Question 1

What is the School Aid Fund and how is it funded?

Accepted Answer

The State of Michigan's approach to funding public education - and more specifically public education for students aged 5 through 26 - works roughly as follows.

The state has two primary budgets: the General Fund and the School Aid Fund (or SAF). Michigan funds public education through the SAF and the SAF's primary funding sources can be seen in the graphic below. The largest source of funding is from Sales and Use Taxes. Not ALL of the Sales Taxes paid by people and companies goes to the SAF, but a large portion of it does. About 4% of the 6% in Sales Tax flows to the SAF.

The second largest source of SAF revenue is Income Tax. A little over 20% of the Income Taxes collected by the State of Michigan flow to the SAF.

The third largest source of revenue for the SAF is Property Taxes. The vast majority of homeowners are charged a 6-mill tax on their primary residence (known as the Homestead). Important to note that even though that 6-mill tax appears on your local property tax bill, that money flows to the state who then redistributes it back to the local school districts as part of the per pupil allowance used to fund local school districts.

In 2023, the SAF had about $20 billion in revenue. Among the most important things to understand about the School Aid Fund and how Michigan funds public schools include the following:
The state is the sole controller of school funding, meaning the state caps those funds. Local school districts do not have the authority to override the state as it relates to funding the operational costs of K12 education.
The state's school aged population has been declining for years (since the mid 2000's). Since Michigan flows money to local school districts based on their student enrollment, this declining enrollment poses significant problems to local school districts. However...
The state's costs do not get any lower due to declining enrollment. In fact, declining enrollment reduces the state's costs. One of the main reasons that in Michigan (of late) has been able to deliver higher per pupil revenue to local districts (via the Foundation Allowance) is because there are fewer students.
Since such a large portion of the SAF revenue is tied to factors such as consumer spending (e.g. Sales Tax) and Income Tax, the SAF has a massive dependence on the health of the state economy. In difficult economics times, such as when unemployment increases or wages get stagnant, it is the SAF that suffers.

We are likely to return to this topic in many related FAQ's.

Question 2

What is General Fund Equity or General Fund Balance and why is it important and how much is enough?

Accepted Answer

In the context of Michigan public school finances, the measure of a school districts General Fund Equity, also sometimes referred to as its General Fund Balance, offers an important and useful measure of a district's financial condition. Let's turn to the National Center for Educational Statistics for a basic definition of General Fund Equity:

Within governmental funds, equity is reported as fund balance; proprietary and fiduciary fund equity is reported as net assets. Fund balance and net assets are the difference between fund assets and liabilities reflected on the balance sheet or statement of net assets. Because of the current financial resources measurement focus of governmental funds, fund balance is often considered a measure of available expendable financial resources. This is a particularly important measure in the general fund because it reflects the primary functions of the government and includes both state aid and local tax revenues. The relative amount of unreserved fund balance reflected in the general fund is used by rating agencies as a measure of the financial strength of the government. Declines in the amount of unreserved fund balance may signal deterioration in the financial condition of the entity.

Others sometimes can refer to fund equity as a the difference between a district's General Fund assets and its liabilities - making it a "point in time" measure. This is an important distinction from ongoing measures. For example, over the course of a school district's fiscal year it will report its revenues and expenses that are incurred over the course of the operations of the school districts. These evolving results, referred to as Operating Results, change the point in time measures such as General Fund Equity.

A school district can, and should, report its operating results on a monthly basis. Those same districts will have an annual budget which is its projection of what the Operating Results are expected to be for a school (or fiscal) year. Since the results are not considered final until after a district completes its Annual Financial Audit, the district's General Fund Equity is only reported on an annual basis. The completion of the annual financial audit triggers the formal change in the district's fund equity. It is also submitted by the district to the state who closely monitor all districts' annual results to remain aware of districts heading toward financial peril.

In practical terms, a layperson's definition of the importance of General Fund Equity can be that it measures both financial health and flexibility. The higher a district's fund equity the more flexibility it has and the better equipped it is to deal with sudden and/or serious financial trauma. For the best interests of students, staff, and families a district should protect itself from financial calamity. Fund Equity therefore is a form of insurance policy. The higher the value of the Fund Equity the greater to insurance established by the district.

Of course, there can be diminishing returns. At some point, which can vary by school district, General Fund Equity can have reached its maximum benefit. And by operating in a manner whereby Fund Equity continues to rise, taxpayers may become reasonably concerned. Why would a district continue to amass taxpayer dollars if the district does not intend to use the resources for the betterment of the community, its students, and its staff?

