Data brief: "A price tag on each student's head"

The AAPS Board of Education will hold a public hearing on the 2010-11 budget next week. This is the home stretch in a process that began last fall, when AAPS officials held public meetings to discuss proposed budget cuts. The reductions are necessary because the district’s revenue, cut substantially in December and likely to be cut next year as well, have opened up what could be a $20 million hole in the budget for the next year. So we thought this would be a good time to shed some light on common questions about AAPS’s financial condition.

The potential $20 million deficit is a combination of the cuts in State funding and the inexorable increases in costs which face every school district. While inflation has been near zero, other costs continue to go up – most notably the cost of health care. Recent struggles in the Legislature to change the state teachers’ pension system may produce savings in the long run, but are unlikely to help in the next several years. Unless health care reform has a real and lasting impact on the cost of insurance, the pressure on district budgets – or on the teachers themselves – is unlikely to abate.

“Every student has a little dollar amount floating above her head.”

To understand the background to this situation, it’s important to understand how schools are funded. Since 1994, schools have received a certain amount of money per pupil to operate schools. The amount varies for each school district, and was originally based on how much the district had spent per pupil in 1993, just before the new system took over. Since then, the per-pupil “foundation allowance” has changed for each district according to a formula set each year by the State Legislature. Since the money is distributed per pupil, there are now complicated rules and auditing procedures to count how many students a district actually has.

In the years since 1994, the Legislature has moved to reduce the gap between the highest and lowest spending districts, among other things. But the total amount of money available to spend on schools is limited by the revenue brought in by the various taxes earmarked to support school funding. Since 1994, the largest share is provided by the state sales tax, followed by the state income tax and then the state education property tax. Other smaller taxes, and the state lottery, round out the rest of the funding pie.

In addition to these state sources, each district is required to levy a local property tax of $18 per $1,000 of taxable value (18 mills) on non-homestead property. This revenue, which stays in the district, is the required local contribution toward the foundation allowance. The state funds the difference between these local funds and the district’s allowance figure. On average, one quarter of school district funding in Michigan comes from local taxes; the rest is provided by the State. In Ann Arbor, it’s about half and half.

The amount of money spent on schools is limited by the revenue generated by these taxes. For the last decade, the contribution to school funding from the State’s general fund budget has been minimal, though in the early days it was in the hundreds of millions. As a result, if tax revenues fall, school funding must fall by a corresponding amount, and without delay. State law actually requires the Governor to take back funding from schools, even in mid-year, should revenue falter – unless the Legislature can find an alternative way of covering the gap.

The shrinking dollar

What does this mean for districts like Ann Arbor? First off, the bulk of any funding increases to schools from 1994-2000 went to lower-spending districts, as part of the effort to close funding gaps. Districts that had been spending below a certain reference amount per pupil got twice the annual increase other districts got, until they caught up to that “basic” allowance. This slowed the funding growth of districts above the “basic” level. All districts were brought up to the basic level in 2001; from then until 2008, all districts received the same annual increase, if any.

However, as that decade began, Michigan slipped into a recession from which it never fully emerged. In the 2002-03 and 2003-04 school years, funding shortfalls required the State to take back some promised funding mid-year. More serious shortfalls in 2007 almost required a huge mid-year cut (“proration”), which was only avoided by some inventive accounting by the State Legislature. Huge revenue losses in the 2008-09 school year would have required dramatic cuts for schools and had to be covered by using half, $600 million, of the Federal stimulus money that was originally supposed to last three years.

As a result, overall school funding levels stagnated for most of the decade. Even the lowest-spending districts were finding that their per-pupil allowance was barely keeping pace with inflation. Higher-spending districts, such as Ann Arbor, faced a separate complication. Back in 1994, some districts were already spending more per student than the State was willing to support in its new formula. So that these districts would not have to suddenly cut spending, they were allowed to levy local taxes to make up the difference – to “hold them harmless” under the new system. These fifty or so “hold harmless” districts could collect the extra amount with a tax on local homestead property. But there was a catch: the extra amount they could collect per pupil would never change. So, AAPS was spending $1,234 per pupil more than the State formula maximum in 1994. AAPS voters have been allowed to keep a property tax to collect precisely that amount per pupil. The tax rate is changed each year so that it generates that precise amount. But the buying power of that $1,234 is much less now than it was in 1994.

The following chart shows the difference between AAPS’s per-pupil foundation allowance each year since 1994 and the real buying power of that amount, after adjusting for inflation:

This chart is also available as a PDF for download, listed at the end of this article.

The real buying power of AAPS’s per-pupil allowance has never exceeded what it was at the very beginning. Overall, the real buying power of AAPS’s funding fell 8.8% from 1994 through 2009 (before the latest cuts). When the latest cuts for this year are added in, the value of AAPS’s funding has fallen by 12% (1994-2010).

At the same time, the cost of things like heath insurance and energy has risen much faster than inflation over the same period. Even if the district shares the cost of health insurance with its employees (as AAPS does), it is hard to keep up without giving all employees what amounts to a huge pay cut each year.

These are the funds AAPS has for operating our schools. There are other special funds from the State, the Federal government, and a county special education millage, that support narrowly-defined programs in our schools. These funds are important and they do help, but they are not available to help cover the rising cost of general education programs. Funds for capital expenses, such as new buildings or major renovations, were never included in the new funding system and are still handled entirely locally. But there are stringent legal requirements to prevent any money raised for capital expenses from being used to pay for any operations. (We’ll be covering more of these in articles to come.)

Some critics of our schools look at the raw dollar numbers and argue that schools have gotten more money each year. But the truth is more complicated, and it shows exactly why the Ann Arbor Public Schools has actually been making “budget reduction plans” for nearly every year of the last decade. After so much trimming, it should not surprise anyone that these latest cuts are really going to hurt.