over-year student enrollmentdeclines is projected to continue through calendaryear 2012.23 Current projections of school enroll-ments and foundation grants for FY2011 and FY2012include pupil declines of 1.6 percent and 1.3 per-cent, respectively.

Blended Count Used in the Foundation Grant Program

The foundation program does not rely entirely on a district’s current-year enrollment for purposes of distributingstate aid. Instead, state law requires school districts to conduct two separate student counts. This blendedcount is used to determine the pupil membership figure for purposes of the foundation program. The first countis the fall head count for the current school year (75 percent of this count). The second count is the springstudent count from the prior school year (25 percent of this count). Mathematically, the current blended count isrepresented by:

(0.75 * current year enrollment) + (0.25 * prior year enrollment) = Pupil Membership

The use of a blended count helps mitigate the negative revenue effects at the local school level during periods ofdeclining enrollments and is intended to provide a financial incentive for schools to retain students from year-to-year. In this environment, fewer students result in fewer dollars under the per-pupil foundation model. Theweighting of the two counts has changed since adoption of school finance reforms in FY1995. Initially (FY1995),the counts were equally weighted at 50 percent. Over time, the weights were gradually shifted to an 80 percent/20 percent blend (used in FY2001 to FY2004). However, in response to declining enrollments, statewide and atthe individual district level, the prior-year count was given additional weight. Since FY2005, the blended pupilcount has been 75 percent of the current year head count and 25 percent of the previous year head count. Thechange to the weightings has helped smooth the observed decline in pupil membership figures since FY2003, vis-à-vis the actual student enrollment figures for each year.

Beginning with the FY2012 budget the weightings will change course again, but this time to a 90 percent/10percent blend. This shift will allow growing districts to more fully benefit (in funding terms) from the additionalstudents. Conversely, the enrollment losses in declining districts will not be smoothed as much.



Enrollment Changes at the District Level

Statewide enrollment figures can mask substantiallydifferent experiences at the individual school districtlevel. Factors affecting annual enrollments at thedistrict level include those influencing statewide en-rollment figures, such as demographic factors (birthrates and out-migration), but districts are also ex-posed to competition for students. While inter-dis-trict competition results in no net gain or loss for thestate as a whole, districts do experience gains andlosses when students change districts because ofcompetition. A student’s corresponding foundationdollars follow them during such migrations.

Depending on the year being examined, the compe-tition for students and demographic changes mani-fest themselves in enrollment changes to varyingdegrees across the state. Some districts will seeincreases in enrollments, while others will see de-

clines. Using FY2009 figures as an example, a littlemore than one-third (285 districts) of the total tra-ditional public school districts and charter schoolsgained students from the prior school year while theremaining two-thirds of all districts experienced adecline in enrollment.24 Chart 9 presents the num-ber of school districts with declining and growingannual enrollments for the six-year period FY2004through FY2009. Since statewide enrollments be-gan declining in FY2004, the number of districts withyear-over-year enrollment losses has grown from 346to 482.

Changes in annual enrollment can have significantfiscal effects on local school district budgets becausegeneral education operations are financed with theper-pupil foundation grant. In the short-run, themarginal costs of losing a student are far greaterthan the average costs of educating a student. Thiscan place a strain on local budgets because annual

Chart 9Annual Enrollment Changes in School Districts: FY2004 to FY2009

346383 392

429

485 482

381353 362

336

281 285

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* Includes traditional public school districts and charters.


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The statewide examination of district-level enrollmentchanges hides considerable variation, includingdifferences that exist between traditional public schooldistricts and charter schools as well as differences withinthe traditional public school district community. Statewideenrollment in Michigan’s traditional public schools inFY2009 was down nearly 34,900 students compared towhere it was at the start of Proposal A (FY1995). This2.2 percent statewide decline partially accounts for thechanges observed at the district level, along with a hostof other factors — including competition for students anddemographic shifts at the individual community level.

Looking only at traditional public schools for FY2009reveals that nearly 75 percent of the 551 districts (406districts) experienced annual membership losses. Of thisgroup, 256 districts realized a loss of 2.5 percent orgreater, the rate of decline for all traditional public schooldistricts as a group for the year. In FY2009, a little overone-quarter of all traditional districts (145 districts) didnot experience a decline (i.e., no change in enrollmentor an increase in enrol lment) (see Table 5).Approximately 75 percent of traditional public schoolchildren in FY2009 were educated in districts thatexperienced year-over-year enrollment declines.

In contrast, only 76 of the 216 charter schools (almostone-third) experienced enrollment declines from FY2008to FY2009.a Overall, as a group, charter schools saw anet increase in enrollments of approximately 3,500students in FY2009, an increase of 3.5 percent.

FY2009 provides a snapshot of traditional public schoolenrollment trends, but is also indicative of a long-term

trend in enrollment changes for traditional public districtsvis-à-vis charters. The number of traditional publicdistricts experiencing annual enrollment losses hasincreased steadily since FY2003, rising from 300 districtsto 406 districts (see Chart 10 on page 33).

The long-term trend for charter school enrollments tellsa different story. While the number of charter schoolsexperiencing year-over-year enrollment declines hasincreased slightly in recent years, the overall picture hasbeen one of relative stability compared to that oftraditional public school districts (see Chart 11 on page33). Furthermore, at the same time that the number ofcharter schools with declining enrollments each year hasbeen somewhat stable, the number of chartersexperiencing rising enrollments also has remained fairlystable. This is in direct contrast to traditional publicdistricts, which have seen fewer and fewer districts withyear-over-year enrollment gains. The aggregatestatewide enrollment in charter schools between FY2003and FY2009 grew 58 percent, compared to a 9 percentstatewide decline in traditional public schools. It is worthnoting that the number of charter schools over this periodincreased from 180 to 224, so the enrollment growthwas spread across a greater number of schools.

a For charter schools, those schools newly created or recentlyabolished are not included in the year-over-year count becauseof the lack of two consecutive years of enrollment data.Including these charters would distort the number of districtswith either increasing or decreasing enrollments. A total of224 charter schools registered enrollments in FY2009, but 216these schools had FY2008 enrollments.

Enrollment Changes in Traditional Public Schools Compared to Charters

Table 5Enrollment Changes in Traditional Public School Districts: FY2008 to FY2009

Number of Percent of Total Percent ofEnrollment Change Districts Districts Enrollment StudentsDecline >10% 29 5.3 131,889 8.7Decline 2.5% to 10% 227 41.2 478,697 31.6Decline 0.1% to 2.5% 150 27.2 528,912 34.9Non-decline 145 26.3 374,106 24.7

Total 551 1,513,604




Chart 10Annual Enrollment Changes in Traditional Public Districts: FY2004 to FY2009

300315

333358

392406

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159145

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Chart 11Annual Enrollment Changes in Charter Schools: FY2004 to FY2009

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6859

71

93

76

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Source: Center for Educational Performance and Information.

CRC Report


enrollment losses generally cannot be translated intoimmediate cost reductions that match the per-pupilfunding lost.

Different Effects of Declining Enrollments

Under Michigan’s foundation program, funding is de-signed to follow the student. Rising student enroll-ments generally mean more funding for an individualdistrict, while declining enrollments result in the op-posite. This dynamic has differenteffects depending on the level ofgovernment (state or local schooldistrict). For example, from theperspective of the State of Michi-gan and the annual School AidFund budget, and assuming a con-stant level of aggregate revenuesto distribute statewide, decliningenrollments generally mean moreresources to distribute on a per-pupil basis. Conversely, from theperspective of a local district andgiven the same assumptions, de-clining enrollments translate intofewer resources in the aggregate.

Local Budgets. Declining enroll-ment creates fiscal challenges for school district bud-gets because the total amount of funding receivedthrough the foundation program is based, in part,on the pupil membership count. As annual enroll-ments fall, districts lose revenue under the per-pupilfoundation program, but they may not be able tocut expenses as quickly as the reduction in revenues.School spending is highly concentrated in teachersalaries and other forms of compensation, such asgroup insurances and retirement benefits. Thesecosts, on a per-employee basis, can be difficult toreduce in the short-run and in response to year-over-year enrollment declines because of the role thatcontracts and collective bargaining play in settingcompensation levels for school employees. In thenear-term time horizon, schools can address the fis-

cal effects of enrollment declines through reducing/cutting programs and/or increasing class sizes, upto a point.

Declining enrollments may result in fewer resources,but may not translate into immediate reduced costsfor districts. For example, a traditional public dis-trict of average enrollment size (2,500 in FY2009)that experiences the average statewide enrollmentdecline (1.5 percent) will lose 29 pupil memberships

under the foundation program. As-suming the district receives the ba-sic foundation grant, the enroll-ment decline corresponds to a lossof about $200,000 – equivalent tothe total annual compensationcosts of approximately three in-structional employees. If theselosses were realized within a singlegrade or even a single school, itmight be possible to eliminate dis-tinct positions to manage the fis-cal impact. However, the lossestend to be spread over the entiredistrict, across multiple grades, andthroughout a number of buildings.For the typical district, it can takea number of years of such gradual

enrollment declines to effect personnel reductionsand realize cost savings.

Under the foundation allowance program, it is mucheasier to manage up (i.e., accommodate growingenrollments) than it is to manage down. In an envi-ronment of shrinking enrollment, the revenue im-pact associated with fewer students, especially inaverage- and small-sized districts, cannot be con-verted to immediate and equal expense reductionsbecause of the nature of school spending and dis-tricts’ desire to maintain class sizes. Faced withshrinking enrollments and fewer resources, compen-sation costs might not come down as quickly as rev-enues because collective bargaining agreements gen-erally stipulate that the least experienced workers

In an environment ofshrinking enrollment, therevenue impact associatedwith fewer students, espe-cially in average- and small-sized districts, cannot beconverted to immediate andequal expense reductionsbecause of the nature ofschool spending and dis-tricts’ desire to maintainclass sizes.



(and lowest paid) must be laid off first. The currentfoundation program was developed in an era of ris-ing enrollments and little attention was given to thefiscal effects of declining enrollments within the struc-ture of the program.

State School Aid Fund Budget. In any fiscal year,School Aid Fund dollars associatedwith the foundation grants in thosedistricts experiencing enrollmentdeclines become available to sup-port the foundation grants in thosedistricts with enrollment increasesin the same year. In effect, thestate aid pie is sliced into differ-ently sized pieces and the re-sources shifted from some districtsto others. This occurs both dur-ing times of rising, as well as stag-nating growth in the amount ofmoney available to distribute tolocal districts, whenever there isnet statewide enrollment declines.

For example, because there was a net statewide en-rollment decline in FY2009, School Aid Fund re-sources previously allocated to the students who left

the system were effectively freed up to help financethe foundation grants in other districts. Even if theaggregate amount of revenue is constant, this canallow per-pupil funding to increase. If the level ofdedicated education resources decline from one yearto the next (which has been the case recently), de-clining statewide enrollments can help avoid or miti-

gate reductions to the per-pupilfoundation grant statewide thatotherwise would have to occur ifenrollments are rising. Thus, de-clining enrollments can help bal-ance the School Aid Fund budget’sobligations during periods of de-clining state revenues.

Characteristics of DecliningEnrollment Districts

Annual enrollment changes amongtraditional public school districtshave varied considerably and in

some cases the changes have been profound (seeTable 6). In total, over 60 percent (334 districts)of all traditional public school districts experiencedsome level of enrollment decline with nearly 9 per-

Table 6Enrollment Changes in Traditional Public School Districts: FY1995 to FY2009

Number of Percent of Total Percent ofEnrollment Change Districts Districts Enrollment StudentsDecline >33% 50 9.1 141,553 9.4Decline 10% to 33% 186 33.8 339,183 22.4Decline 0.1% to 10% 98 17.8 245,087 16.2 Subtotal 334 60.7 725,823 48.0

Increase 0% to 10% 87 15.8 283,431 18.7Increase 10% to 33% 83 15.1 293,493 19.4Increase > 33% 47 8.5 210,857 13.9 Subtotal 217 39.3 787,781 52.0


In total, over 60 percent ofall traditional public schooldistricts experienced somelevel of enrollment declinewith nearly 9 percent expe-riencing an enrollment re-duction of one-third orgreater from FY1995 toFY2009.

CRC Report


cent (50 districts) experiencing an enrollment re-duction of one-third or greater from FY1995 toFY2009. At the other end of the spectrum, approxi-mately the same number of dis-tricts (47 districts) experiencedenrollment gains of one-third orgreater during the period. Nearly43 percent of all traditional districts(236 districts) experienced an en-rollment decline of 10 percent ormore, a loss which is almost fivetimes as large as the total state-wide figure of 2.2 percent decline.

As noted above, nearly 75 percentof all traditional districts experi-enced declining enrollment from FY2008 to FY2009and 61 percent of districts have lost enrollments since

the implementation of Proposal A. Since FY2003,when statewide enrollments started to decline, thenumber of districts with year-over-year declines, re-

gardless of size or geographic lo-cation, has grown significantly.However, the annual rate of declineover the six-year period variesgreatly from district to district.Similarly, the average rate ofgrowth in those districts with ris-ing enrollments also varies.

Chart 12 shows the average an-nual rate of change in each schooldistrict’s enrollment from FY2003through FY2009; the far left side

of the chart represents the district with the greatestaverage annual rate of decline and the far right siderepresents the district with the greatest annual rate

Chart 12Annual Rate of Change in Enrollment by School District: FY2003 to FY2009

-15%

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Districts Ordered from Lowest to Highest Rate of Change

Aver

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Nearly 75 percent of all tra-ditional districts experienceddeclining enrollment fromFY2008 to FY2009 and 61percent of districts have lostenrollments since the imple-mentation of Proposal A.