If we consider the above an example of the "over-funding" of fund equity, then we can safely say that this is a rare problem. More often the problem takes the form of a district not saving enough.

But how much is enough? Or how much is too little....or too much? There is no single way to answer these questions. District's each have their own unique characteristics. Each must be able to review its history and its data and the level of satisfaction of their communities in order to know how much fund equity is enough.

Barring the establishment of an alternative, one reasonable suggestion might be this:

Beginning with the start of the Proposal A era (in 1994) each district should know the history of its annual operating results for each year. If you do not know, please contact us here and we can help you.
It can take multiple years to correct a problem of recurring years of expenses exceeding revenues. Districts should know that it can often take three of four years to correct financial imbalances.
Districts should review their own history and identify the total of their worst performing four year span of operations. These would best be measured not in dollars but in percentages - specifically a measure called Operating Margin. 
Operating Margin is calculated by dividing Annual Operating Results by the district's total general fund revenues. Let's say, for example, that a district's worst four year stretch saw their total expenses exceed their total revenues by 12%.
Let's also remember that to avoid state intervention in district financial and operational issues, a district must maintain at least a 5% fund balance. Recall that fund balance percentage is calculated by dividing fund balance by total annual revenues (of the most recent year). 
With 5% as a baseline minimum and 12% as the worst consecutive 4 year span of results, then a district wound want to establish (and not get below) 17% fund equity.
An alternative to consider, to be safer, is to benchmark similar districts (however you define them) and calculate the worst four year span of the operating results of those districts. This would help your district plan for a worse case scenario that had actually occurred to a district like your own.

Whatever calculation you rely upon, every Michigan public school Board of Education ought to be able to articulate its rationale for why it establishes its own fund equity percentage. And each year, through the course of budget development and review of monthly financial reports, each Board of Education should be able to review Annual Operating Results and Fund Equity to assess the financial health of the school districts they serve.

Question 3

What are Annual Operating Results and what do they tell us?

Accepted Answer

Annual Operating Results are an annual measure of a school districts total General Fund revenues minus its total General Fund expenses. Annual Operating Results are always an annual measure. It is the literal "bottom line" financial measure for a school district.

While public school districts do not operate for the purposes of generating a profit, they also cannot operate perpetually with expenses exceeding revenues. On a purely functional basis, this would jeopardize the districts ability to operate without triggering state intervention. But on a practical level, if a school district cannot achieve the financial flexibility required to provide quality services to their local communities then student achievement - and even safety - is at risk. This is not a healthy condition for students, families, or communities.

In this respect, school district financial viability - and their Operating Results -  are extremely important.

With this background, Operating Results become one of the most important financial measures for school districts. In any given year, Boards of Education and the voters who have elected them must tend to this bottom line measure. If a district operates for too long a period of time with expenses exceeding revenue then it will deplete its reserves and have little flexibility (namely financial resources) to deal with the many threats commonly facing Michigan school districts.

What are these threats? Here are some examples:

Changes in state funding. Michigan public school districts reliance on state funding is extraordinarily important. On average, state funding accounts for about three quarters of a school district's General Fund revenues. If the state experiences sudden and or significant reductions in tax revenues this can (and has) threatened the funds each district receives based on the number of students enrolled. In the case of Michigan's "Great Recession" (in 2008-2011), state tax revenues plummeted to such a degree that the state reduced the per pupil funding to school districts mid-year. Districts that had not saved enough money in their "rainy day funds," also known as Fund Equity or Fund Balance, had to make severe reductions in staff.
Changes in enrollment. Since Michigan funds public schools on a per pupil basis, districts that experience sustained (i.e. over the course of several years) and/or significant enrollment loss (such as what happened in the pandemic years) can be placed in great financial peril. Many can be forced to reduce costs quickly and in ways that can be detrimental to student achievement. And since employee costs account for 75% to 80% of all school budgets, when costs must be reduced then it only follows that staff must be reduced. In this respect, declining enrollment is one of the largest threats against Michigan public schools.

In both of these examples, to protect undie shock to students, staff, and communities districts benefit from having sufficient financial reserves to soften the adverse consequences of these threats.

Now, back to Operating Results. The reserves available to public schools are their best means to counteract these threats. The only way a district can build up its reserves (i.e. its savings or rainy day funds or fund balances) is to have positive (meaning literally not negative) Operating Results more years than not. A simple way to describe how a district establishes its General Fund Balance is to add up all of its years of Operating Results.

