Legislators head towards budget compromise, but no new thinking in sight.

Most parts of the State budget for next fiscal year are in the final stages of negotiations, as House/Senate conference committees meet this week to hammer out versions acceptable to the Democratic House and the Republican Senate. The school aid budget bill (SB 1107), which supports K-12 education, is part of this process. The good news is that, despite the continued slide of Michigan's economy, lawmakers will probably not have to cut school funding for the current year, which they avoided last year only after some creative accounting. The bad news is that revenues earmarked for schools will be even lower next year than projected in January, making any attempt to simply keep up with inflation impossible. State government's main budget, the general fund, is in even worse shape, ruling out help from that direction as well.

Having narrowly avoided a government shutdown on October 1st, our legislators got perilously close to Halloween before approving final budget documents for the fiscal year that was already one month old. One of the less controversial, but still critical, items, was the School Aid budget, which determines per-pupil spending limits and state aid payments to local school districts. Constant readers will not be surprised that we - like many others concerned about school funding - found the budget bill to be a mixed bag. The bill does provide for a modest increase in per pupil funding, and resumes closing the gap between lower and higher-spending districts. But overall state spending for school aid is flat, and our lawmakers have made no clear commitment to invest in education. School aid revenues remain vulnerable, and the future of the extended services tax - the one part of the compromise revenue package which increased direct revenue to the school aid fund - became more uncertain as the month wore on. Our forecast: storm clouds ahead.

In the early hours of Monday morning, our lawmakers prevented a state government shutdown with a deal that left both sides bloody. However, all it bought us was time: a final agreement on the state budget remains to be sealed.

When efforts to broker budget compromises on the floors of the House and Senate failed, our lawmakers essentially punted: the two houses sent gutted, but still incompatible, versions of an income tax bill to conference committee, where a handful of lawmakers will get to try again.

The state House remained deadlocked this morning on revenue measures intended to plug the $1.7 billion hole in the state budget, including the school aid fund. House Speaker Andy Dillon had warned members to "bring their sleeping bags."

The measure currently up for a vote would increase the state income tax from the current 3.9% to 4.6%, where it stood before the passage of the Proposal A school funding realignment in 1994. The increase would cost someone with $50,000 in taxable income (after deductions and exemptions) an extra $350 in state income tax each year, and it would raise approximately $1billion for the state general fund and the school aid fund.

Nearly every school district passed its budget for this year last June, our children went back to school this week, and the State's new fiscal year begins in 24 days. But, as yet, there is no agreement in Lansing on what schools will be allowed to spend this year, let alone how it will be paid for.

You would think this would put school systems in a bind, and you would be right. Sadly, the fate of our schools and our children's education takes a back seat to larger issues, namely: who is going to take the blame for increasing taxes.

As bills make their way through both houses of the Legislature, it is becoming clear what kinds of "reform" measures the Republican caucuses in both houses will demand in return for allowing a vote on new or increased taxes. In the House, a bill is set to come to the floor which would limit health care plans offered to teachers by local districts, pegging them to the plans offered to the non-unionized civil service. In the Senate, a package of bills would encourage public employers, including schools, to band together into large pools to negotiate for health insurance. The Senate plan has attracted bipartisan support as well as support from public sector unions, with the notable exception of the MEA. (See our earlier coverage.) Changes to the teacher's retirement system just recently passed the Senate (see earlier story). Some other bills recently introduced in the House make it clear that the effort to score political points will not end soon.

Late Friday, Michigan's top lawmakers hammered out a deal which both prevents last-minute cuts to schools and closes the current year's deficit without a tax increase, but at a cost. Most of the cuts from the regular state budget went to fund increases for health care and prison beds, both of which are projected to increase because of the poor economy. To fill the overall gap, the Legislature intends to sell rights to some future tobacco settlement fund revenues ("securitize" these revenues), among other things. Closing the current year's deficit without a tax increase is evidently part of an agreement with Senate Republicans not to block a vote on an income tax increase for fiscal 2008.

Much as the Hubble Telescope expanded the known universe, the May revenue estimation conference expanded the "known deficit" for Michigan government and schools. Top state economists agreed that revenues earmarked for school aid for the current year (2006-7) will be $153 million lower than estimated in January - or about $560 million less than originally budgeted for school aid last year. After program cuts, accounting changes, and an extra lottery transfer, a deficit of about $213 million remains to be covered either by cuts to schools or new sources of revenue found by the Legislature.

The state Senate approved a Republican plan to balance the current fiscal year's budget along party lines last night after negotiations on a compromise proposal broke down. The measures include cuts to schools of $36 per pupil, transfers from restricted funds, and pushing some expenses into next year. Senate Republican leaders wanted to pass a plan to close the current year deficit without increased taxes, while Gov. Jennifer Granholm and House Democratic leaders wanted new revenues to be part of the package to help with both this year and next.