School funding ten years after Michigan's proposal A: Does equity equal adequacy?

Chicago Fed Letter, Jun 2004 by Mattoon, Richard

Michigan's school finance reform aimed primarily to improve the equity in funding across school districts. Now, policymakers are turning their attention to the adequacy of education-ensuring that schools provide a desired level of learning and the necessary resources to support student achievement.

Although it has achieved greater funding equity and per pupil expenditure levels above the national average, Michigan's reform is not problem-free.

It has been ten years since the state of Michigan adopted Proposal A, a sweeping reform of school financing in the state. Like many states, Michigan had historically relied on local property taxes to pay for K-12 education. This had two consequences. Local property tax rates had risen considerably over time, becoming increasingly unpopular with voters, and disparities in school district funding had become acute. In July 1993, the state legislature eliminated the local school property tax that was responsible for $7 billion in annual school funding. In its place Michigan voters approved Proposal A, a constitutional amendment on school finance that shifted funding responsibility to the state. The new state funding package included raising the state's sales tax rate from 4% to 6%, cutting the personal income tax rate from 4.6% to 4.4%, and creating a state education property tax of 6 mills1 (assessed valuation) on residential and agricultural property and 18 mills on nonhomestead property. A primary goal of the change in the finance system was to change the foundation allowance2 for education provided by the state and to reduce the fiscal disparities between districts.

Ten years later, Michigan has made great strides in reducing fiscal disparity across its school districts. In 1994, 32 states had a more equal distribution of funding of per pupil revenues than Michigan. By 2000, only 17 states had a more equal revenue distribution.3 In addition, the new funding structure has allowed Michigan to support current per pupil expenditure levels that are significantly above the national average and achieve some measure of improvement in student test scores, while reducing some fiscal pressure for schools in property poor districts such as the city of Detroit.4

Despite its having achieved greater funding equity and maintaining per pupil expenditure levels above the national average, Michigan's reform is not without its problems. From a financing point of view, the recent slowdown in state revenue sources has made increases in the basic foundation grant level more difficult. While property tax growth remained healthy over the 2001 recession and subsequent recovery, state tax bases such as sales and income were far more sluggish and less predictable. The revenues earmarked for the state's School Aid Fund have tended to lag, and the state has had to transfer money out of the general fund to provide desired spending levels. Now that Michigan no longer enjoys a general fund budget surplus, transfers are no longer available. In addition, loss of local control over schools has been a source of friction. For the first three years following passage of Proposal A, local districts could adopt a local property tax levy of up to 3 mills to supplement state spending. This provision has expired, which has created tension in high-spending districts. Also, the structure for distributing revenues has created winners and losers among school districts. Money is allocated based on the school district's per pupil funding allowance and the number of pupils enrolled. In the case of schools with falling enrollments, the increase in the per pupil grant is often swamped by the effect of the declining student population. In addition, while operating revenues have been equalized, capital spending has not been affected. Schools with poor facilities (or start-up efforts like charter schools) have not received additional funding to improve the physical condition of their schools.

What's next in school finance reform? The quest for adequacy

Michigan's school finance reform was primarily designed to improve the equity in funding across school districts. Most efforts at school finance reform in the 1980s and early 1990s focused on improving funding equity as required by court actions. Today however, the school finance debate has moved beyond equalizing school funding to increasingly focus on the idea of "educational adequacy." The goal is to design a school financing system that assures that all students receive a desired level of learning and that financing provides the necessary resources to support student achievement. In this framework, school financing is linked to both student and school performance and differences in student characteristics, and regional costs are considered in determining the equitable level of funding for each school. The notion of tying financing to the adequacy of education emerged from several major court cases in the late 1980s and 1990s.5

The challenge of such an approach is defining adequacy, which involves both policy and value judgements. It requires defining a minimum performance level that schools are expected to meet and then calculating a financing structure that will provide schools with the resources to achieve that level. In several states, courts have set forth educational outcomes that are defining an adequate education. For example, the West Virginia Supreme Court in 1979 required that school funding be adequate to develop eight competencies, including literacy, basic numerical ability, knowledge of government, self-knowledge, work training, recreational pursuits, interest in the creative arts, and social ethics.6 Other slate courts and legislatures have defined similar lists, and a clear challenge is determining how to measure school performance in those attributes that are not captured on standardized tests. (See figure 1 for details of Wyoming's requirements.)