As a Board of Education trustee or as a taxpayer or any interested party, one of the first measures to use to assess a district's financial health is its General Fund Balance (or General Fund Equity) and its Annual Operating Results. And as we have established here, these two measures have a direct relationship. In any given year when a district's revenues exceed its expenses, then it has had a positive Annual Operating Result and it has increased its General Fund Equity.

As you begin to assess a Michigan school district's financial condition, these two measures - Annual Operating Results and General Fund Equity - are good places to start.

Question 4

School district budgets are presented in Function and Object views. What is the difference?

Accepted Answer

This question will focus on the expense categories used by Michigan public schools. Revenues will be treated in a different post.

As members of the Board of Education or as engaged taxpayers, we review reports to understand the financial condition of a district, to assess the factors that influence decisions, and the ensure that taxpayers dollars are being optimized for student benefits and to enhance community trust in both the Board and the district. When trust breaks down, the benefits we all seek from supporting public education is put at risk.

Understanding district finances and making the best decisions based on that understanding is fundamental to being an effective member of the Board of Education.

Board members approve budgets and subsequent budget revisions. Board members also receive the annual financial audit which offers third party validation of the district's handling of taxpayer dollars. Board members should also be receiving monthly financial reports that keep the Board of Education and the taxpaying public appraised of the district's execution of the budget.

As we become more familiar with these reports, we see a recurring structure and the use of budget categories that are consistent from district to district. In fact the State of Michigan mandates much of this structure. To make the best use of these reports, we need to understand the structures used and the terms and definitions within them.

The Function View and the Object View of school district expenses are two different ways to look at the same data. The two views complement each other and help the viewer of the reports learn more about where and how the school district is spending taxpayer dollars.

Let's start with the Function View since this is the format used most frequently when Boards of Education approve or amend budgets or when they review the annual financial audit. A "Function" is what a thing does or provides. The categories within Function Views offer an indication of the  service delivered by the resources that are funded. When readers review the Function View categories, they begin to see the types of services being provided. As we wade in, here is a useful graphic that can guide us.

All of these boxes are nested within each other (think "Russian Doll" style.) The two Major Categories are Instruction and Support Services. So it is possible that a district could categorize nearly all of its expenses into once of those two Major Categories. (Exceptions might include financial events like transfers or service areas such as Community Services.)

Both of the Function View's two Major Categories have two Minor Categories. The two Minor Categories nested to Instruction are Basic Instruction and Added Needs Instruction. The two Minor Categories nested to Support Services are Instructional Support Services and Non-Instructional Support Services. Beyond that, the Instruction branch ends with the Minor Categories, meaning no other category nests lower than Basic Instruction or Added Needs Instruction. However, in the Support Services branch, the Minor Categories of Instructional Support and Non-Instructional Support have Sub-Minor Categories.

When we distinguish the Instructional spend between Basic and Added Needs, we are referring to the costs allocation between students who are receiving General Education instruction (which is the vast majority of students) and those students who have received an Individual Education Plan (an IEP) which qualifies those students for Special Needs Educational services.

Why is this distinction made? Well, mainly because the laws and rules governing educational funding and spending make the distinction between Basic and Added Needs Instruction. The distinction is indeed formal and with legal implications. For this reason, the financial reporting is equally distinguished.

Within the Instructional Support Branch are four Sub-Minor Categories: Pupil Support Services, Instructional Staff Support Services, School (or Building) Administration, and finally Athletics, which can also contain Co-Curricular costs if a district chooses. As may be inferred from the Sub-Minor Category titles, these Functional areas tend to be just slightly closer to the actual instruction of students.

Within the Non-Instructional Support Services Branch there are five Sub-Minor Categories: General Administration, Business Administration, Operations and Maintenance, Transportation, and Other Support Services. (For this last sub-minor category, these are sometimes referred to as Central Support Services.)

Instructional Support Services expenses are comprised of Pupil Support Services, Instructional Staff Support Services, School (or Building) Administration., and Athletics. 
Pupil Support Services supplement the teaching process and include attendance, guidance, health, and social work services. 
Instructional Staff Support Services covers activities associated with assisting the instructional staff with the content and process of providing learning experiences for pupils. It includes teacher in-service, curriculum development, educational media services, computer labs, educational television, and program directors. 
School Administration are support resources that are attributed to individual school buildings and would include principles and assistant (or vice) principles.
Athletics include the expenses used to fund student participation in school sports activities. Common expenses within this category would be used to pay for equipment and services to support the activity and expenses for coaching, athletic training, and other services related to the operation of the school's athletic participation activities.