Chart 13Declining and Growing Districts by Type: FY1995 to FY2009

18

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Source: Center for Educational Performance and Information; US Dept. of Education, National Center forEducational Statistics

of increase. Over 70 percent of the districts had anannual rate of growth or decline between 0 and 2.5percent for the six-year period.25 The average rateof growth for growing districts dur-ing this period was 1.5 percent,while the average rate of declinefor shrinking districts was 2.4 per-cent. The statewide average an-nual rate of change during the pe-riod was a decline of 1.5 percent.

Chart 13 examines schools dis-tricts with declining and growingenrollments by district type – cen-tral city, suburban, and rural.26 While all district types

have experienced some degree of declining enroll-ments, the problem has been most pronounced inrural and city settings. Nearly 72 percent (269 dis-

tricts) of the 376 rural districts havelost enrollments since the adoptionof the foundation grant. Similarly,nearly 70 percent of 26 districtsserving central cities have lost stu-dent enrollments between FY1995and FY2009. In contrast, 68 per-cent of the 149 suburban districtshave experienced enrollment gainsbetween FY1995 and FY2009. Nosingle factor explains the different

While all district types haveexperienced some degreeof declining enrollments,the problem has been mostpronounced in rural and citysettings.

CRC Report


causes for enrollment declines in either the city set-ting or the rural setting; however, it is likely that anumber or forces are contributing simultaneously.Most of Michigan’s charter schools are located inurban areas, which will explain some of the enroll-ment declines in central cities. In the case of ruralschools, migration patterns might explain some ofthe observed enrollment losses.

Smaller districts have experienced the greatest amountof decline. These districts are primarily located inrural parts of the state. Chart 14 shows that enroll-ment losses have been concentrated in districts withless than 2,500 students. Of the total 334 districts

that experienced declines between FY1995 andFY2009, 248 districts (74 percent) had fewer than2,500 students (the approximate statewide averagedistrict enrollment in FY2009). In contrast, of all theschool districts with enrollments larger than 2,500students, the number of districts with declining andgrowing enrollments is almost equal, 86 districts and90 districts, respectively. Looking at the student popu-lations in declining versus growing districts, nearly726,000 students in FY2009 were educated in declin-ing enrollment districts. The vast majority of thesestudents (69 percent) were located in districts withenrollments greater than 2,500 in FY2009.

Chart 14Declining and Growing Districts by Size: FY1995 to FY2009

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As depicted in Chart 8 (on page 29) only a small frac-tion of school districts saw enrollment increases over thepast six years. There is considerable diversity in thisgroup of districts in terms of enrollment size, geographiclocation, household income, and type. Despite this varia-tion, some general observations can be made. Most aresuburban districts. This is important because many char-ter schools (a key source of competition for students)are situated in urban settings (though students from anydistrict can enroll in a charter school). Thus, many ofthe increasing enrollment traditional public districts donot face the same competitive forces for students thatcentral city districts do, although suburban districts com-pete for students with private and parochial schools situ-ated nearby. Districts of all types face many of the samecompetitive forces associated with inter-district choiceprovided by Michigan’s schools of choice policy.

Growing districts share similarities in terms of income andtotal enrollments. Nearly all of the increasing enrollmentdistricts have median household income above the state-wide average. In terms of enrollment size, these districtstend to enroll more students than the average district inthe state. Many of these factors are outside of the controlof school district administrators and board members.

Separate from income, location, and size, there may befactors that districts (including declining enrollment dis-tricts) can control. These factors include the quality ofprogramming within districts, the achievement level ofschools, parental and community involvement, and manymore. One option for dealing with declining enrollmentwould be to examine districts with increasing enrollmentsto see what strategies might be transferred to districtsexperiencing declining enrollments.

The Kalamazoo Promise Driving EnrollmentGrowth in Kalamazoo

The Kalamazoo Promise, a unique economic developmenttool, is largely credited with improving enrollments in thatcentral city public school district. In November 2005, TheKalamazoo Promise was created as an education-basedeconomic development tool, funded by a group of anony-mous donors. While some of the specifics of the programcan be fairly technical, the basic premise of The Promiseprogram is that students graduating from the KalamazooPublic School (KPS) district will receive full college schol-arships. KPS is a large, urban district with an enrollmentof over 12,000, of which 39 percent is African American.The program differs from other post-secondary scholar-ships in that it is not based on need or merit, but instead

on location. Specifically, beginning with the graduatingclass of 2006, every graduate of KPS enrolled and residingwithin KPS for at least the previous four years is eligiblefor a scholarship to a Michigan public university or com-munity college.

The Kalamazoo Promise was designed to address a hostof issues confronting the area immediately surroundingKPS – educational achievement, economic development,community development, etc. Related to the educationgoals and specific to KPS finances, The Promise was ef-fective at reversing the district’s decades-long enrollmentdecline and helping stabilize district finances under theper-pupil foundation program. This change was the re-sult of both “front end” and “back end” effects on annualenrollment levels. In terms of the “front end,” The Prom-ise has been responsible for drawing families (and stu-dents) from surrounding districts, incenting them to move(and enroll) in KPS. On the “back end,” evidence sug-gests that the program has been effective in reducing “exitrates” from KPS. Furthermore, this research suggests thatreducing the “exit rates” has had a more significant effecton enrollment gains than boosting the entry rates.a Withthe scholarship in place, students are less likely to trans-fer from KPS to other districts or charter schools.

From FY2005 to FY2010, KPS enrollment increased a to-tal of 18.9 percent, from 10,343 to 12,301 students. Thisexperience contrasts markedly with that of other urbanschool districts in Michigan during the same period. Italso contrasts with the experience of the eight neighbor-ing Kalamazoo County school districts (Climax-Scotts,Comstock, Galesburg-Augusta, Gull Lake, Parchment, Por-tage, Schoolcraft, and Vicksburg). Collectively, these dis-tricts witnessed a total enrollment decline of 7.3 percentfrom FY2005 to FY2010.

The Kalamazoo Promise clearly has had an effect on KPSenrollment by allowing the district to reverse its histori-cal trend and begin growing in the face of statewide en-rollment declines. To some extent, this growth has beenat the expense of other districts. However, some of thegrowth is attributable to higher “retention rates” and re-ducing the number of students that exit KPS. Althoughimproving KPS enrollments was not the sole educationalobjective of The Promise, it has been one result.

a Timothy Bartik, Randall Eberts, and Wei-Jang Huang, “TheKalamazoo Promise: Enrollment and Achievement Trends inKalamazoo Public Schools,” presented at the PromiseNet 2010Conference, June 16-18, Kalamazoo, Michigan.

Who is Gaining Enrollment?

CRC Report


Addressing Declining Enrollments

The state has recognized the fiscal management chal-lenges created by declining enrollments at the schooldistrict level, opting to address the issue in two ways.The first method involves how students are countedfor the foundation program and making changes tothe weightings allocated to the components of thepupil membership figured used in the calculation offoundation grant funding (dis-cussed earlier). The secondmethod involves providing addi-tional funding to declining enroll-ment districts through a categori-cal grant. In both cases, theseresponses have been less thanfully effective in completely miti-gating the negative revenue ef-fects associated with declining en-rollment.

Blended Count

Over the years, the state has changed the weightingsassigned to the blended count to help mitigate thenegative revenue effects of declining enrollments onschool districts’ budgets. On different occasions,statutory changes to the State School Aid Act havebeen made to give more weight to the previous year’senrollment count and less to the current year’s count.In FY2005, the current year/previous year weightingswere changed from 80/20 to 75/25 to favor the pre-vious year enrollment figures. The weightings werechanged to 90/10 for FY2012, which will favor thecurrent-year enrollment count more than the 75/25blend.

The blended count is used by all districts (both tra-ditional public school districts and charters) and af-fects declining and growing districts differently. Thedistricts with increasing enrollments are preventedfrom taking full advantage of year-over-year enroll-ment gains. In effect, only 75 percent of an annualenrollment increase is reflected in the foundationprogram calculation. On the other hand, the use ofthe blended count protects declining districts fromthe full effects of lost pupils – current year pupil

counts only represent 75 percent of the actual en-rollment shrinkage. Stated another way, these dis-tricts are allowed to count 25 percent of the pupilsthey lost from one year to the next for purposes ofthe foundation program in the current year.

Policymakers might consider further modificationsto the blended count, such as a change to a 60/40or 50/50 composition in an effort to further shield

declining districts from the full ef-fect of lost pupils. The blendedcount used in the three years fol-lowing Proposal A’s adoption was50/50 before changing to 60/40.

When the legislature decides tochange the weightings to favor theprevious year count (i.e., the higherenrollment figure for a decliningdistrict), districts with rising enroll-ments will be negatively impacted

while declining enrollment districts wil l beadvantaged. In other words, a growing district willexperience a loss of funding compared to what thedistrict would have received if the formula changedid not occur.

Another option that might be considered involvesthe use of two different blended counts, one fordeclining districts (e.g., 70/30) and one for growingdistricts (e.g., 100/0). Such an approach would helpshrinking districts manage through annual fundingreductions when state aid is distributed on a per-pupil basis. Some states, such as Minnesota, allowdeclining districts to use a different blended countthan growing districts in order to dampen the pupilloss year-over-year. A slight deviation of this optionwould allow declining districts to use a three-yearaverage enrollment figure, providing equal weight-ing to each of the previous three year enrollmentamounts.

Another alternative would allow districts to use thegreater of the two most recent fall enrollment counts,a method endorsed by school business officials. Thiswould allow declining districts a full year to plan forthe reduction in students and accompanying fund-ing cuts.

In both cases, these re-sponses have been lessthan fully effective in termsof completely mitigating thenegative revenue effectsassociated with decliningenrollment.



Categorical Funding

In recognition of the growing challenges raised bydeclining enrollment and as another tool to addressthe phenomenon, the legislature has set aside dedi-cated state resources to be shared by eligible dis-tricts. A new state categorical grant was created inFY2007 for declining districts. Basically, this fund-ing is available to districts with two prior consecu-tive years of declining pupil memberships. Provi-sions in the state School Aid Actallow districts to calculate a three-year pupil membership averageand use this number for the foun-dation grant calculation (whichwould be higher if a district is los-ing enrollments).27 Each district’scalculated payment is equal to thedistrict’s foundation grant multi-plied by the difference between thethree-year pupil membership aver-age and the current-year member-ship figure. Districts receive lessthan the full calculated amountbecause of the amount of funding statewide andthe number of districts eligible. The state law ex-cludes charter schools from receiving declining en-rollment grants

Although the declining enrollment categorical granthas been available since FY2007, the state has neverfully funded the appropriation. To do so would beextremely expensive; requiring at least $220 million

according to the Senate Fiscal Agency.28 In recentyears, the appropriation has been $20 million, downfrom $30 million in FY2008. Because of the increas-ing number of eligible districts each year and therelatively small amount of funding available, districtdeclining enrollment grants have been significantlyprorated. In FY2011, eligible districts will receive aprorated declining enrollment grant equal to about8 percent of the full amount allowed under state

law. Given the significant prora-tion, the supplemental paymentshave not been able to make up forthe revenue losses declining enroll-ment districts experience.

Thus far, all state policies designedto address declining enrollmenthave had the effect of padding theenrollments of declining-enroll-ment districts. These policies havebenefited declining districts at theexpense of other districts; how-ever, they have fallen short of fully

compensating districts for the revenue losses fromfewer students. In the case of the declining enroll-ment grants, constraints on the amount of state rev-enue available for this program have been the ma-jor limiting factor. Directing more state assistanceto this categorical grant would leave fewer resourcesavailable to all districts under the foundation grantprogram, which can hamper efforts to reduce per-pupil funding disparities.

These policies havebenefited declining districtsat the expense of otherdistricts; however, theyhave fallen short of fullycompensating districts forthe revenue losses fromfewer students.

CRC Report


At its core, the foundation program was designed toprovide general assistance to all local school districtsin order to deliver at least basic educational servicesacross the state. However, as noted earlier, therewas no attempt to define what was included in theconcept of “basic.” Instead, each district’s initial foun-dation grant was largely determined by the level offunding it received under the previous financing sys-tem. Initial adjustments to the FY1994 per-pupilrevenue amounts were made with the understand-ing that those districts spending less than the “ba-sic” grant amount were delivering something lessthan a basic educational program. At no time dur-ing the design or implementation of the foundationgrant, and at no time since, has there been an ex-plicit attempt to quantify what constitutes a basiceducation. Similarly, no attempt has been made toaccount for cost differences across districts. Thereis a touch of irony in the state’s use of the term“basic” to describe a foundation grant amount whenlittle has been done to establish what is, or is not,included in basic educational services across districts.

In addition to its role as the basic operating revenuesource, the foundation program was designed as thestate’s tool to address the per-pupil funding dispari-ties that existed between high- and low-revenue dis-tricts prior to FY1995. To reiterate, a stated goal ofthe Proposal A school finance reforms was to re-duce, not eliminate, these disparities in the yearsjust following the implementation of the new financ-ing system. It was believed that such reductionswould provide greater educational opportunity orhorizontal equity -- meaning that similarly situatedstudents would be treated similarly for purposes ofschool spending.29 Horizontal equity does not in-volve equalizing per-pupil funding to take into ac-count the different costs of educating children (e.g.,student characteristics, teacher salaries, etc.) acrossdistricts. Also, either explicitly or implicitly stated

at the time of Proposal A’s enactment, it was thoughtthat reducing per-pupil revenue differences wouldimprove student performance in initially lower-rev-enue districts.

