You are on page 1of 29

Grosse Pointe Public School System

Financial Transparency Series

PROPOSAL A AND HOW THE STATE
OF MICHIGAN FUNDS PUBLIC
SCHOOLS
Presentation Objectives
Deliver a Basic Understanding of:
2

History of Michigan Public School
Funding

Proposal A, Local Taxes, and how
GPPSS compares to others

Impact of Proposal A

Financial Transparency Series – School Funding and Taxes
Mill • A tax unit equal to $1 per $1,000 in taxable value

Property Cash • The established value of a property
Value
State Equalized • 50% of a property’s true cash value (aka taxable
value)
Value
Homestead • A property that a taxpayer would classify as a primary
residence
Property
Non-Homestead • Property that is not a primary residence, typically
commercial or vacation homes
Property
Foundation • After Proposal A, a per pupil amount the state
authorizes, and primarily funds, for school operations
Allowance
Financial Transparency Series – School Funding and Taxes 3
4

Before
Property Property
Proposal A Taxes Serve Taxes were
as Primary 34% above
Source of national avg.
Why School Revenue (7th in nation)
Finance and
Tax Reform
Were Hot Wealthiest
Districts No
Issues in Outspent Restrictions
Michigan in Lowest 3:1 on on Millage
1993 a Per Pupil Increases
Basis

Financial Transparency Series – School Funding and Taxes
Proposal A Ballot Forces a Choice
5

On July 20, 1993 after years of partisan stalemates on tax and school funding
reform, lawmakers passed a bill completely eliminating the use of local property
taxes for school district operations after December 31, 1993.

Governor Engler signed it into law. The state had just eliminated the vast majority
of school funding sources. On March 15, 1994 Proposal A offers the voters two
options to fill the massive revenue gap the state lawmakers had just created:

Yes on Proposal A No on Proposal A
Establish 6-mill statewide Property Tax Establish 12-mill statewide Property Tax
Reduce income tax from 4.6 to 4.4% Raise income tax from 4.4% to 6%
Raise cigarette tax by $0.50 per pack Raise cigarette tax by $0.15 per pack
Raise the state sales tax from 4 to 6%
Voters approved Proposal A (voted Yes) by comfortable margin: 69% to 31%

Financial Transparency Series – School Funding and Taxes
Practical Implications of Proposal A
• Operating revenue is capped by State
• Significantly reduced School Property Taxes.
• Taxes and funding based on student
enrollment
• State responsible for majority of public
school funding, establishes School Aid Fund
• Low spending districts get “leveled up” to
close gap
• Highest spending districts allowed a Hold
Harmless Millage
Financial Transparency Series – School Funding and Taxes 6
Proposal A’s Impact on Homestead Millages
2008-9 Tax Levy Rates More Than 50% Lower From 1993-4
7

1993-4 1994-5 2008-9
Local Operating Mills Local Operating Mills Hold Harmless
29.0250 8.3680 5.8445

State Mills 0.0000 State Mills 6.0000 State Mills 6.0000

Debt Mills 0.2324 Debt Mills 2.000 Debt Mills 1.2478

Sinking Fund 0.0000 Sinking Fund 0.0000 Sinking Fund 0.9738

Total Mills 29.2574 Total Mills 16.3680 Total Mills 14.0661

Financial Transparency Series – School Funding and Taxes
State School Aid Fund Revenue Sources
Proposal A Shifts Majority of Tax Revenue Away from Property Taxes
8
Business Tax Other Real Estate
2% Transfer
Cigarette Tax 3% 2%
4%

Use Tax
4%

Lottery
7% Sales Tax
42%

State Property
Tax
18%

Income Tax
18% 2007-8 Budget Year

Financial Transparency Series – School Funding and Taxes
GPPSS General Fund Revenue by Source
Local Property Taxes Provide 22% of School Funding
9

Federal Other
Local Non-
2.6% 1.9%
Homestead
7.1%
Local Hold
Harmless
15.1%

State 20 J
1.6% State
Foundation
Allowance
County
58.6%
6.4%
State
Categorical
6.6% 2009-10 Budget Year - Projected

