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Budget Brief: Snyder's education budget proposal

Michigan Governor Rick Snyder presented his first budget proposals to the state legislature on 17 February. While it wasn't quite the "atomic bomb" Lt. Governor Brian Calley had promised, it produced shock waves nonetheless. Gov. Snyder had twin goals: to balance the budget and to promote business investment. By scrapping the Michigan Business Tax and replacing it with a much narrower corporate income tax, the proposed budget cuts business taxes by over $1 billion in 2011-12 and by $1.7 billion in the year after. To pay for this and still balance the budget, the governor wants to cut overall education spending by nearly $1.1 billion next year; his proposal also makes changes to the income tax that will increase revenues in large part by requiring retirees and low-income families to pay more in taxes. Evidently, this is Gov. Snyder's vision for "reinventing Michigan."

Probably the most dramatic change in the Snyder budget, besides the elimination of the MBT, is the shift of a majority of university and community college funding to the School Aid Fund, which had traditionally been reserved for K-12 education. Two-thirds of state spending on community colleges, which survived without cuts, was shifted from the state's General Fund to the SAF. More than half of state spending on university operations was shifted to the SAF, after cuts of 15% to the overall total. While the SAF was projected to have a surplus this year, which many districts hoped would be used to replace recent cuts, the funding shifts wiped out that surplus and more.

At the same time, other tax and revenue changes hit the amount available for schools. The expiration of the Federal Education Jobs Fund program, which was used to backfill a $170 per pupil cut this year, will remove some $316 million from available K-12 funds. The Snyder Administration's budget does not include replacing those funds. In addition, a portion of MBT revenues was earmarked for the SAF; with the MBT eliminated, school aid will lose $200 million even after a substantial transfer from the general fund budget to make up part of the difference. What all this means is that, after years of uncertainty and repeated cuts, Michigan's public schools will lose $300 per pupil on top of the $170 per pupil once covered by Federal funds, as well as a number of earmarked, so-called "categorical" funds. The outright cuts total some $538 million for next year, and balloon to some $854 million once the disappearing Federal funds are factored in.

If that weren't enough, the mandatory contributions from school districts to the state-run Michigan Public School Employee Retirement System (MPSERS) are set to increase from 20.7% of payroll this year to 24.5%, largely to make up for market losses in the investment portfolio that pays for pensions. (About a third of the total goes to pay for current health-care benefits for retirees, which is managed on a "pay-as-you-go" basis.) Only last year, this rate stood at 17%. State agencies expect the increase to cost districts a further $245 per pupil.

The executive budget proposal includes no new revenue measures. A number of possibilities had been floated over the last several months, including: introducing a graduated income tax for Michigan (would require a constitutional amendment); raising income tax rates; extending the sales tax to most services; and adjusting the rate of the State Education Property Tax. None of these make any appearance in Gov. Snyder's budget for the next two years or his tax restructuring proposals.

On the other hand, some Michiganders will be paying more in tax: the proposals reverse course on Michigan's relatively generous treatment of retirement income by making public pensions taxable and removing the exemption for private pensions. (Social Security income will continue to be tax-free.) Virtually all deductions and many exemptions (for children, for instance) would be eliminated from the income tax. At the same time, low-income working families will lose the benefit of the Michigan earned income tax credit, which currently supplements the Federal credit. Advocates for low income families, such as the Michigan League for Human Services, argue that the net result of the tax changes will make Michigan's tax system even more regressive by increasing taxes (as a share of income) more on low income families than on high income families. (A fact sheet prepared by MiLHS can be found here.)

The net effect of the Snyder budget will be to push many more school districts (and local governments, which are losing revenue sharing funds) into financial crisis. This crisis, moreover, may make them subject to the sweeping new powers of emergency financial managers enacted into law on 17 March. Emergency managers have the power to void contracts, make any financial changes, and even to strip local elected leaders of any authority, without any local recourse. The Administration's theme of "shared sacrifice" seems to have taken an odd twist, with our most important institutions - schools - and the most vulnerable members of society shouldering the burden of that sacrifice.

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