Differences at the District Level

By its very design, implementation of Michigan’s foun-dation program did not seek absolute equity – wherethe same amount of per-pupil funding is distributedto all districts statewide. Absolute equity does notpreclude differently situated students from beingtreated differently through the allocation of categori-cal or supplemental resources, i.e., special educa-tion students receiving additional resources com-pared to general education students. As previouslynoted, the design of Michigan’s foundation programpermitted certain per-pupil funding disparities tocontinue under specific condition (e.g., hold harm-less districts had to raise the additional resourcesexclusively at the local level to maintain their higherper-pupil revenue amounts.)

Despite the initial per-pupil funding inequities thatwere folded into the new foundation program andthe various foundation grant amounts (minimum,basic, and maximum), significant strides have beenmade towards greater horizontal equity. These havebeen accomplished over the years through two pri-mary methods. First, the state employed the 2Xformula to annually adjust the foundation grants oflower-revenue districts up to twice the size of higher-revenue districts. Second, the state equalized per-pupil revenue by providing occasional supplementalequity payments to the lowest-revenue districts. Athird way that per-pupil revenue has been equalizedis by reducing funding of the highest spending dis-tricts, but this only occurred once and its effects wereminimal in terms of statewide equalization efforts(i.e., gubernatorial veto of Section 20j funding inthe School Aid Fund budget in FY2010).

Per-Pupil Revenue Disparities



A fairly simple and straightforward method to chartprogress towards per-pupil fund-ing equalization and horizontalequity is to examine changes be-tween the highest and lowest per-pupil foundation grants. Table 7illustrates how the range or equitygap between these two has beenreduced in dollar terms betweenFY1994 (the per-pupil revenueamounts just before Proposal A)and FY2010.

The range between the highest andlowest foundation grants has beenreduced considerably over the past16 years. The absolute gap hasbeen lowered from approximately $7,500 to $5,000,

a reduction of 33 percent. Equity gains, also ex-pressed as a ratio of the highestto the lowest, were made in everyyear since FY1994 with the excep-tion of the two years when foun-dation grants were frozen (FY2003and FY2004). Through FY2009, allequity gains were achievedthrough the “leveling up” ap-proach, by either providing largerannual increases in foundationgrants to those districts closer tothe bottom of the range or provid-ing these districts with supplemen-tal equity payments.

The horizontal equity gains seenin FY2010 (reflected in the $119 gap reduction from

Table 7Lowest and Highest Foundation Grants

Difference RatioLowest Highest (High – Low) (High to Low)

FY1994 $2,762 $10,294 $7,532 3.73FY1995 $4,200 $10,454 $6,254 2.49FY1996 $4,506 $10,607 $6,101 2.35FY1997 $4,816 $10,762 $5,946 2.23FY1998 $5,124 $10,916 $5,792 2.13FY1999 $5,170 $10,916 $5,746 2.11FY2000 $5,700 $11,154 $5,454 1.96FY2001 $6,000 $11,454 $5,454 1.91FY2002 $6,500 $11,754 $5,254 1.81FY2003 $6,626 $11,880 $5,254 1.79FY2004 $6,626 $11,880 $5,254 1.79FY2005 $6,700 $11,954 $5,254 1.78FY2006 $6,875 $12,129 $5,254 1.76FY2007 $7,108 $12,339 $5,231 1.74FY2008 $7,204 $12,387 $5,183 1.72FY2009 $7,316 $12,443 $5,127 1.70FY2010* $7,162 $12,170 $5,008 1.70

Note: Lowest and highest grants are reflected here to show the effects of per-pupil reductions enactedthroughout years that may not have been statutorily reflected in the foundation grant, but had the same effect.Also, equity payments subsequently incorporated into the foundation grant are included.

* FY2010 includes the effects of the $154 per pupil reduction for all districts and the hold harmless/Sec. 20j vetoreduction for select districts.


Through FY2009, all equitygains were achievedthrough the “leveling up”approach, by either provid-ing larger annual increasesin foundation grants to thosedistricts closer to the bottomof the range or providingthese districts with supple-mental equity payments.

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FY2009 to FY2010) were achieved by breaking withthe tradition of leveling up those districts nearer thebottom of the range. Instead, equity gains wereeffectively realized when the highest grant was re-duced. This occurred as a result of GovernorGranholm’s veto of a supplemental state aid pay-ment to certain high-revenue districts (Section 20j)as part of the FY2010 state budget. Justification forthe veto was premised on concerns about projectedrevenue availability in the School Aid Fund forFY2010, not on a policy to increase school fundingequity (see FY2010 Per-Pupil Reduction and theSection 20j Veto box). However, the veto had theeffect of narrowing the gap between the lowest- andhighest-revenue districts from $5,127 per pupil inFY2009 to $5,008 per pupil in FY2010.

The chief problem with using the range as a mea-sure of per-pupil revenue disparities is the fact thatthis measures differences at the extremes, ignoringthe distribution of per-pupil amounts that exist be-tween the lowest and highest amounts. Further-more, these amounts do not provide any informa-tion about how many students are at each level, orthe number of students at various amounts in be-tween the two extremes. Another way to examinethe reduction in per-pupil revenue disparities underthe school finance system is to sort school districtsby their foundation grant and then group districtsinto five equal sub-groups or quintiles. To representthe per-pupil revenue amount for each subgroup,the average foundation grant is calculated and ex-amined. Changes in the average for each quintileover time show how per-pupil disparities have beenlessened.

FY2010 Per-Pupil Reduction and the Section 20j Veto

Despite the use of $450 million in one-time federal resources available from the American Recovery andReinvestment Act of 2009, the FY2010 School Aid Fund budget required further reductions from the spendinglevels authorized in FY2009 based on the estimated level of available resources. Initially, the budget included a$165 per-pupil reduction in state aid for all districts. Subsequent action reduced the funding cut by $11 perstudent, thus the final FY2010 budget included a $154 per-pupil cut for all districts. (The legislature did notstatutorily reduce the basic foundation grant within the State School Aid Act, but the reduction had the samebasic effect. For this reason, the reduction is included in the foundation grants presented here.) Because thereduction applied to all districts, it had no effect on per-pupil revenue disparities.

In addition to the $154 per-pupil reduction, hold harmless districts were affected by a veto of the Section 20jallocation contained within the State School Aid Act (discussed earlier). This veto had the effect of reducing per-pupil revenue amounts in affected districts to varying degrees in FY2010 because of the manner in which thesupplemental payments are calculated. In total, the veto affected 40 districts in amounts ranging from a $119per-pupil cut in Bloomfield Hills School District, with an effective foundation grant of $12,443, to a $324 per-pupilcut in Harper Woods School District, with an effective foundation grant of $8,497.

Unlike the $154 per-pupil cut, the 20j cut did have the effect of reducing the revenue disparities at the per-pupillevel, albeit very minimally because of the relatively small size of the cut to districts with the highest per-pupilgrants. Also of significance is the fact that the 20j cut produced equity gains by cutting state aid funding for thehigher revenue districts as opposed to providing additional funding to districts below the hold harmless amount.



Table 8 presents per-pupil revenue disparities atthe district level by quintile in inflation-adjusted dol-lars (FY2009) for FY1994, FY2000 and FY2009. Anintermediary point (FY2000) is selected becausethrough this period a sliding scale was used to pro-vide additional funds to lower-rev-enue districts. This sliding scalewas abandoned in the followingyears, until its reemergence andimplementation in FY2008. Thechange in the average foundationgrant for each quintile is comparedto the average figure for that groupjust prior to the finance reforms inFY1994.30

The greatest degree of foundationgrant growth for all districts occurred betweenFY1994 and FY2000, but growth was the greatestfor the districts with the lowest per-pupil revenues.Between FY1994 and FY2000, the average founda-tion grant in the first quintile (lowest per-pupil rev-enue districts) increased by $1,380 per pupil in realterms. At the other end, the growth of the averagegrant in the fifth quintile (highest per-pupil revenuedistricts) failed to keep pace with inflation and de-

clined by $232 per pupil. The gap between the twoquintiles in constant FY2009 dollars was reduced from$3,876 per pupil in FY1994 to $2,264 per pupil inFY2000, a 42 percent cut.

The lowest per-pupil revenuequintile realized further equitygains between FY2000 andFY2009 as a result of two equitypayments ($200 per pupil inFY2002 and $23 per pupil inFY2007) and the use of the 2X for-mula in FY2008 and FY2009. Thespread between the foundationgrants of the first and fifth quintileswas further reduced in the yearsbetween FY2000 and FY2009, fall-

ing from $2,264 per pupil in FY2000 to $1,511 perpupil in FY2009. The highest per-pupil revenuequintile lost further ground relative to inflation overthe FY2000 to FY2009 period. Similarly, the growthin the average grant for the fourth quintile did notkeep pace with inflation. During this period, thelowest three quintiles continued to see growth inreal terms from their pre-Proposal A foundation grantamounts.

The greatest degree offoundation grant growth forall districts occurred be-tween FY1994 and FY2000,but growth was the great-est for the districts with thelowest per-pupil revenues.

Table 8Inflation-Adjusted Average Foundation Grants by District Group*: FY1994, FY2000, and FY2009

Change Change FY1994 – FY2009FY1994 - FY2000 - Dollar Percent

Quintile** FY1994 FY2000 FY2009 FY2000 FY2009 Change Change1 $5,755 $7,135 $7,333 $1,380 $198 $1,578 27.4%2 $6,348 $7,135 $7,324 $787 $189 $976 15.4%3 $6,773 $7,145 $7,322 $372 $177 $549 8.1%4 $7,460 $7,577 $7,496 $118 ($82) $36 0.5%5 $9,630 $9,399 $8,844 ($232) ($555) ($786) (8.1%)

Diff. = Q5 - Q1 $3,876 $2,264 $1,511

* Foundation grants include the supplemental allocation provided to eligible districts under Section 20jof the School Aid Act.

** Quintiles include 110 districts (5th quintile excludes two districts – Bois Blanc and Grant Twp – withsmall enrollments and high per-pupil revenues in FY1994).

Source: Senate Fiscal Agency; U.S. Bureau of Labor Statistics, Consumer Price Index (state fiscal yearbasis); CRC calculations.

CRC Report


Chart 16Distribution of Districts by Foundation Grant: FY2007 and FY2010(FY2010 Dollars)

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1 51 101 151 201 251 301 351 401 451 501

Districts Ordered by Foundation Grant (lowest to highest)

Foun

datio

n G

rant

FY2007

FY2010

Source: Michigan Department of Education; US Bureau of Labor Statistics

Chart 15Distribution of Districts by Foundation Grant: FY1994, FY2000,and FY2007(FY2010 Dollars)

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1 51 101 151 201 251 301 351 401 451 501Districts Ordered by Foundation Grant (lowest to highest)

Foun

datio

n G

rant

FY1994

FY2000

FY2007

Source: Michigan Department of Education; US Bureau of Labor Statistics

Equalization of per-pupil rev-enue across school districtsunder Proposal A is furtherevidenced in terms of the dis-tribution of districts by theirfoundation grants in constantFY2010 dollars, whenamounts for FY1994, FY2000,and FY2007 are compared(see Chart 15). Clearly, thevarious mechanisms used tolevel up have been success-ful, with more districts at thesame, higher per-pupil rev-enue amount. Furthermore,lower-revenue districts (thoseon left side of chart) have ex-perienced growth relative toinflation at each point(FY2000 and FY2007) sinceFY1994. However, growth ofthe foundation grants forhigher-revenue districts (right

side of the chart) has trailedinflation. As can be seen, theinflation-adjusted FY2007foundation grant in nearly 20percent of the districts is be-low the FY1994 level.

Further erosion of the grantoccurred between FY2007and FY2010 with the per-pu-pil reductions that affected alldistricts and the Section 20jveto that affected only thehighest-revenue districts. Asa result of these cuts, the realvalue of the foundation grantin all districts in FY2010 isbelow where it was in FY2007,but the decline was greater forthose districts with higherfoundation grants because ofthe Section 20j veto (seeChart 16).



Differences at the Student Level

The previous comparisons focused on disparitiesamong districts where each quintile consisted of anequal number of districts; however, the aggregatenumber of Michigan school childrenvaried within each quintile becausedistricts have different enrollments.Another way to look at reductionsin per-pupil revenue disparities isto examine changes at the studentlevel. To do this, students areranked by the level of per-pupil rev-enue in their districts and dividedinto quintiles, similar to the opera-tion involving districts. An averagefoundation grant for each subgroupis calculated. Then changes overtime in the average grant for eachquintile are examined to determineprogress towards narrowing theper-pupil revenue gap among K-12students. We would expect to seesimilar results to what was discov-ered at the district level, which isthe case. Table 9 presents this information in con-stant FY2009 dollars (inflation-adjusted) for threeyears, FY1994, FY2000, and FY2009.31

The general result at the student level is similar tothat observed at the district level, notably that con-siderable progress has been made to narrow the gapbetween the number of students in high- and low-revenue districts. The spread between the fifth

quintile (highest per-pupil rev-enue) and the first quintile (low-est per-pupil revenue) was de-creased from $4,254 per pupil inFY1994 to $1,933 per pupil inFY2009, after adjusting for theeffects of inflation.