Financial Transparency Series – School Funding and Taxes
School Operations Millages Post Proposal A
Taxes That Can Be or Are Levied for District Operations
10

State • A 6 mill levy against all homestead property
Foundation • Local district can’t increase or decrease
• No vote and no option for local districts to opt out
Millage
Non-
• Maximum of 18 mills (subject to Headlee rollback)
Homestead • Requires voter approval, available to all districts
Property Tax
Hold Harmless • For districts that spent > $6,500 per pupil in 1994
Homestead • Requires voter approval (subject to Headlee)
• Fixed amount per pupil; no increases since 1995
Property Tax
Financial Transparency Series – School Funding and Taxes
• A 1978 Michigan Constitution amendment requiring taxing
What is the Headlee jurisdictions to roll back tax rates if the taxable value,
Amendment? excluding new construction, increases faster than the rate of
inflation. It caps tax rates at the rate of inflation.

Why was it • Prior to Proposal A, residential tax rates were rising so rapidly
implemented? that homeowners feared being taxed out of their homes.

• When the state calculates the per pupil Foundation Allowance,
What is the problem it assumes a local district is collecting the maximum on Non-
in the context of Homestead property. The Headlee Amendment can reduce
this revenue and the district does not get its full per pupil
Proposal A? foundation allowance because of the state reduction.

• In tax levy ballot language, local districts can propose tax
How is the problem rates that appear to exceed the maximum allowable rate, even
though the net effect is to levy what the state anticipates the
addressed? local district would otherwise be able to but for the Headlee
Amendment.

Financial Transparency Series – School Funding and Taxes 11
Non-Homestead Tax Basics
• All districts have option to levy 18
mills if they did so before Proposal A
• Term limited tax (GPPSS’ expires
after 2009-10 school year)
• Subject to Headlee Rollback
• Contributes 7% of total GPPSS
district revenue
• 94% of Michigan districts levy 17
mills or more
Financial Transparency Series – School Funding and Taxes 12
Hold Harmless Tax Basics
• Districts that spent more than $6,500 per
pupil in 1994 were “held harmless” from
overly harsh spending cuts brought by
Proposal A (52 such districts).
• Formula driven rate that delivers a fixed
rate per pupil ($1,893 in GPPSS, same
since 1995.)
• Subject to Headlee Rollback.
• Contributes 15% of total GPPSS revenue.
• Term limited, expires after 2009-10 school
year.
Financial Transparency Series – School Funding and Taxes 13
Formula Driven Hold Harmless Millage Rate

Downward Millagee Pressure
Increasing Decreasing
Upward Millagee Pressure

Enrollment Enrollment

Counter Balance

Decreasing Increasing
SEV’s SEV’s

Financial Transparency Series – School Funding and Taxes 14
15

Explanation of Applicable • 52 such districts in the state
Section 20J only to Hold (including GPPSS)
Funds Harmless • Not an incremental tax charge to
the local district
In response to their own
Districts
budget challenges, the
state often threatens to
reduce or eliminate 20J Corrects • Revenue not supposed to exceed
funds. rate of inflation
Fault in • 20J funds correct error that short-
20J Funds account for Revised changes HH districts from
a substantial portion of School Code receiving full per pupil funding
the GPPSS budget
(roughly $1.6 million).

This may serve as a 20J are NOT
useful explanation of • These are funds that are rightfully
what exactly 20J Funds a Lansing due to Hold Harmless districts
are. Charitable • When threatened we must act!
Offering

Financial Transparency Series – School Funding and Taxes
Facility Construction and Repair Millages
(neither can be used for Operational Expenses)

Bonds Sinking Funds

Typically levied Fund capital
for larger scale, projects, Creates in year
Multiple bond typically revenue.
construction
issues can run associated with Maximum of 5
projects with
concurrently repairs and mills and 20
longer financing
terms smaller years
construction

