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Historical Amnesia: Schools don't need that money, do they?

Talk of an ever-growing flow of money to schools is, like many such things, wildly exaggerated. But it does serve to frame the debate about school funding in such a way that cutting schools seems only “fair.”

We started to hear it during the debate over next year’s state budget. Lawmakers backing the governor’s budget responded to constituents worried about cuts to K-12 schools with two, oddly contradictory, palliatives: that money for schools continued to “pour in” even though there were fewer students; and that “getting spending in line with reality means understanding our lack of revenue.” Sometimes these earnest-sounding claims were in the same paragraph.

The most recent example of this effort to depict schools as awash in cash comes in an interview of State Budget Director John Nixon by the AP’s Kathy Barks Hoffman.

Mr. Nixon heads up budgetary policy for the Snyder Administration and moved from Utah early this year to work for the governor.

Noting that revenues for other state programs had tumbled faster than those coming in to the state School Aid Fund, Mr. Nixon says: “Sixty percent of our taxing goes to the school aid fund, which is great…. We should fund schools adequately.” Nevertheless, he cautions: “we’re in a new dynamic.” Given the competing claims on state revenue, Mr. Nixon questions if the state should continue to set aside so much for K-12 schools. “It’s not that I’m saying we need to cut the school aid fund…” he says, “(but) a lot of this was put in place 15, 20 years ago when Michigan looked totally different.”

Different indeed
Michigan did look quite different back in 1994, when the current school funding system was written into law. At the end of last year, Michigan had some 300,000 fewer jobs than it had at the end of 1994, and 750,000 fewer than it had at the high point in 2000. The vast majority of the job losses came in the manufacturing sector and industries related to it. Many of the jobs that helped build the backbone of our state’s middle class have disappeared – particularly those which were well-paid but did not require much formal education beyond a high school diploma.

There is no question that Michigan suffered what some call a “single-state recession” in the first decade of the 21st century. Clearly, this would put pressure on the provision of public services. But in the midst of this kind of wrenching transition, is the most sensible policy to cut back on our investment in schools?

Declining commitment
Yet, that’s precisely what we did. Many citizens did not perceive it as a conscious choice, but at root it was. The measures passed as Proposal A in 1994 did not specify that schools should be funded adequately, or provide a mechanism to ensure that schools had the resources they needed. Instead, the changes brought by Proposal A defined a funding system for K-12 education, and provided that school spending must remain within the limits of what that system generated. The system was set up so that education spending would be roughly the same in 1995 as it was the year before, except for some lower-spending districts who received accelerated increases. The only safety valve in the system was the contribution set by the Legislature to the School Aid Fund from the state’s General Fund, which was quite large (over $300 million each year) at the beginning.

The laws and amendments to the state Constitution embodied in Proposal A shifted the bulk of school funding away from property taxes and onto an increased sales tax, the income tax, and a basket of other taxes. A state educational property tax was created, and its rate can only be changed by a three-quarters vote of each house of the legislature. Local property taxes for school operations were sharply curtailed, and nearly all local taxes on homestead property for school operations were eliminated. (Taxes for capital spending were not addressed by Proposal A, but strict rules were put in place to ensure that funds raised for capital projects could not be used for operations.)

What have been the consequences of this shift? Well, first off, the main source of school funding shifted from local districts to the state’s School Aid Fund. Mr. Nixon might be less surprised at the size of the school aid budget if he made himself familiar with this history. You can see this shift clearly in the following chart, which shows the inflation-adjusted spending on K-12 schools from state and local sources:

Chart of real school revenues from state and local sources, 1969-2010

This chart also shows how education spending has changed in the last forty years, after removing the effects of inflation. The one period of modest growth was in the 1980s and early 1990s. Real spending increases in the 1970s were minimal, given Michigan’s perilous economic conditions in that decade. In the last fifteen years, however, we have averaged a 0.3% real decline in education spending from state and local sources. More on this in a moment.

Keeping it in perspective
At first blush, we might feel pretty good about that chart, noting that, on the whole, real spending on education has gone up considerably since the end of the 1960s. While that’s true, you have to remember the context. The US economy weathered many changes over that period, not all of which are adequately reflected in the Consumer Price Index (used to adjust these numbers for inflation). Schools are mostly people, and professional employees traditionally expect decent health care coverage as part of their employment. Old-style pension systems also offered medical coverage to retirees. Michigan schools faced both these costs and were hit hard by the dramatic rise in the cost of health care over the last decades. The actual benefits may not have changed much, but their cost certainly has. The following chart illustrates this by comparing an index reflecting Michigan state and local school spending (adjusted for inflation) to an index showing the increase in cost, above the inflation rate, of health care services in the US as a whole.