Whereas per-pupil revenue growthfor the bottom 40 percent of stu-dents (first and second quintiles)surpassed inflation from FY1994through FY2009, the revenuegrowth for nearly 40 percent ofMichigan students (fourth and fifthquintile) failed to keep pace withinflation and the middle 20 per-cent of students just barely keptpace with inflation during the pe-riod. Sixty percent of Michigan

school children have experienced inflation-adjustedper-pupil revenue growth since the adoption of Pro-posal A; however, the average real per-pupil rev-

Table 9Inflation-Adjusted Average Foundation Grants by Student Group*: FY1994, FY2000, and FY2009

Change Change FY1994 – FY2009FY1994 - FY2000 - Dollar Percent

Quintile** FY1994 FY2000 FY2009 FY2000 FY2009 Change Change1 $6,065 $7,135 $7,322 $1,070 $187 $1,257 20.7%2 $6,760 $7,152 $7,325 $391 $173 $564 8.3%3 $7,452 $7,570 $7,498 $119 ($73) $46 0.6%4 $7,964 $7,997 $7,816 $33 ($181) ($147) (1.8%)5 $10,319 $9,981 $9,255 ($338) ($726) ($1,064) (10.3%)

Diff. = Q5 - Q1 $4,254 $2,846 $1,933

* Foundation grants include the supplemental allocation provided to eligible districts under Section 20jof the State School Aid Act.

** Quintiles based on FY2009 enrollments and each includes 302,600 students (5th quintile excludes twodistricts – Bois Blanc and Grant Twp – with small enrollments and high per-pupil revenues in FY1994).

Source: Senate Fiscal Agency; U.S. Bureau of Labor Statistics, Consumer Price Index (state fiscal yearbasis); CRC calculations.

Whereas per-pupil revenuegrowth for the bottom 40percent of studentssurpassed inflation fromFY1994 through FY2009,the revenue growth fornearly 40 percent ofMichigan students failed tokeep pace with inflation andthe middle 20 percent ofstudents just barely keptpace with inflation duringthe period.

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enue amount for 40 percent of K-12 students (fourthand fifth quintiles) was larger in FY1994 than it wasin FY2009.

Foundation Growth and District Wealth

The foundation program and the annual adjustmentsmade to the foundation grant ignore certain eco-nomic and demographic characteristics of individualdistricts and the students attending these schools.In some cases categorical fund-ing provides additional resourcesto districts to educate studentsbased on various economic anddemographic factors with the un-derstanding that these character-istics may make it more difficultto educate children. Examples in-clude at-risk and special educationstudents. However, because thevast majority of state aid is dis-tributed through the foundation program and thisfunding provides the basis for school operations, itis instructive to examine foundation grant growthby various district characteristics. Also, it may bethe case that the additional funding allocated throughcategorical grants does not fully support the addedcosts associated with certain students, and the foun-dation grant subsidizes the education of select groupsof students.

While poorer districts have seen larger increases intheir per-pupil grant from FY1994 to FY2009 com-pared to wealthier districts, the poorest districts havenot fared the best. Some of the poorest districts inthe state prior to Proposal A had per-pupil revenuesat or above the statewide average and therefore didnot receive the largest benefits from state efforts toreduce per-pupil revenue disparities. Prior to Pro-posal A, district wealth and per-pupil revenue werenot perfectly correlated, although there was a posi-

tive relationship between the two.

There are a number of reasons whythe poorest districts have not ben-efited the most from the state’sfunding equalization efforts. Spe-cifically, some large districts locatedin poor central cities benefited fromhigher tax rates and more state aid,resulting in higher per-pupil rev-enues prior to Proposal A. At the

same time, many middle-income districts (rural andsuburban) with average household income or prop-erty wealth had low per-pupil revenues because theresidents in those communities chose to tax them-selves at relatively low rates and did not receive asmuch state aid. Thus, the state’s policies to raisethe bottom have not had the direct affect of increas-ing funding for districts serving the state’s poorestpopulations.

Table 10Inflation-Adjusted Average Foundation Grant by District Median Household Income:FY1994 and FY2009

Median Dollar PercentQuintile Income FY1994 FY2009 Change Change

1 $36,723 $6,989 $7,677 $688 9.8%2 $42,878 $6,526 $7,413 $887 13.6%3 $47,611 $7,064 $7,590 $526 7.4%4 $55,683 $7,363 $7,667 $304 4.1%5 $66,858 $7,964 $7,944 ($20) -0.3%

Diff. = Q5 - Q1 $975 $267

Source: Senate Fiscal Agency; National Center of Educational Statistics; U.S. Bureau of LaborStatistics, Consumer Price Index (state fiscal year basis); CRC calculations.

The state’s policies to raisethe bottom have not hadthe direct affect of increas-ing funding for districtsserving the state’s poorestpopulations.



Table 10 examines the growth in foundation grantsby districts’ median household income.32 The aver-age foundation for the districts serving the poorestpopulations (first quintile) experienced inflation-ad-justed growth of 9.8 percent between FY1994 andFY2009; however, this was belowthe growth seen in the secondquintile (13.6 percent). The dis-tricts serving the poorest popula-tions did not benefit the most fromthe perspective of reducing per-pupil revenue disparities, but theydid do better than the wealthiest60 percent of school districts.

As would be expected from the dis-cussion about foundation grantgrowth, the quintile with the high-est median household income (fifthquintile) experienced a decline in the real value ofthe average foundation grant. In the pre-ProposalA era, many of the wealthiest school districts alsohad the highest per-pupil revenues because of theirsubstantial property wealth. They were able to gen-erate significant local property tax receipts with lowtax rates and they did not face the strict per-pupilrevenue caps that exist today under Proposal A’scentralized school financing system.

The spread between the average foundation grantin the districts serving the poorest populations (firstquintile) and the districts serving the wealthiest popu-

lations (fifth quintile) was reduced from $975 inFY1994 to $267 in FY2009.

Similar results are seen when district wealth is mea-sured in terms of property wealth (taxable value per

pupil). Under the previous schoolfinancing system property wealthwas directly, but not perfectly, cor-related with per-pupil revenue.The link between property wealthand per-pupil revenue was stron-ger than the relationship betweenhousehold income levels and per-pupil revenue. The correlationbetween property wealth and dis-trict revenue was strongest for thehighest-revenue districts (Table11). In terms of Proposal A’s ef-forts to reduce per-pupil funding

disparities, progress can be seen in the difference,over time, of the average foundation grant of thedistricts with the highest property wealth (fifthquintile) and the average grant for the districts withthe lowest property wealth (first quintile). As wasthe case with the breakout of districts by householdincome, the districts serving the poorest populationsdid not fare the best in terms of inflation-adjustedgrant growth from FY1994 to FY2009. The averagefoundation of the second quintile of districts had thegreatest total inflation-adjusted growth (13.5 per-cent) during the period.

Table 11Inflation-Adjusted Average Foundation Grant by District Property Wealth: FY1994 and FY2009

Median Dollar PercentQuintile SEV/Pupil FY1994 FY2009 Change Change

1 $133,918 $6,571 $7,386 $815 12.4%2 $171,289 $6,473 $7,348 $875 13.5%3 $207,257 $6,666 $7,425 $758 11.4%4 $267,441 $7,093 $7,541 $448 6.3%5 $436,183 $9,128 $8,603 ($525) -5.7%

Diff. = Q5 - Q1 $2,557 $1,217

Source: Center for Educational Performance and Information; Senate Fiscal Agency; U.S. Bureau ofLabor Statistics, Consumer Price Index (state fiscal year basis); U.S. Census Bureau; CRC calculations.

As was the case with thebreakout of districts byhousehold income, the dis-tricts serving the poorestpopulations did not fare thebest in terms of inflation-adjusted grant growth fromFY1994 to FY2009.

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A related analysis of per-pupil revenue based on an-other measure of district wealth produced similarresults as those based on median household incomeand property wealth. For this examination, schooldistricts were ranked by the percentage of total stu-dents eligible for free or reduced-price lunch underthe National School Lunch Program.33 This measureis not used to determine the amount of the founda-tion grant received by individual districts; however,the number of students qualifying for free lunchunder the National School Lunch Program in eachdistrict is used to distribute state resources underthe at-risk student categorical program (see At-RiskCategorical Funding box on page 51). For pur-poses of determining district wealth, it is assumedthat districts with larger percentages of students eli-

Table 12Inflation-Adjusted Average Foundation Grant by Percent of Free or Reduced-Price LunchEligible Students: FY1994 and FY2009

Dollar PercentQuintile FY1994 FY2009 Change Change

1 $7,238 $7,718 $480 6.6%2 $6,787 $7,557 $770 11.3%3 $6,751 $7,480 $729 10.8%4 $7,282 $7,634 $352 4.8%5 $7,874 $7,914 $40 0.5%

Diff. = Q5 - Q1 $636 $196

Source: Center for Educational Performance and Information; Senate Fiscal Agency; U.S. Bureau of LaborStatistics, Consumer Price Index (state fiscal year basis); U.S. Census Bureau; CRC calculations.

gible for free or reduced-price lunch are relativelypoorer than those with smaller percentages of eli-gible students.

Table 12 shows the growth of the inflation-adjustedaverage foundation grants for each quintile of schooldistricts ranked by this metric. In this comparison,the districts in the second and third quintiles (dis-tricts falling between the 20 and 60 percentiles) hadthe greatest real foundation grant growth, followedby the first quintile. The group consisting of thedistricts serving the fewest free or reduced-pricelunch students saw growth that slightly exceeded(0.5 percent) the growth in general prices fromFY1994 to FY2009.



Michigan has a long-standing commitment to providingsupplemental funding for school children determined tobe educationally at-risk. State at-risk funding targets chil-dren from low-income households based on federal freelunch eligibility criteria. The basic premise is that theselow-income children, for a variety of reasons but primarilyeconomic ones, have educational needs that are morecomplicated and thus require additional resources. Thismoney is designed to supplement, not supplant, generaloperating funding provided through the foundation grant.Thus, even before Proposal A, this funding was providedthrough a separate categorical program. However, sincethe adoption of Proposal A, the amount of at-risk moneythat an eligible district receives is directly related to thesize of the district’s foundation grant.

Eligibility and Use of Funding. Both traditional publicschool districts and charter schools with a foundationgrant below the maximum amount are eligible for at-riskfunding. A one-time application is required to begin re-ceiving the supplemental funds and money must be usedfor pupils who meet at least two of the following charac-teristics:

• Victim of child abuse or neglect,• Below grade level in English language and com-

munications skills or mathematics,• Pregnant teenager or teenage parent,• Eligible for free or reduced-price lunch,• Atypical behavior or attendance patterns,• Family history of school failure, incarceration, or

substance abuse.

In addition, other pupils may be eligible for this fundingbased on academic performance on the most recent Michi-gan Education Assessment Program or Michigan MeritExam; pupils in grades K-3 who are at risk of not meet-ing core curricular objectives; and children birth to age 5that meet the at-risk criteria used to determine eligibilityfor the Great Start School Readiness Program.a

Unlike the general foundation grant, at-risk funds can-not be used for all operating costs associated with edu-cating at-risk students. The funding must be used forspecific instructional programming and direct non-instruc-tional services, as defined in state law. Generally speak-ing, instructional programs include tutorial services, earlychildhood education, reduced class size, adult education(e.g., adult high school completion, adult English as asecond language), K-3 early intervention, and reading

assistance. Direct non-instructional services can includeearly childhood education, medical and counseling ser-vices, school health clinics, security, and hearing and vi-sion screenings.b

Equally important, state law prohibits at-risk funds frombeing used for any administrative costs associated withthe instructional or direct non-instructional programming,including personnel time spent managing the program,audit, evaluation, and/or indirect costs.

Allocation to Districts and Funding History. At-riskfunds are distributed to traditional public school districtsand charter schools via a formula based on the numberof students who qualified for free lunch under the Na-tional School Lunch Program in the previous fiscal yearand the amount of the foundation grant.c Statutorily, foreach eligible at-risk student, a district receives a maxi-mum supplemental payment equal to 11.5 percent ofthe district’s foundation grant. This percentage is estab-lished in the annual School Aid Fund budget and it hasremained constant since 1995. For example, a districtthat received the state minimum foundation grant of$7,316 in FY2009, was eligible to receive a maximum at-risk payment of $841 per eligible student, totaling $8,157for each at-risk pupil in combined foundation grant andcategorical funding. However, this amount was reducedby 30 percent to meet the available funding.

A district’s maximum total at-risk supplemental paymentis calculated by multiplying the number of eligible pupilsby 11.5 percent of the district’s foundation grant. How-ever, a district’s actual payment is controlled by theamount appropriated each year. When the appropria-tion is below the full amount needed to satisfy all dis-tricts’ statutory maximum, a prorated amount is distrib-uted. Proration is calculated to provide the same per-pupildollar reduction for each district.