Non-Instructional Support Services expenses contain of  five subcategories:
General Administration costs contains the office of the district superintendent and limited numbers of district-wide administration, including Board of Education expenses 
Business Administration encompasses expenses related to budgeting, accounting, payroll, purchasing, and internal services
Operations and Maintenance includes the people and resources who support the physical plants, buildings and grounds of the district operations.
Transportation contains costs for inter-district transport - mainly bus services.
Other Support Services is sometimes referred to as Central Services and includes all expenses other than those mentioned above which support each of the instructional and supporting service programs. It includes research, personnel, and informational technology / data processing expenses.

The Function View of district expenditure data helps us understand where the taxpayer dollars are being spent and to see the distinction between expenses that are related to student instruction as opposed to all of the Functional areas (in Support Services) that support instruction but are not squarely defined as instruction. For those familiar with the services enabled by all of the Minor and Sub-Minor categories we can safely say they are necessary. However, as funds get tighter and difficult decisions are made based on their budget impact, Instruction costs tend to be favored.

That is the Functional View summarized. Notice how frequently you may need to refer back to these definitions and distinctions to understand them. For the educational professionals, especially district administration, these categories become intuitive. Board of Education members, and taxpayers as well, may need to spend more time to internalize these categories.

But we can also be honest, especially as we are learning the definitions, that even for those with limited financial expertise that we might be able to make better sense of where and how money is being spent if we had a different set of categories than those provided by the Function View.

In such a case, the Object View of school district expenses may be preferred. Let's start again with the data model.

The Major Categories of the Object View are consistent with the Function View: Instruction and Support Services. But among the Minor Categories we see the inclusion of Salaries and Benefits. These are safely intuitive (at least at a high level), and especially so in the case of Salary expenses. Salary costs are what you likely assume they are. But we must also remember there can be instances when a school district acquires services that are delivered by a human being, but the payment is actually for a service and does not go towards a salary.

The best example of how a school district procures a service (delivered by humans) but does not pay a "salary"? Outsourcing. Many districts have done with bus services and/or custodial/building maintenance services and teacher substitute services. In these examples , even though human services are being procured, the cost is not "salary" to the procuring district, but rather "Purchased Services" since (as the name tells us) the district is buying the service from another company who then provides the service.

Having touched on Salaries and Purchased Services, let's go back to Benefits. The main reason many school districts would rather procure a Purchased Service instead of paying a Salary is because the district is avoiding significant Benefits costs. How and why?

The why is a simple. By procuring workforce capacity through a Purchased Service the district avoids a couple of very large Benefits expenses - namely employee healthcare costs, retirement costs, and FICA/Social Security costs. These are the three largest cost components of the Benefits category.

The how? Well, by procuring services via Purchased Services instead of paying salaries, the resources used by the service provider are not on the district's payroll, and legally this allows the district to avoid legally/technically "hiring" people. Now, somewhere else along the line these same resources are receiving health benefits and paying Social Security costs, but often at a lower rate/cost. But the biggest cost school districts avoid by procuring Purchased Services instead of hiring and paying salary is avoiding mandatory school employee retirement costs.

Retirement and Healthcare are the two largest Benefits costs. Outsourcing and procuring Purchased Services allows the district to sidestep these costs. Elsewhere we can get into more detail about the financial mechanics and the implications of these dynamics, but as we are now just establishing the Object View Cost Model, let's put a pin in it for now.

Having now covered the basics of Salaries, Benefits, and Purchased Services the next largest Major Category of the Object View model is Supplies and Materials. From our own school days we may think of Supplies and Materials in familiar terms - books, paper, pencils and the like. All that remains the case, but the most significant Supplies and Materials costs are Electrical , Natural Gas, Heating and HVAC, lighting, and a host of others related to the physical operations of a school building and related expenses.

The Object View Major Categories then rounds out with Capital Outlay. This tends to be a rarely used category since most school districts have turned to voted bonds to make significant capital investments.

With that we have covered the basics of the Function View and the Object View of school districts expenditures. When it comes to gaining an understanding of where and how your school district spends taxpayer dollars, using both the Function and Object View is best. Why?