Financial Transparency Series – School Funding and Taxes 16
A Closer Look at Bond and Sinking Fund
Neither Funding Source May be used for District Operation
17


Bond •
Levied by 86% of Michigan districts
Average state-wide rate is 4.788
• GPPSS rate is 1.276
Millage • Will be paid off in 2032


Sinking •
Levied by 25% of Michigan districts
Average state-wide rate is 1.388
• GPPSS rate is .9738 yielding ~$3MM
Fund • Expires in June, 2010

Financial Transparency Series – School Funding and Taxes
GPPS Strategy for Building Repair and Maintenance
18

GPPSS is well under average in our debt millage
level and among a minority that levy a Sinking Fund.

GPPSS strategy has been to repair/restore older
buildings, many of which are historic sites, the
upkeep of which is valued by the community.

In relation to this strategy, a Sinking Fund is a more
financially efficient model because it does not incur
long-term service debt.

Financial Transparency Series – School Funding and Taxes
Benchmarking Local Tax Rates (2009)
In 1993 Statewide School Operating Millages Averaged 33.9 mills
19

Hold Harmless Sinking Fund Debt Retirement Total Local
Mills Mills Mills Homestead Mills

BIRMINGHAM 7.84 0.0 2.90 10.74
FARMINGTON 7.89 0.0 1.80 9.69
WEST BLOOMFIELD 3.20 0.0 6.20 9.40
BLOOMFIELD HILLS 6.72 1.48 0.67 8.87
TROY 4.62 0.0 4.10 8.72
E. GRAND RAPIDS 0.0 0.49 7.95 8.44
GROSSE POINTE 5.84 0.97 1.25 8.07
CHIPPEWA VALLEY 0.0 0.0 7.65 7.65
ANN ARBOR 4.29 0.99 2.27 7.55
HARPER WOODS 0.0 0.0 7.40 7.40
GROSSE ILE 1.86 1.00 4.32 7.18
FOREST HILLS 0.0 0.0 6.50 6.50
ROCHESTER 0.0 0.0 5.18 5.18
NORTHVILLE 0.0 0.0 3.90 3.90
PLYMOUTH CANTON 0.0 0.0 3.15 3.15

Financial Transparency Series – School Funding and Taxes
Applying Mills to State Equalized Value
Equalized on a Per Pupil Basis – Assumes All District Levy Full 18 Non-Homestead Mills
20

Non-HS Homestead Total Homestead Non-HS Tax Total Local
SEV Per SEV Per Homestead Tax Revenue Revenue Per Tax Revenue
Pupil Pupil Mills Per Pupil Pupil Per Pupil
BIRMINGHAM $140,810 $477,696 10.74 $5,130 $2,535 $7,665
BLOOMFIELD HILLS $118,041 $564,358 8.87 $5,006 $2,125 $7,131
ANN ARBOR $204,323 $262,616 7.55 $1,983 $3,678 $5,661
FARMINGTON $140,860 $237,138 9.69 $2,298 $2,535 $4,833
TROY $166,555 $192,373 8.72 $1,677 $2,998 $4,675
WEST BLOOMFIELD $57,597 $265,816 9.40 $2,499 $1,037 $3,535
GROSSE POINTE $47,871 $313,692 8.07 $2,531 $862 $3,371
FOREST HILLS $107,740 $196,834 6.50 $1,279 $1,939 $3,219
GROSSE ILE $35,760 $307,352 7.18 $2,207 $644 $2,850
ROCHESTER $74,500 $261,509 5.18 $1,355 $1,341 $2,696
NORTHVILLE $71,458 $319,560 3.90 $1,246 $1,286 $2,533
HARPER WOODS $82,958 $125,537 7.40 $929 $1,493 $2,422
CHIPPEWA VALLEY $52,486 $192,519 7.65 $1,473 $945 $2,418
PLYMOUTH-CANTON $93,866 $228,761 3.15 $721 $1,690 $2,410
E. GRAND RAPIDS $18,689 $162,938 8.44 $1,375 $336 $1,712
Financial Transparency Series – School Funding and Taxes
GPPSS Local Property Taxes – 5 Year History
21