Table 13 (on page 52) presents the history of at-riskfunding and the number of eligible students each yearfor the last eight years, FY2003 to FY2010. The totalappropriation amount has remained fairly constant, hov-ering around $310 million per year; however, the num-ber of students eligible for this funding has increasedrapidly and steadily, rising from 444,916 students inFY2003 to 558,554 students in FY2010 – a total increaseof 26 percent. Similarly, the number of districts partici-pating also has increased over the eight-year period, mir-roring the state’s economic troubles and the associateddecline in jobs and incomes. As a direct result of flatfunding and rising eligibility, the required per-pupil re-

At-Risk Categorical Funding

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Table 13At-Risk Categorical Funding History and Per-Pupil Proration

“At-Risk” Eligible Percent ofAppropriation “Free Lunch” Number of Statutory Per-Pupil

(millions) Students Districts Maximum ProrationFY2003 $ 314.2 444,916 675 90.6% $ 73FY2004 $ 314.2 459,414 684 87.1% $ 99FY2005 $ 310.4 479,825 701 83.1% $130FY2006 $ 310.5 499,939 707 77.7% $176

FY2007 $ 310.5 508,577 714 74.9% $206FY2008 $ 310.5 528,946 715 70.9% $242FY2009 $ 309.0 531,827 719 69.8% $254FY2010 $ 309.0 558,554 741 64.9% $295

Source: Michigan Department of Education; Center for Educational Performance Information.

Table 14Effects of Prorated At-Risk Funding on Districts Receiving Minimum Foundation Grant

Minimum Maximum Pro-RatedFoundation Per-Pupil At-Risk Per-Pupil At-Risk

Grant Payment PaymentFY2003 $6,700 $771 $698FY2004 $6,700 $771 $671FY2005 $6,700 $771 $640FY2006 $6,875 $791 $614

FY2007 $7,108 $817 $612FY2008 $7,204 $828 $587FY2009 $7,316 $841 $587FY2010 $7,316 $841 $546

Source: Michigan Department of Education; Center for Educational Performance Information.

duction from each district’s statutory maximum increased— from $73 in FY2003 to $295 in FY2010.

Table 14 illustrates the effects of the prorated per-pupilfunding reductions on a district receiving the minimumfoundation grant. By law, the maximum per-pupil at-risksupplement grew with the minimum grant from $771 inFY2003 to $841 in FY2010. However, because of prora-tion, the actual per-pupil at-risk payment declined from$698 in FY2003 to $546 in FY2010 – a total reduction of22 percent. Inflation increased by 19 percent during thisperiod; therefore, the real value of the at-risk paymentdeclined by 34 percent.

1 Michigan Department of Education, Office of School Improve-ment, Section 31a Program for At-Risk Pupils Allowable Usesof Funds, December 2009.2 Ibid.3 For example, the FY2010 distribution is based on the numberof free lunch-eligible students on October 31, 2008 (FY2009)and reported to the Michigan Department of Education, sub-ject to adjustment not later than December 31, 2008.



The Achievement Gap

The educational achievement gap between poor andnon-poor children, and between minority and whitechildren, has been at the center of national and stateeducation policy debates for decades. Major federaljudicial rulings (e.g., 1954 Brown v. Board of Educa-tion desegregation decision) andlegislative changes (e.g., the 1965Elementary and Secondary Educa-tion Act) have addressed achieve-ment disparities among school-agechildren. More recently, the en-actment of the federal No Child LeftBehind (NCLB) law required uni-versal testing and disaggregatingtest scores in order to better iden-tify and address disparities. De-spite these major initiatives, anumber of poor, minority Michiganschool children still struggle toachieve on national and state tests, relative to non-poor, non-minority students.

The magnitude of the achievement gap in Michiganwas brought into clear focus when Detroit PublicSchools’ scores on the 2009 National Assessment ofEducational Progress (NAEP) were reported. TheDetroit Public School district, where only about 3percent of the students are white, registered the

lowest test scores in the history of the NAEP.34 Com-pared to students in other large urban school dis-tricts across the county, low-income African Ameri-can students in Detroit scored the worst.35

Unfortunately, the educational performance strugglesof Michigan’s low-income and minority students are

not limited to Detroit PublicSchools. Based on the state-ad-ministered Michigan EducationalAssessment Program (MEAP) test,non-white students (African Ameri-can and Hispanic) did not performas well as white students statewidein 2010. Scores on fourth andeighth grade reading and mathtests were lower for non-white stu-dents than their white counterparts(see Table 15). Although thereis evidence that the achievementgap between white and non-white

students in Michigan has narrowed, it remains amongthe largest in the nation based on NAEP scores.36

In FY2009, African American students accounted for17 percent of the total student population in tradi-tional public schools; however, the distribution of thispopulation across the 551 traditional public schooldistricts was far from homogenous. African Ameri-can students were heavily concentrated in a handful

Table 152010 MEAP Scores

Reading MathRace Grade 4 Grade 8 Grade 4 Grade 8All Students 430.3 821.8 428.8 818.1White 434.8 825.0 432.1 821.5Hispanic 421.2 814.3 421.7 810.1Black 415.1 810.3 416.2 803.7

Difference: White-Black 19.7 14.7 15.9 17.8Difference: White-Hispanic 13.6 10.7 10.4 11.4


Although there is evidencethat the achievement gapbetween White and non-White students in Michiganhas narrowed, it remainsamong the largest in thenation based on NAEPscores.

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of districts, which are mainly urban (see Table 16).Thirty-eight districts accounted for almost three-fourths of all African American students in traditionalpublic school districts. Conversely, 412 (75 percentof all districts) had student populations that consistedof less than 5 percent African American children.

Foundation Growth and District Racial Composition

District students’ race is a characteristic that waslargely ignored in establishing the initial foundationgrant amounts and has not played any role in theannual adjustments made to the grant since. Origi-nal foundation grants were based on pre-Proposal Aper-pupil revenue amounts and those districts withthe highest concentrations of non-white students(many of the urban districts such as Detroit, Flint,Lansing) had some of the highest per-pupil revenueamounts because they benefited from greater

amounts of state aid (due to high tax rates and lowproperty wealth) under the previous financing sys-tem and received more categorical assistance be-cause of their unique student and district character-istics. Since Proposal A’s adoption the greatestannual revenue increases have been targeted at thelowest revenue districts. Thus, in light of ProposalA’s goal of raising the per-pupil amounts of the low-est revenue districts, districts with the highest con-centrations of non-white students did not benefit themost from per-pupil funding equalization.

When growth in foundation grants across districts isexamined through a racial composition lens, districtswith the highest percentage of African American stu-dents have fared the worst (see Table 17). Theaverage foundation grant in these districts declined3.0 percent in inflation-adjusted dollars betweenFY1994 and FY2009, compared to a 10.1 percent

Table 16Distribution of African American Students

Percent of District Number of Percent of African AmericanAfrican American Districts Students Statewide

0% to 1% 225 0.7%1% to 5% 192 4.5%5% to 33% 96 23.1%

> 33% 38 71.7%


Table 17Inflation-Adjusted Average Foundation Grants by Percent of African American Studentsin FY2009: FY1994 and FY2009

Percent of District Dollar Percent African American FY1994 FY2009 Change Change

0% to 1% $6,902 $7,599 $698 10.1%1% to 5% $6,970 $7,536 $566 8.1%5% to 33% $8,031 $8,014 ($17) -0.2%

> 33% $8,334 $8,088 ($246) -3.0%

Source: Center for Educational Performance and Information; Senate Fiscal Agency; U.S.Bureau of Labor Statistics, Consumer Price Index (state fiscal year basis); CRC calculations.



increase in districts where the African American popu-lation makes up less than 1 percent of the studentenrollment. Districts with the highest concentrationof African American students had the highest aver-age grant in FY1994, which is still the case in FY2009;however, because of disparate growth rates, the per-pupil revenue difference between district groupsdeclined from $1,432 in FY1994 to $409 in FY2009.

These districts consist of students scoring the low-est on Michigan’s standardized MEAP tests and havesome of the highest dropout rates in the state. Thus,Proposal A provided the smallest annual per-pupilincreases (after adjusting for inflation) to some ofthe state’s worst performing students and districtswith the poorest populations. As discussed later inthis report, many of these districts also experiencedthe largest enrollment declines since Proposal A,which exacerbated the financial losses associatedwith minimal per-pupil annual increases.

Total Foundation Revenue Changesby District Type

Under the foundation program, the total amount ofgeneral operating assistance that an individual schooldistrict receives each year is determined based onthe amount of its foundation grant and the district’spupil membership. Table 18 provides a summaryof the interaction of enrollment changes and foun-dation grant changes (i.e., enrollment multiplied byfoundation grant) from FY1995 to FY2009 and theircumulative effect on the growth in total foundationrevenue by type of traditional public school district.37

Just over 60 percent of all districts have seen somereduction in their student enrollment from FY1995to FY2009. Rural districts have been impacted thegreatest as nearly 72 percent of all the districts inthat grouping have experienced enrollment decline.Almost 70 percent of all central city districts have

Table 18Changes in Enrollment, Foundation Grant, and Total Foundation Revenue by District Type:FY1995 to FY2009(FY2009 Dollars)

TotalEnrollment Real Foundation Grant Foundation Revenue

Decline Gain Decline Gain Decline GainCity 18 8 19 7 18 8Suburban 47 102 93 56 56 93Rural 269 107 80 296 199 177Total 334 217 192 359 273 278

Source: Center for Educational Performance and Information; Senate Fiscal Agency; U.S. Bureau of LaborStatistics, Consumer Price Index (state fiscal year basis); CRC calculations.

CRC Report


experienced enrollment losses over the last 15-yearperiod. In contrast, the number of suburban dis-tricts with enrollment gains has outnumbered thesuburban districts with enrollment losses.

Compared to the number of districts experiencingsome degree of declining enrollment, many moredistricts experienced some real growth in the foun-dation grant between FY1995 and FY2009. Nearlytwo-thirds of all school districts saw the growth intheir foundation grant exceed the growth in infla-tion over the 15-year period.

When enrollment and foundation grant changes arecombined, a total of 273 districts, nearly half of alltraditional public school districts, have experienceda decline in their inflation-adjusted total foundationrevenue between FY1995 and FY2009.

Of course, the experiences of Michigan’s districts havebeen anything but uniform in terms of the degree oftotal foundation revenue growth: some districts haveexperienced substantial real foundation revenuegrowth while others have seen significant revenuelosses. To show this diversity, Chart 17 presentsthe average annual rate of change in total founda-tion revenue for traditional public school districtsbetween FY1995 and FY2009.38 The average an-nual rates ranged from a decline of 6.2 percent (farleft side of chart) to an increase of 4.6 percent (farright side of chart). The average annual rate ofchange in the total foundation revenue betweenFY1995 and FY2009 was a decline of 0.23 percent.

Despite the variation in annual rates of change, somebroad conclusions can be drawn about the observedchanges in total foundation revenue, especially when

Chart 17Annual Rate of Change in Total Foundation Revenue: FY1995 to FY2009

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1 51 101 151 201 251 301 351 401 451 501

Districts Ordered by Rate (lowest to highest)

Ave

rage

Ann

ual R

ate




districts are categorized by type (city, suburban, ru-ral). As a group, suburban districts have fared bet-ter than central city and rural districts, primarily dueto rising enrollments. Rising enrollments helped off-set foundation grant declines. Although rural dis-tricts experienced the greatest growth in the foun-dation grant between FY1995 andFY2009, partially because they hadthe lowest per-pupil revenue be-fore Proposal A, declining enroll-ments in these districts have beenparticularly problematic and causedtotal foundation revenue declinesin many cases. The central citydistricts experienced the worst ofboth worlds: declining enrollmentsand reductions in their inflation-ad-justed foundation grants.

Traditional public school districtsserving students in some of Michigan’s largest andmost iconic cities have experienced the largest totalfoundation revenue declines, primarily as a result of

enrollment losses. In some cases, such as Detroit,these districts are responsible for educating largeportions of the state’s children enrolled in traditionalpublic schools (see Table 19).

Detroit and Flint, for example, both experienced en-rollment declines of greater than40 percent between FY1995 andFY2009, contributing to total foun-dation revenue declines of 42 per-cent and 46 percent, respectively.Even in some districts that experi-enced moderate real growth oftheir foundation grants, such asBenton Harbor, these financialgains were wiped out entirely bythe attendant enrollment losses.Even moderate enrollment de-clines, such as those that occurredin Bay City, can overwhelm the

positive fiscal effects that accompanied strong foun-dation grant revenue growth.

Table 19Changes in Enrollment, Foundation Grant, and Total Foundation Revenue in Select Districtswithin Urban Areas: FY1995 to FY2009

TotalPercentage of District Real Foundation

Statewide Enrollment Per-Pupil RevenueEnrollment Change Grant Change Change

Flint 0.9% -44.8% -1.6% -45.7%Benton Harbor 0.2% -43.8% 12.4% -36.8%Pontiac 0.5% -42.6% -1.5% -43.5%Detroit 6.2% -40.3% -2.9% -42.0%Grand Rapids 1.2% -28.0% 1.2% -27.1%Lansing 1.0% -27.3% -1.0% -28.0%Saginaw 0.6% -27.0% -2.3% -28.7%Muskegon 0.3% -23.8% 1.3% -22.8%Battle Creek 0.4% -22.6% -1.7% -23.9%Jackson 0.4% -18.4% -0.7% -18.9%Highland Park 0.2% -13.9% -4.3% -17.6%Bay City 0.6% -13.0% 16.8% 1.7%


Traditional public school dis-tricts serving students insome of Michigan’s largestand most iconic cities haveexperienced the greatesttotal foundation revenuedeclines, primarily as a re-sult of enrollment losses.

