Governor's February 2007 budget proposal

Governor Jennifer Granholm's budget proposal for the 2008 fiscal year includes a number of provisions that affect school aid, including changes which would help plug the funding shortfall for the current year (fiscal 07). Below are some extracts from the release on the budget proposal with some commentary; a full analysis of the budget, and legislative action, will follow soon. Basically, the Governor's budget aims to close the gap in education funding this year, and increase state aid to education next year, with a combination of scattered spending cuts, accounting changes, and new or restructured taxes. The new and changed taxes are transaction taxes, like the sales tax, which will remain vulnerable to the condition of Michigan's economy. Addressing the current shortfall With regard to the current shortfall in education funding for this year, the release says:

In order to ensure that school funding is not cut mid-year, the governor proposes changing the actuarial valuation of the Public School Employees Retirement System to save $185 million and reducing spending of several new categorical programs by $5 million.

In other words, by changing how the value of the MPSERS pension assets are calculated, they hope to ease the pressures on local districts, which are currently responsible for making pension contributions on behalf of their employees (at a rate set by the state pension system). These $190 million in explicit savings will not quite cover half of the estimated $377 million shortfall for the current fiscal year. Further funds will come, the release says, from immediate adoption of the newly "restructured" taxes (see below). Funding for next year As to education funding for next year, the Governor proposes:

The governor's budget proposes an overall 2.6 percent, or $337.3 million, increase in Michigan's public schools. These increases include a $178 per student increase, which brings the minimum foundation allowance to $7,286 per pupil.

This follows an increase of around $200 per student for the current year, not counting any reductions that take place as a result of the shortfall. Also included is funding for districts to offer preschool services to at-risk children. Payments to districts losing students are increased by $16 million (to $36 million); funds for this will come from eliminating the middle school math initiative. Given that state budget authorities project declines in revenue for next year as things stand (with a particularly sharp drop in the school aid fund from the elimination of the Single Business Tax), the Governor's proposed increases can only come from new revenue. To this end, she proposes a replacement for the SBT and changes in a number of other taxes:

• A "Michigan Business Tax" to replace the SBT, but exempting payroll, benefits and health care, so that it still represents a substantial tax cut compared to the SBT
• A two-percent tax on services (excluding education and health care)
• A separate state estate tax on estates over $2 million (excluding family farms and businesses)
• Increases of "sin taxes" on alcohol and tobacco

Notable is the absence of any changes to the property or income taxes. The Governor's strategy is clearly to increase the funding base for education (and the state General Fund) by making changes at the margins and avoiding some of the hot-button tax issues. The tax on services, however, is likely to be controversial. Along with the new revenue, local school districts will be offered one-time funding incentives to consolidate administrative and other functions with their local ISDs; the governor's intention in future years is to penalize districts which do not make these moves. Closing the school funding gap for this year is contingent on the tax changes proposed by the governor, particularly the new business tax, the excise tax on services, and alcohol & tobacco taxes. Should the legislature balk at these measures, a substantial gap will remain despite the other cost-saving measures - and funding in future years will remain very much in doubt.