Actual Actual Actual Actual Projected
2005-6 2006-7 2007-8 2008-9 2009-10
Hold Harmless Tax $16,208,752 $16,620,915 $16,219,184 $15,824,496 $15,496,596

Non-Homestead $6,688,182 $7,353,295 $7,459,200 $7,797,243 $7,801,714

Debt Fund $3,921,778 $4,143,598 $3,972,903 $4,050,000 $4,150,000

Sinking Fund $2,799,694 $2,957,580 $3,040,298 $3,085,628 $2,937,397

TOTALS $29,618,406 $31,075,388 $30,691,585 $30,757,367 $30,385,707

Proposal A has successfully capped local property taxes.
Our largest expenses (salaries, retirement, and healthcare)
are not equally capped.

Financial Transparency Series – School Funding and Taxes
Per Pupil Foundation Allowance by District
From 1995 to 2009 – Significant Gaps Persist
22

1995 2009

$13,000
$11,500
$10,000
$8,500
$7,000
$5,500
$4,000

Financial Transparency Series – School Funding and Taxes
GPPSS School Foundation Allowance
Annual Percentage Change versus Annual Inflation Rate
23

4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
1999
1995

1996

1997

1998

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
Inflation Rate Foundation Allowance

Financial Transparency Series – School Funding and Taxes
What is the source of recurring shortfalls?
Salaries, Health Care, Retirement, FICA Costs Outpace Revenues
24

$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2007-8 2008-9 2009-10
Foundation Allowance $10,128 $10,184 $10,184
GPPS Total Employee
$10,238 $10,718 $10,802
Compensation Per Pupil
Non-Human Resources
$2,163 $2,216 $1,943
Costs Per Pupil

Financial Transparency Series – School Funding and Taxes
GPPSS Human Resources vs. Other Expenses
An Unsustainable Trend of H.R. Costs Portion of Budget
25

2008-2009 Budget 2009-2010 Budget

H.R. Expenses Non H.R. Expenses H.R. Expenses Non H.R. Expenses

17.1% 15.2%

82.9% 84.8%

961 Employees 8,359 Students 908 Employees 8,171 Students
Financial Transparency Series – School Funding and Taxes
Evaluating Proposal A 15 Years Later
Did it deliver what was promised or expected?
26

The
The Good The Bad
Questions
Delivered
“Pop Up tax” Did it improve
promised tax
issue education?
relief

Reduced Limited local What will state do
“spending gap” control to control costs?

Balanced state Salary, retirement, Are higher taxes
health care outpace
tax code per pupil allowance the alternative?

Financial Transparency Series – School Funding and Taxes
The Fundamental Differences Before and After
Proposal A
27

Before • Local District in Control
• Need more money? Raise the
Proposal millage rate
A • Revenue Management Mindset

After • State Primarily in Control
• Need more money? Attract or
Proposal retain students
A • Expense Management Mindset

Financial Transparency Series – School Funding and Taxes
Living With Proposal A
• Year to year uncertainty of state aid makes multi-
year planning challenging.
• Foundation Allowance has not kept pace with
inflation.
• “Land locked” and non-Schools of Choice districts
have limited revenue generation opportunities.
• Fund Equity becomes of much greater
importance.
• Local Hold Harmless and Non-Homestead
millages deliver what Proposal A allows – they do
not increase over time.
Financial Transparency Series – School Funding and Taxes 28
29

Like all of the local districts impacted by
Final Analysis the current funding model, Lansing must
and Summary make tough decisions on its expenditures.
History – particularly
that of Proposal A
itself - tells us that
Tax and School
If Lansing does not find a way to respond
Funding Reform
to their own structural deficits, the local
comes very slowly.
school district must.
At this point in time,
we should not expect
state tax revenue
increases to be part
of the solution. School districts cannot make budget and
What can we
policy decisions based on the assumption
expect? that Lansing will fix the problem.

Financial Transparency Series – School Funding and Taxes