CRC Report


Detroit is Michigan’s most iconic city and is home to thestate’s largest school district, Detroit Public Schools (DPS).In FY2010, 9.0 percent (144,435) of the state’s public K-12student population resided in Detroit and attended DPS,charter schools within Detroit, non-Detroit charter schools,or other traditional public schools. Of this total, DPS wasresponsible for educating the largest share of Detroit residentstudents, about 60 percent or 86,470 students (5.8 percentof the state’s traditional public school students), larger thanthe combined student body of the next four largest districtsin FY2010.

Similar to other urban cities (Flint, Grand Rapids, Lansing,and Saginaw), the main public school district (DPS) hasexperienced massive enrollment losses in recent years,particularly since FY2003 when statewide enrollmentspeaked. In the case of DPS, enrollments in FY1995 (158,379students) and FY2003 were basically the same (156,182students). This means that almost the entire enrollmentdecline since the adoption of the foundation program inFY1995 was concentrated between FY2003 and FY2010.Over this seven-year period, DPS’s enrollment declined everyyear for a total loss of 63,305 students or 43.7 percent.This enrollment loss is nearly equivalent to the combined

enrollments in the next three largest districts (UticaCommunity Schools, Plymouth-Canton Community Schools,and Grand Rapids Public Schools). So, where did all thestudents go that were previously enrolled in DPS? No singlefactor accounts for the enrollment decline, rather a host offactors contributed to this massive loss.

One factor which is not unique to Detroit has to do with thereduction in birth rates and the end of the Baby Boom Echo(i.e., children of Baby Boomers or those born between themid-1970s to early 2000s). This is reflected in the fact thatstatewide enrollment figures since Proposal A peaked in2003. Additionally, statewide enrollments also declined inresponse to the economic situation in the state: employmentopportunities in Michigan, or the lack thereof, have causedfamilies, including those with school-age children, to leavethe state to seek work elsewhere.

In addition to the broad demographic forces affectingMichigan’s population and DPS, part of the explanation lieswith the long-term trend in population changes for the Cityof Detroit. Detroit has been losing population consistentlysince the 1950s, according to decennial census figures, withthe rate of loss varying over time. Prior to 2010 decennial

Where Did All the Students Go?

Chart 18Detroit Resident Enrollments: FY2003 to FY2010

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

Attending DPS Attending Charter Schools Attending Other Traditional Public Schools




census, declines were greatest between 1970 and 1990.Between 1990 and 2000, the rate of decline was lesspronounced. In contrast, the State of Michigan consistentlygained population since the 1950s and only recently(beginning in 2006) began losing population.

Most recently the U.S. Census reported that Detroit’s residentpopulation declined 23 percent from the 2003 estimate(926,903) to the 2010 Census (713,777). This represents asignificant drop in population, but it is less than the 44percent loss in DPS student enrollments over the similarperiod.

Another explanation for the DPS student decline betweenFY2003 and FY2010 is the availability of school choice toDetroit residents. Competition for students from charterschools is reflected in the enrollment growth seen in charterschools vis-à-vis the decline in DPS enrollment. Also,competition for Detroit students comes from other non-Detroit traditional public schools, which partially explainsthe enrollment losses in DPS. In FY2009, Detroit was hometo 50 charter schools (approximately 22 percent of the total224 statewide). In Detroit, reasons for student migrationto charter schools or other traditional districts likely mirrorthose found in other areas of the state; however, greaterout-migration may have occurred in DPS because of concernsabout the quality of the education provided in the districtcompared to alternative educational settings.1

It is also quite likely that recent financial and academicchallenges account for some of the exodus from DPS,although the amount is not quantifiable. The district hasbeen under the supervision of a state-appointed emergencymanager since early 2009. Initially, the position was taskedwith stabilizing the district’s finances and eliminating theaccumulated deficit. Recent changes to state law (PublicAct 4 of 2011) have provided the position with the authorityover academic matters as well financial dealings in strugglingdistricts. Operational, financial, and academic changes

initiated under the emergency manager may havecontributed to some students leaving DPS for othereducational providers, in Detroit and elsewhere.

Detroit residents attending charter schools (in Detroit andelsewhere) increased from 27,506 students in FY2003 to45,036 students in FY2010, an increase of 17,530 students,or 63.7 percent (see Chart 18). Although representing asmaller cohort of Detroit residents, those attending non-Detroittraditional public school districts increased from 7,770 studentsin FY2003 to 12,929 students in FY2010, a change of 5,159students or 66.4 percent. The combined increase of Detroitresidents attending either charter schools or non-Detroittraditional public schools was 22,689 students over this period.This compares to a decline in DPS enrollment of 63,305students. The net enrollment increase in charter schools andnon-DPS public schools accounts for 35.8 percent of the totalenrollment decline in DPS from FY2003 to FY2010.

The changes in Detroit resident enrollments among thevarious schools have been profound (see Table 20). InFY2010, charter schools were responsible for educatingnearly one of every three Detroit children, compared withone of every seven children in FY2003. DPS, on the otherhand, was responsible for educating four out of every fivechildren in the city in FY2003, but recently DPS’s sharedropped to three of every five children. Non-Detroittraditional public schools also gained Detroit residentenrollments during the time that DPS lost enrollments. Ifcurrent trends continue, it is likely that DPS will remain thelargest single educator of Detroit children, but soon it willbe responsible for educating less than one-half of the childrenin its geographic district: the remainder will be attendingeither charter schools or other traditional public schoolsoutside the city limits.

1 Citizens Research Council of Michigan, Nontraditional K-12Schools in Michigan, Report 364.

Table 20Detroit Resident Enrollments: FY2003 and FY2010

FY2003 FY2010Attending Detroit Public Schools 156,127 82% 86,470 60%Attending Other Traditional Public Schools 7,770 4% 12,929 9%Attending Charter schools 27,506 14% 45,036 31%

Total 191,403 144,435


CRC Report


Evaluation of Michigan’s Efforts to AddressFunding Disparities: National Context

A number of studies have examined state school fi-nance systems from an equity perspective, with aspecific focus on how state policies affect low-in-come children and children of color. Generally, thestudies attempt to determine whether school dis-tricts with the highest concentrations of low-incomestudents and minorities are getting a fair amount ofstate and local education resources. Individual stateresults vary depending on thestudy; however, general themesare evident when comparingacross studies. In Michigan’scase, the general observation isthat the financing system doesnot adequately account for edu-cational needs of low-income andminority students and that fund-ing inequities between high- andlow-wealth school districts doexist.

Is School Funding Fair? ANational Report Card

A recent study by the EducationLaw Center, a New Jersey-basedadvocacy organization concernedwith school funding equality, ex-amined the fairness of stateschool finance systems through-out the United States.39 Thestudy used a definition of fairness that went beyondsimple measures of resource levels to includewhether sufficient funding was directed to the poor-est schools in a state, based on pre-recession data.The Law Center based its analysis on four metrics offairness and the result for Michigan was a mixedbag depending on the individual measure.

In the national context, Michigan was grouped with13 other states that exhibit concentrated levels ofpoverty – states in which at least 10 percent of theirstudent population is in districts with poverty ratesover 30 percent. According to the U.S. Census data,25 Michigan districts containing 202,717 students(13 percent of the statewide total), had a student

population where more than 30 percent of studentswere poor. Such levels of concentrated poverty, ac-cording to the study, are the “most critical variableaffecting funding levels,” and correlate with a num-ber of factors that impact the costs of providing equaleducational opportunity, including gaps in achieve-ment, racial composition, and English language pro-ficiency. According to the Education Law Center,fair state finance systems, in addition to providingsufficient overall funding for all schools, should tar-get more dollars to high-poverty versus lower-pov-

erty districts.

The study used four measures offairness to evaluate states: fund-ing level, distribution, effort, andcoverage. On the first metric,compared to other states and theDistrict of Columbia, Michigan re-ceived average marks for itsoverall funding level, measuredas per-pupil revenues adjustedfor student poverty rates, re-gional wage variation, economiesof scales, and population density.Michigan was ranked 23rd over-all, with an adjusted state andlocal revenue per-pupil amountof $9,678, below $10,132 per pu-pil for the U.S. average.

In terms of funding distributionand targeting more resources tohigher-poverty districts; how-

ever, Michigan received a grade of “D”. The state’sfinancing system was labeled regressive, althoughthe relationship between the level of funding andstudent poverty was determined not to be statisti-cally significant. The study found too much varia-tion among individual Michigan districts on this mea-sure to establish a pattern, a result that one wouldexpect given how the foundation program functions.

With respect to funding effort (state and local rev-enues as a percent of state economic output), Michi-gan received an “A.” This is consistent with Michigan’slong-standing support of high levels of educationfunding, relative to its available economic resourcesand compared to other states. Recently, however,

In the national context, Michi-gan was grouped with 13 otherstates that exhibit concen-trated levels of poverty –states in which at least 10 per-cent of their student popula-tion is in districts with povertyrates over 30 percent. Accord-ing to the U.S. Census data,25 Michigan districts contain-ing 202,717 students (13 per-cent of the statewide total),had a student populationwhere more than 30 percentof students were poor.



Michigan’s standing among other states on this mea-sure has slipped.

The fourth measure was coverage, which attemptedto capture the degree to which children attend publicschools vis-à-vis private schools and the householdincome of those children. Michigan ranked above theU.S. average, in the top one-third of states on thismeasure – 16th overall. This was due to the fact that88 percent of Michigan school age children are en-rolled in public schools (traditional public and char-ters) and the ratio of household in-comes in public schools relative toprivate schools was below the U.S.average. Strong support of publicschools, relative to private schools,is evidence of the potential politicalwill to support fair funding.

The Education Trust’s FundingGaps Report

From time to time, The EducationTrust, a Washington D.C.-based or-ganization that advocates forequality in educational opportunity,examines state education financesystems to determine if districtswith high concentrations of low-in-come, minority, and/or English-lan-guage-learning students are receiving their fair shareof funding. Additionally, The Education Trust calcu-lates funding gaps that exist between the highest-and lowest-poverty school districts within states. Themost recent report was released in 2006, based onfinancial data from the 2003-04 school year.40

According to the Funding Gaps report, most statesare unfair in their treatment of high-poverty and high-minority school districts, providing fewer resourcesto districts with high concentrations of these students.Michigan is one of these states. Without adjustingfor cost differentials, Michigan exhibited a funding gapof $573 per pupil in total revenues between the high-est- and lowest-poverty districts in 2004.41 After ad-justing for the additional costs associated with edu-cating low-income students, the gap in Michiganexpanded to $1,073.42 The U.S. average funding gapswere $825 per pupil (unadjusted) and $1,307 per pu-

pil (adjusted). While Michigan fared better relative tothe U.S. averages, its system was deemed unfair alongwith 33 other states.

The disparity in funding between high- and low-mi-nority districts in Michigan was less stark. In Michi-gan, a gap did not exist when the figures were un-adjusted; however, a small gap ($251 per pupil) diddevelop when per-pupil revenues were adjusted toaccount for the additional costs of minority students.Michigan’s gap was well below the calculated “fund-

ing gap” for the U.S. as a whole($1,213 per student) in 2004.Nationally, 30 states had fundinggaps between their highest andlowest minority districts, 12 ofwhich had gaps that exceeded$1,000 per student.

The Education Trust recommendsa series of public policy responsesat each level of government to ad-dress funding disparities. For stategovernments, the Funding Gapsreport suggests a larger role forstates vis-à-vis local school districtsin funding responsibility for schools– substituting local property taxeswhich are inherently biasedagainst low-wealth communities

with statewide revenue sources. In Michigan’s case,revenue-raising responsibility is already highly cen-tralized at the state level. Another policy prescrip-tion is to target funding to high-poverty districts. Asnoted previously, the amount of Michigan’s “at-risk”categorical funding has remained constant despitegrowing demand over the years, which has reducedthe effectiveness and efficacy of the targeted fund-ing to ameliorate funding disparities. The final rec-ommendation favors state involvement in sub-dis-trict resource allocation to ensure that individualschools are equitably funded. Michigan’s currentfinance system is void of such mechanisms.

At the local level, recommendations to improve edu-cational opportunity for low-income and minority stu-dents hinge on greater transparency in budgetingand resource allocation within districts, changing thedistribution formula used by districts to target re-sources to individual schools. The report recom-

Without adjusting for costdifferentials, Michigan ex-hibited a funding gap of$573 per pupil in total rev-enues between the highest-and lowest-poverty districtsin 2004.41 After adjustingfor the additional costs as-sociated with educatinglow-income students, thegap in Michigan expandedto $1,073.

CRC Report


mends the use of weighted student formulas,whereby school budgetary decisions are based onstudent needs rather than program or staff alloca-tion metrics.43

Issues to Consider Regarding Further Per-Pupil Revenue Equalization

As others have noted previously,and what the preceding discussionreiterates, is that the currentschool financing system has re-sulted in significant gains in per-pupil revenue equalization acrossschool districts and students, atleast in terms of general operat-ing assistance.44 As Chart 19shows, equity gains have beenachieved primarily through polices directed at rais-ing the bottom. In FY1995, 55 percent of traditionalpublic school districts (representing 35 percent ofstudents) received a foundation grant less than thetarget amount of $5,000 per pupil. By using the 2X

formula, all districts received at least the the targetgrant amount by FY2000 ($5,700). Further levelingup occurred in FY2003 and FY2007 as a result ofequity payments made to lower spending districts.As a result, by FY2009 62 percent of the districtsrepresenting 41 percent of students received thesame foundation grant ($7,316). More recently, and

in contrast to the policy of levelingup, minor equity gains were real-ized when cuts to per-pupil fund-ing were targeted at higher-rev-enue districts (Section 20j veto).While these cuts were significantto the districts affected, they con-tributed marginally to reducing theoverall equity gap.