Chart of real school revenue growth vs increase in health care costs above inflation, 1969-2010

Of course, schools faced many other costs, not all of which grew as fast as health care. But the demands on schools increased dramatically over the same period. Notably, state and federal requirements to provide special education to all eligible students have been a key element in the increase of school operating costs over the last decades. The modest increases in school spending over the last forty years need to be considered in context.

Funny numbers
Some politicos argue that funding for schools has kept going up even though Michigan has fewer students today, but that argument at best skirts the truth. Since 1994, all operational funding for schools has been paid on a per-pupil basis. That is, even if a school district’s per student allotment has increased in a given year, if the district has fewer pupils, they will receive less money from the state.

Every year, the school aid budget includes an adjustment for changes in the number of students, reducing demands on the budget if the student population has dropped. Nevertheless, in many recent years, the per pupil allowance has been cut despite the savings from fewer students.

The following chart shows state and local school revenues per pupil, adjusted for inflation, for the past 18 years. Funding increased in the first years after Proposal A was passed, largely because lower-spending districts were receiving accelerated increases. But after 2002, when all districts had been brought up to the “basic” level, real per-pupil revenue from state and local sources has been in almost constant decline. In other words, the buying power of the funds available to schools has been in decline for almost a decade. This chart, which ends in FY2010, does not even include the large cuts in school spending in the 2010-11 school year, or the even more dramatic cuts to come next year.

Chart of real per pupil school revenue, 1992-2010

As you can see, in 2010 schools had less buying power per pupil than they did in 1995. Claims that money has been “pouring in” to schools are an effort to distort the truth.

Costs of inequality
Finally, there is the legitimate question: how could we have maintained our commitment to schools in the middle of the “Great Recession”? That’s a good question, and here is one possible answer: you would think that, even if we couldn’t protect schools from cuts, we would at least dedicate the same share of our total income to schools. Our income might be down, but the commitment would be the same.

We haven’t even done that. Contrary to what many of us might have thought, overall Michigan “personal income” (a measure of all the income generated in the state) did not fall for most of the last decade, and it actually slipped only in 2009. According to federal and state figures, Michigan personal income grew faster than inflation in 2010 and is projected to continue doing so in 2011 through 2013.

So how have schools fared? Not so well. In the following chart, you can see that the overall share of our personal income that we have invested in schools has been in dramatic decline since 2002.

Chart of state and local school spending as a share of Michigan personal income, 2001-2010

In other words, in good times or bad, we have been investing less of what we have in our schools. Why? Because our tax policy supporting schools is designed to capture a smaller and smaller share of all economic activity. Retail goods are being taxed, but services – the fastest growing part of the economy – are not. The taxable value of all property can fall as fast as its market value in bad times, but can only rise as fast as inflation in good times. Michigan taxpayers pay the same share of their income in taxes regardless of the level of that income, while income inequality has been growing in this state and in the country as a whole. (That helps explain why state personal income has been growing even though most of us see precious few signs of a recovery.)

“Are kids as important as roads?”
So why all the posturing? Why the sideways arguments that “we should fund schools well, but…”? These kinds of arguments are designed to frame the debate over funding for public education. If there isn’t enough money to fund schools and do other things, one possible solution is to raise new revenue. But if you are determined not to do that, it’s hard to make voters feel good about the cuts that have been made to schools and other public services.

One way to shift that discussion is to start talking about the money earmarked for schools, and how it is such a huge share of all state revenue. Surely, with all that cash and fewer students, it’s only fair to divert some to other purposes?

But the problem is that the money hasn’t been enough in the past and there is even less today. A huge portion of the state’s revenues go to schools because we chose to centralize school funding in 1994, doing so to an extent that was unique in the country at that time. That doesn’t mean schools are awash in money. Quite the opposite in fact, just when we need our schools the most.

In the same article, the AP quotes former state senator Dan DeGrow, who worked on Proposal A in the 1990s and is now head of the St. Clair County RESA. He headed a study committee on education for the new Snyder administration which suggested many changes but also urged that school spending not be cut. Reacting to Mr. Nixon’s remarks, Mr. DeGrow said:

“John [Nixon] and I would have a philosophical difference. He would say, ‘Why do you earmark money for schools?‘and I would say, ‘Because that’s the most important thing we do…. We put aside money for roads. Are kids as important as roads?”

If we want good schools, we as a state must face up to what it will take to make that happen. It should be crystal clear by now that our state is in transition, and that education will be a critical part of that transition. As a result, we can’t wait for a full recovery before we invest in our schools. If we do not make that investment, recovery may be harder and harder to achieve.

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