Regardless of the means, equaliza-tion has reduced differences in per-pupil revenues.However, large differences still exist between dis-tricts. The spread between the highest- and lowest-revenue districts in FY2009 was $5,000 per pupil.Also, there continues to be variation in per-pupil rev-

Chart 19School Districts by Foundation Grant Grouping: FY1995, FY2000, and FY2009

307

0 01

308343

195 193

155

52 53 53

0

50

100

150

200

250

300

350

400

FY1995 FY2000 FY2009

Num

ber

of D

istr

icts

Less than Basic At Basic Basic to Hold Harmless At or above Hold Harmless


A logical question facingpolicymakers prospectivelyis whether to pursue furthergains in horizontal equitywhen additional resourcesbecome available.



enues based on district type, size, and other charac-teristics. Equity gains have fallen short of absoluteequity. A logical question facing policymakers pro-spectively is whether to pursue further gains in hori-zontal equity when additional resources becomeavailable.

If policymakers endeavor to further reduce the eq-uity gap, a number of issues shouldbe addressed. Perhaps most im-portant is defining what is meantby equity and establishing sometype of broad timeframe to achievethe goal. If absolute equity is theultimate goal, it may be years un-til such a goal is achieved basedon the rate of progress thus far andgiven the outlook for revenuegrowth prospectively.45 The costs of further equal-ization are great and have to be considered. Fur-thermore, directing future resources towards greaterequalization will mean that other policy goals willcontinue to take on secondary importance. Finally,policymakers may want to consider the effects, ifany, that greater equalization has on academic per-formance.

What Level of Equalization?

Neither Proposal A nor the related reforms definethe level of per-pupil funding equalization that shouldbe achieved. Similarly, policy changes did not set atimeline to reduce per-pupil disparities. For example,while an initial goal was articulated to raise all dis-tricts to at least the target (basic) foundation granta specific time frame for doing so was not estab-lished. It took six years for all districts to reach at

least the targeted amount. More recently, the stateestablish and budget decisions in FY2010 requiredequal per-pupil funding reductions for all districtsand halted funding equalization efforts.

As the national and state economies improve, state-dedicated school revenues are expected to grow.Policymakers will have to decide how to use the ad-

ditional state resources andwhether to re-engage efforts toreduce disparities in general oper-ating funding. However, ifpolicymakers decide that per-pu-pil funding equalization should as-sume a secondary role, future ad-ditional resources might bedirected at other policy objectivessuch as providing more resources

to students with special needs and to those who aremore difficult to educate. The state may turn itsattention to the concept of vertical equity, definedas treating different districts (and students) differ-ently. Furthering this policy goal would involve di-recting more resources to categorical funding thatsupports at-risk and special education students, andproportionately fewer resources to the general foun-dation program. Alternatively, greater vertical eq-uity might be achieved by modifying the foundationprogram to incorporate funding components that takeinto account certain student characteristics.

Financial Costs of Further Equalization

If further per-pupil equalization is to occur, it is likelyto happen by leveling up as opposed to reducingthe foundation grants of higher-revenue districts.This has been the preferred method to date; how-

Neither Proposal A nor therelated reforms define thelevel of per-pupil fundingequalization that should beachieved.

CRC Report


ever, it is also the most costly. Chart 20 shows thedistribution of traditional public school students inFY2009 by foundation grant. Approximately 86 per-cent of the 1.5 million students were in districts thatreceived less than the maximum foundation grantof $8,489.

Further equalizing per-pupil funding for students be-low the hold harmless grant will be extremely ex-

pensive (see Table 21). Based on FY2009 data, itwould cost $509 million to increase the foundationgrants of students to at least $7,903 (one-half ofthe difference between the current maximum grant($8,489) and the minimum grant ($7,316). Thiswould result in about three-quarters of the total stu-dent population being equalized and leave one-quar-ter of the students in districts receiving more thanthe new minimum funding. The cost of equalizing

Chart 20Traditional Public School Students by FY2009 Foundation

Minimum ($7,316)41%

Basic to "Hold Harmless"

($7,316 - $8,489)45%

Maximum or Above14%

Source: Senate Fiscal Agency; Center for Educational Performance and Information

Table 21Estimated Cost of Equalizing FY2009 Foundation Grants at Two Levels

Pupils Pupils Above Cost PerEqualized Equalized Total Cost Pupil

Level of Equalization (Percent of Total) Level (millions) Equalized$7,903 (1/2 of difference between 1,117,751 395,853 $509 $455 minimum and maximum) (74%)

$8,489 (maximum grant) 1,296,684 216,920 $1,221 $941(86%)

Source: Center for Educational Performance and Information; Senate Fiscal Agency



all students to at least the maximum level would be$1.2 billion and would result in 86 percent of thetotal students being equalized. Even if this levelwere funded, it would leave 216,920 students in dis-tricts spending more than the newly-equalized level.

The actual costs of equalization could be substan-tially greater than the figures reported in Table 21because the data reflects only the cost of levelingup some portion of the students in districts that re-ceive a foundation grant below themaximum grant amount. In prac-tice, efforts to achieve greaterequalization will probably have toinclude the costs of providing otherdistricts with some degree of in-crease. In other words, it is un-likely that equalization is going tooccur in a vacuum, but more likelywill occur in an environment whereall districts are provided some levelof additional resources. Thus, it could be necessaryto provide increased revenues for all students, notjust those below the proposed equalization level, in-cluding students enrolled in charter schools. Fur-thermore, these increases represent additional an-nual costs, which would add substantially to thecumulative costs of equating per-pupil revenues.

Equalization and Student Academic Achievement

Similar to many other states that have reformed theirschool finance systems, Michigan endeavored toachieve multiple goals when it abandoned its power-equalization/guaranteed tax base formula in favor ofthe foundation grant program in the mid-1990s. Onegoal was to achieve greater per-pupil revenue equal-ization to provide more equal educational opportuni-ties to students. Another objective was to reduce theproperty tax burden by significantly curtailing the rolethe tax plays in financing K-12 education. Anotherimportant objective, and one that was clearly relatedto efforts to achieve greater per-pupil funding equal-ization, was to improve student performance.

There is considerable evidence that progress towardsthe first two policy goals has been made. Evidenceregarding the effects of equalization on studentachievement, however, has been less plentiful. Aca-

demic research on the link between per-pupil rev-enue equalization and student performance, espe-cially among lower-revenue districts, provides someinsight on the progress made toward the third policyobjective.

The Michigan Experiment. An important publicpolicy question that arises following the adoption ofschool finance reform is whether the new systemresults in improved student academic performance.

Considerable academic researchhas been conducted to determinethe link between education spend-ing and student performance, a re-lationship that has proven difficultto establish.46 In many previousstudies, the difficulty in establish-ing such a relationship resultedfrom the lack of substantial reform(i.e., reform did not generate alarge enough variation in inputs)

and/or methodological challenges (i.e., inability todevelop an econometric model capable of control-ling for confounding variables with available data orby methodological means). For example, researchfound that California’s school finance equalizationsystem of the 1970s did not improve student perfor-mance for the low-spending school districts prima-rily because the method of equalization was focusedon reducing per-pupil funding in higher-revenue dis-tricts, as opposed to raising the revenues in lower-revenue districts.47

Michigan’s school finance experience has proven tobe an ideal experiment or case study for research-ers attempting to link financial resource inputs tostudent performance outputs, especially for districtswith lower per-pupil revenues before the reform. Amajor reason has to do with the sizeable changes infunding provided to school districts, especially lower-revenue districts, initially. Although this equaliza-tion slowed in later years, the initial variation in an-nual per-pupil revenue increases provided theexogenous variable that was lacking when research-ers examined other school finance reforms.

Performance Gains in Low-Spending Districts. Aseries of research papers authored by economicsprofessor Leslie Papke, Ph.D. of Michigan State Uni-

A series of research paperssuggest a positive and largespending effect on passrates for standardized testsfollowing implementation ofMichigan’s finance reforms.

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versity suggest a positive and large spending effecton pass rates for standardized tests following imple-mentation of Michigan’s finance reforms.48 This con-clusion has been confirmed by others looking atMichigan-based test scores; however, the researchdid not find the same improvements in nationwidetest scores.49 Prof. Papke’s research employed a va-riety of econometric models toshow that Michigan’s school fi-nance equalization has improvedstudent performance, at least forMichigan 4th graders on standard-ized math tests. She found that “arough rule-of-thumb would be that10 percent more real spending in-creases the pass rate by betweenone and two percentage points, and more for ini-tially underperforming schools.” Using alternatemethods, she also found that the increase in thepercentage of students performing satisfactorily onthe test, given the same increase in real spending,was 2.5 percent. Her findings are consistent withthe conclusions reached by other researchers thatexamined Proposal A’s per-pupil funding equaliza-tion effects on student achievement.50

Prof. Papke notes that while all districts improvedstudent performance since the implementation ofProposal A, the effects were greatest for the initiallylowest–revenue districts, which received the largestannual per-pupil increases after Proposal A. In otherwords, initially low-revenue districts improved more

than high-revenue districts. This finding providessupport for policies that target resources to low-per-forming schools.

It is important to note the relatively large fundingincrease (e.g., 10 percent in real terms) needed toachieve very modest gains in student performance.

Specifically, the increase in passrates (2.5 percent) is equivalent toimproving the performance of 1child out of 40. It is also worthnoting that the research examinedequalization efforts through 2004.Student funding equalization wasstrongest during the years imme-diately following Proposal A’s adop-

tion and into the early 2000s when the growth ofthe foundation grant exceeded inflation for most dis-tricts, especially the lowest spending districts. How-ever, since that time, funding equalization has stag-nated and growth in the foundation grant has notkept pace with inflation. Thus, the existing researchdoes not tell us whether the minimal funding in-creases provided to the foundation allowance dur-ing the mid- to late-2000s have had any effect onstudent performance. This is especially relevantgiven the modest equalization gains achieved dur-ing this latter period. Future research is likely toshed light on the effect of more recent school fund-ing changes in Michigan and student performance,especially among districts with relatively lower per-pupil spending.

The increase in pass ratesis equivalent to improvingthe performance of 1 childout of 40.



Conclusion

The school finance reforms of the mid-1990s wereborne out of a sense of crisis; a crisis that mani-fested itself on many levels. Leading the way wasconcern about property taxation. Specifically, schooloperating property taxes in many communities weredeemed to be too high and growing at a rate thatoutpaced the growth in taxpayers’ incomes and theirability to pay. Coupled with the concerns about prop-erty tax growth was the uncertainty about the fu-ture funding of local schools. Voter angst and anti-tax sentiment made the renewal of expiring localschool millages in some communities anything but a“sure bet,” which was exemplified by the case ofKalkaska schools’ inability to get a millage passed inearly 1993 after numerous attempts. Also, therewas a perceived “quality crisis” in many districts,defined in terms of per-pupil funding. The heavyreliance on local property taxes (i.e., property wealth)resulted in wide per-pupil revenue disparities acrossdistricts (even at low tax rates), which was deemedunacceptable by many. Finally, for some observersthe “quality crisis” also touched upon issues of edu-cational choice, or lack thereof, and the accountabil-ity of traditional public school districts.

The statewide question of amending the state consti-tution, presented as Proposal A of 1994, and the re-lated statutory changes that accompanied it addressed,to varying degrees, all aspects of the educational cri-ses, real or perceived, that existed in the mid-1990s.The most substantial reforms, at least in the near-term,involved the K-12 revenue collection and allocation ar-eas. To a lesser extent, quality and accountability re-forms were addressed through other changes enactedat the time. More recently, reforms involving educa-tion quality and performance have been at the fore-front of the public policy debate.

Various components of the K-12 education landscapehave changed since the implementation of ProposalA; however, the primary systems and methods forcollecting and distributing K-12 education resourcesto local school districts have not been modified ma-terially. The major sources of revenue (state andlocal) and related tax rates are the same, while theper-pupil foundation grant remains the primarymechanism to allocate the majority of operating fund-

ing school districts. Despite the significant changesto Michigan’s economy and population over the past16 years, the Proposal A financing system remainsin tack today.

Today, as was the case in 1994, the financing of K-12 education is a major public policy issue. For manyobservers of the policy debate today, the Proposal Aschool finance system has been in crisis for sometime. Problems with the system surfaced in the early2000s, when the Michigan economy, after a mildnational recession, never fully recovered. The growthof state revenues, which shoulder most of the fi-nancing responsibility for funding public schools,tracked the slowdown in economic activity.Michigan’s continued economic challenges through-out the decade arising from the deterioration of thestate’s manufacturing base further affected schoolfinances.

For a growing number of districts over the last de-cade, the effects of the sustained economic slowdownwere made worse by declining student enrollmentsthat translated into fewer dollars under Proposal A’sper-pupil foundation mechanism. More recently, thenational recession reduced the aggregate amount ofstate funding going to K-12 schools for two years in arow (FY2009 and FY2010), necessitating across-the-board per-pupil funding cuts. Revenue growth (rela-tive to economic growth) in the post-recession periodwill be constrained by the design of the state’s taxstructure and is expected to be below the annualgrowth in school spending pressures.

Because many throughout the state currently per-ceive a school funding crisis, calls for school financereforms in recent years have been the loudest sinceProposal A was enacted. The calls have largely fo-cused on the amount of funding provided to schools,both at the aggregate and per-pupil levels. Equallyimportant, but sometimes lacking in the policy dis-cussion and the reform rhetoric, has been the methodto distribute state and local resources to school dis-tricts. Specifically, little attention has been given tohow the Proposal A foundation grant has functionedover the last 16 years. Any review of the foundationgrant must first consider the origins and stated policy

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objectives of the primary mechanism for distribut-ing state and local operating revenues to schools.However, also important to consider are the publicpolicy issues that have been largely unaddressed bythe foundation grant, either intentionally or unin-tentionally. The measurable, and sometimes tumul-tuous, changes to Michigan’s economy, population,and the state budget (all factors that directly impactupon the functioning of the foundation grant) de-mand that a broader perspective be adopted whenevaluating the distribution of operating revenues toschools.

Michigan’s experience with Proposal A suggests thatschool finance reform is unlikely to occur on its own.Rather, it is likely to be paired with a much broadereducation agenda, such as governance/managementreforms; a renewed focus on student performance;and/or efforts to provide greater and more diversechoice in public education. Ultimately, and regard-less of the origins of reform, policymakers and vot-ers likely will face some fundamental choices thattouch upon the issues of local control, intergovern-mental fiscal matters, state and local tax policy, andthe relationship between funding and student per-formance. The Proposal A financing system raises ahost of questions:

• Should the degree of funding centralization atthe state level be reduced to allow some amount

of local control over the amount of operatingrevenues available each year to educate children?

• Given the recent cuts in state aid to all schooldistricts in response to the economic downturn,should districts at least have the ability to re-place these resources locally?

• Does it make sense to prevent higher revenuedistricts from raising additional revenue to sup-port more spending in order to further enhanceper-pupil revenue equity on a statewide basis?

• In a revised system, should the basic formulafor distributing general operating revenues todistricts include an adjustment to mitigate theeffects of declining student enrollments?

• Should this basic formula take into account theadded costs of educating certain student popu-lations as opposed to addressing these coststhrough categorical grants?

• Should policymakers and voters pursue furtherreductions in the per-pupil funding gap betweenlower- and higher-revenue districts? If so, howlong should it take to achieve these equity gains?What is a reasonable cost?

• Should additional funding, when it becomes avail-able, be targeted towards low-performing dis-tricts, where the gains might be greater? Alter-natively, should additional funding go to thosedistricts already performing at the top?



1 Citizens Research Council of Michigan, State and Lo-cal Revenues for Public Education in Michigan, Report363 September 2010.2 National Center for Education Statistics, Digest ofEducation Statistics: 2009, April 2010, Table 172:Revenues for Public Elementary and Secondary Schoolsby Source of Funds.3 U.S. Census Bureau, Public Education Finances:2008, June 2010.4 Education Week, School Finance, December 6, 2007.www.edweek.org/ew/issues/school-finance5 John Augenblick, The Status of School Finance Today,ECS Issue Paper — Education Finance in the States:Its Past, Present and Future, Education Commission ofthe States, July 2001.6 Michigan school districts operate on a fiscal year ba-sis that runs from July 1 to June 30, which contrastswith the state fiscal year that begins on October 1 andends on September 30. For purposes of this reportand to avoid the confusion that can accompany the dif-ferent timing with these two fiscal periods, all fiscalyear citations refer to the State of Michigan, unlessotherwise noted.7 An alternative to the deductible millage program wascontemplated by Public Act 100 of 1970. This law con-tained a state aid program for two years, 1970-71 and1971-72, however, it was ultimately abandoned. UnderPA 100, a conventional deductible millage formula wasto be used in the first year. In the second year (1971-72), PA 100 distributed state aid based on a newpower equalizing system, which guaranteed a local dis-trict an equal return in combined state and local fundsfor each mill levied. Public Act 100 also included a newprovision to provide state reimbursement for a portionof non-public school teacher salaries beginning in1970-71. This piece of the law was effectively nullifiedwhen state voters, in November 1970, adopted a con-stitutional prohibition against state aid to non-publicschools (Article VIII, Section 2). Many observersviewed the aid to non-public schools and the newpower equalization system as a package (i.e., non-sev-erable) and the constitutional amendment killed theentire package. Following the statewide vote in 1970,the legislature repealed PA 100 in 1971 and the newpower equalizing system, and restored the traditionaldeductible millage formula.8 Governor v State Treasurer (389 Mich 1; 1972).

9 In 1973, after the U.S. Supreme Court ruled in SanAntonio Independent School District v Rodriguez that perpupil disparities did not violate the equal protection clauseof the U.S. Constitution and the Michigan Legislatureenacted the GTB school aid formula, the Michigan Su-preme Court vacated its earlier decision in Governor vState Treasurer.10 Michael F. Addonizio, At the Crossroad in Michigan K-12 School Finance, Michigan State University andMichigan Senate Fiscal Agency, March 1988.11 In FY2009, there were 551 traditional public schooldistricts (technically referred to as local education au-thorities or LEAs) and 233 charter schools (technicallyreferred to as public school academies or PSAs) for atotal of 784 local school districts. In addition to LEAsand PSAs, there were 57 Intermediate School Districtsor ISDs in FY2009. In this report, the term “local schooldistrict” is used generically to refer to traditional publicschools or LEAs, unless specifically noted otherwise.This report also uses the generic terms “charter schools”or “charters” to refer to PSAs when appropriate.12 A series of calculations were made to arrive at thetotal revenue from state and local sources each districtreceived in FY1994. This included both select categori-cal and general aid received by each district. This rev-enue total was divided by each districts’ pupil member-ship level to arrive at a per-pupil revenue amount. Amajor categorical included in the revenue figure wasthe state’s contribution to the Michigan Public SchoolEmployees Retirement System. See: Senate andHouse Fiscal Agency, Printout Explanation of Public Act336 Estimated Impact by School District, unpublisheddata, January 1994.13 House Fiscal Agency, Memorandum: The Basics ofthe Foundation Allowance – FY2008-09, January 2009.14 Public Act 336 of 1993 amended the School Aid Actto implement the foundation allowance program effec-tive FY1995.15 C. Philip Kearney and Michael F. Addonizio, A Primeron Michigan School Finance, Fourth Edition, 2002.16 The additional tax levy is first applied to homesteadproperty, up to 18 mills. If additional local revenue isrequired, an equal millage rate is applied to all prop-erty in the district, such that homestead and non-homestead property is assessed at the same aggregaterate under the foundation program.

Endnotes

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17 For special education students, the foundation grantis entirely funded by the state government (with stateand federal resources). The local 18-mill property tax,or its equivalent, is not used to finance the foundationallowance for special education students.18 “Non-homestead” property generically refers to allproperty, real and personal, other than: a principalresidence, qualified agricultural property, qualified for-est property, supportive housing property, and indus-trial personal property. Furthermore, as a result of theState of Michigan’s business tax restructuring in 2007,commercial personal property was partially exempted(12 of 18 mills) from the “non-homestead” school op-erating tax. For the purposes here, we generally referto the 18-mill “non-homestead” tax to include the 6-mill tax applied to commercial personal property.19 The 18-mill non-homestead tax is subject to tax raterollback because it is a local tax, but the 6-mill StateEducation Tax (a state property tax) is not subject tothe rollback provisions.20 The index was not used in FY1999 to adjust the low-est foundation grant. Instead the state set the indexto 1.0 in statute and provided a $46 increase to theminimum grant. The decision to minimize the founda-tion grant increases was related to the State ofMichigan’s settlement in the Durant lawsuit (discussedlater).21 Initially, equity payments were made separate from adistrict’s foundation grant, but they were subsequentlybuilt into the base of a district’s foundation grant.22 For a more comprehensive discussion of the perfor-mance of Michigan state and local revenues dedicatedto public education, see Citizens Research Council ofMichigan, State and Local Revenues for Public Educa-tion in Michigan, Report 363, September 2010. Be-cause CRC devoted considerable attention to the topicof dedicated education revenues in the earlier report,the majority of the discussion in this report pertains tothe enrollment changes.23 Senate Fiscal Agency, Declining Enrollment: A Con-tinuing Issue, State Notes, June 2008.24 The data collected for this analysis is from the Stateof Michigan, Center for Educational Performance andInformation (CEPI) and is based on district-wideheadcount information. Only districts in operation inboth FY2008 and FY2009 are used in the analysis ofincreasing and declining enrollments; therefore, somecharters may not be included.25 For this presentation, a couple of very small districtshave been excluded because the enrollment changes in

these districts translate into substantial annual rates ofincrease/decrease.26 This categorization of Michigan school districts isbased on the Common Core of Data: School Years2008-09 compiled by the US Department of Education,National Center of Educational Statistics (NCES), ad-justed by the Citizens Research Council of Michigan.Rural districts include all districts outside of an urban-ized area (i.e., all sizes of town and rural districts clas-sified by NCES).27 This payment is not available to a very small subsetof school districts that are already using a three-yearaverage membership figure or eligible for “geographi-cally isolated district” funding under the state SchoolAid Act.28 Senate Fiscal Agency, Declining Enrollment: A Con-tinuing Issue, June 2008.29 For discussions of per-pupil revenue equity measuresand Michigan’s efforts relative to these see: 1) C.Phillip Kearney and Michael F. Addonizio, A Primer onMichigan School Finance, 4th edition, 2002, and 2) H.J.Prince, “Michigan’s School Finance Reform: Initial Pu-pil-Equity Results”, Journal of Education Finance,Spring 1997. Both works are cited in Michael F.Addonizio and Douglas Drake, Revolution and Evolu-tion: Michigan’s Proposal A School Finance Reform, ARetrospective Analysis, 2005.30 This analysis is based on traditional (non-charter)school districts in continuous existence in FY1994,FY200, and FY2009; all other districts have been ex-cluded.31 Again, this analysis is based on those traditional pub-lic school districts in continuous existence in FY1994,FY2000, and FY2009.32 This categorization of Michigan school districts isbased on the Common Core of Data: School Years2008-09 compiled by the US Department of Education,National Center of Educational Statistics (NCES) usingCensus 2000 median household income data.

33 The National School Lunch Program is a federally-assisted meal program available to public and privateschool children. Children from families with incomes ator below 130 percent of the poverty level are eligible forfree meals. Those with incomes between 130 percentand 185 percent of the poverty level are eligible for re-duced-price meals, for which students can be chargedno more than 40 cents. (For the period July 1, 2010,through June 30, 2011, 130 percent of the poverty levelis $28,665 for a family of four; 185 percent is $40,793.)



34 Robin Erb and Chastity Pratt Dawsey, Detroit FreePress, “Detroit students’ scores a record low on na-tional test,” December 8, 2009.35 The Education Trust-Midwest, Becoming a Leader inEducation: An Agenda for Michigan, January 1, 2011.36 Citizens Research Council of Michigan, Early Child-hood Education, Report 366, February 2011.37 For this analysis, the enrollment figures are the re-ported student headcount data (district level) from theCenter for Educational Performance and Information.This enrollment figure is different from the pupil mem-bership count used to allocate foundation funding.38 A small number of very small districts have been ex-cluded because relatively minor changes in enrollmenthave the effect of inflating the average annual ratescalculated. A total of 28 districts had student enroll-ment of less than 100 children in FY1995.39 Bruce Baker, David Sciarra, and Danielle Farrie, IsSchool Funding Fair? A National Report Card, Educa-tion Law Center, September 2010.40 The Education Trust, Funding Gaps 2006, January2006.41 To compare across states, The Education Trust re-port adjusts per-pupil revenues to account for regionalcost differences and the additional costs of educatingstudents with disabilities, which has the effect of re-ducing the effective funding in high-cost districts withlarge numbers of students with disabilities.42 Further adjustments (beyond regional cost differen-tials and disabilities) are made for high-poverty andhigh-minority districts, adding 40 percent to the cost ofeducating students in these districts.43 Weighted student formula, also known as student-based budgeting, is a resource allocation processdriven by the characteristics of the student populationin individual schools, as opposed to the raw number ofstudents attending a school or the programs offered ata school. Generally, the weighted student funding sys-tem helps ensure more funding is allocated to studentswith more expensive educational needs. To date, suchsystems have been used sparingly throughout the U.S.44 C. Philip Kearney and Michael F. Addonizio. A Primeron Michigan School Finance. Fourth Edition. 2002.David Arsen and David Plank. Michigan School FinanceUnder Proposal A State Control, Local Consequences.2003. Leslie E. Papke. The Effects of Changes inMichigan’s School Finance System. August 2006.

45 CRC details the major structural issues that will con-strain state and local education revenue growth in itsSeptember 2010 report, State and Local Revenues forPublic Education in Michigan.46 J. Yinger, “State Aid and the Pursuit of EducationalEquity: An Overview,” in J. Yinger, ed., Helping Chil-dren Left Behind: State Aid and the Pursuit of Educa-tional Equity, 2004.47 T.A. Downes, Evaluating the Impact of School Fi-nance Reform on the Provision of Public Education:The California Case, National Tax Journal, vol. 45,1992.48 Leslie E. Papke, “The Effects of Changes inMichigan’s School Finance System“, Department ofEconomics, Michigan State University, 2006.49 Joydeep Roy, “Impact of School Finance Reform onResource Equalization and Academic Performance:Evidence from Michigan“, Working Paper #8, EducationResearch Section, Princeton University, 2004.50 J.B. Cullen and S. Loeb, “School Finance Reform inMichigan: Evaluating Proposal A” in J. Yinger, ed.,Helping Children Left Behind: State Aid and the Pur-suit of Educational Equity, 2004.

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