The Function View helps stakeholders understand where -  Functionally - the district is spending taxpayers resources which, in the Function View, helps us understand how much money is flowing to core Instructional services versus everything else that surrounds instruction.

By cross referencing the Object View, stakeholders gain the added dimension of the form the investment is taking and, importantly, how the district distributes its financial resources across the purchase of more people, or more services, or supplies, etc. As unpleasant as the thought is, unfortunately districts do need to engage in cost containment and reduction activity from time to time. The Object View of expenditures helps Boards of Education quantify the distribution of cost across people costs and materials costs - generally with the goal being to contain material costs to maximize the investment into people who interact with the community's children.

Question 5

What was the "2023 MPSERS UAAL funding anomaly"?

Accepted Answer

This issue will come up frequently and for simple reference purposes, let's always refer to it as the "2023 MPSERS UAAL funding anomaly."

Catchy, eh? Let's understand what it means.

Whenever Federal forces influence state level government operations we can expect a little chaos. At Michigan Benchmark, where we analyze financial patterns and their impact, we will forever need to account for the Federal funding anomalies that accompanied the pandemic and the many responses to it.

At issue here are Federal funds that were used to pay down the State of Michigan's decades long battle with public school employee retirement benefits obligations. Few issues have had as significant an impact on state and local school finance as MPSERS - the acronym for the Michigan Public School Employee Retirement System.

While we do not have the resources to cover all the multifaceted aspects of all MPSERS related issues, we can summarize it this way. The State of Michigan, for decades up until the financial crisis of 2009-10, foisted nearly all costs of the public school employees retirement pension and healthcare benefits onto the local school districts - and even then the funds allocated to pay retiree benefits was woefully short of the obligations made to retirees. To be clear, this is a STATE system. The local districts are just along for the ride - for better or for worse, and usually for the worse.

Along comes 2010. Amid the national financial meltdown and massive stock losses (which play a massive part in the ability to fund the growing cost obligation of these "post-employee benefits") the funding problem exploded. To be clear, as retiree benefit costs continued to rise, the money required to fund these costs fell woefully short. The MPSERS problem, in a way, is much like the turmoil surrounding the Federal Social Security problem. In theory, the funding model makes sense. In practice, overseers of these systems over-estimated the financial returns of the markets and the volume of growth of new participants.

Back to 2010. As the investments (in securities) lost massive portions of their value, the base investments and funds required to pay the retired employees obligations were short by roughly $40 billion. The MPSERS model was utterly unsustainable. It was broken.

The state recognized that it must migrate from the "defined benefit" (aka DB) mode of employee benefit funding to the "defined contribution" (aka DC) method of funding. Since the state could not just pull the rug out from under the retired (or to be retired) school employees, it would have to begin a "grand-fathering process" that would migrate newer school employees to a more traditional 401k style of benefits familiar to most Americans.

But despite the logic and necessity of this switch, the legacy costs remained to be paid. Who was going to pay into them now? In response the state established a roughly thirty year timeline to end the DB model and pay off the legacy debt. While sound in design, this also meant that fewer employees would be paying into the retirement system, upon which the retirees would depend to fund the retirement benefits.

In response to these dynamics, the state has been massively increasing its budget proportion flowing to this multi-decade and billion dollar liability to retire the legacy cost obligations of the MPSERS system. The practical impact of this has the state sending billions of dollars to pay down the MPSERS debt (technically known as UAAL, or Unfunded Actuarial Accrued Liability). This impacts everything. Foe example, it means that instead of higher state tax revenues flowing to existing (and often growing) costs, it must keep pace with the plan to pay off the legacy retirement debt.

So let's wander back to 2023 and the aftermath of the pandemic and all of the unique revenue that flowed to public schools as a result. For a variety of technical, legal, and financial reasons, in order for the State of Michigan to leverage Federal money made available to the state, the state that was expected to use one-time Federal funds to pay down legacy pension debt. In order to do so, the state had to flow money down to the local school districts who then were required to immediately issue those earmarked funds back to Lansing. (The memo sent to local school districts explaining this process is excerpted below.)

So what?

Mainly this means that as we evaluate and analyze Michigan public school finances, especially for the 2022-23 fiscal/school year, we must remember that state revenue received by the local school districts in 2023 will appear abnormally high. This is because even though the extra revenue flowed down to the local school districts it was obligated to be returned immediately. For anyone who may be unaware of this dynamic, they might see that revenues to their local district increased substantially in 2023. But they cannot lose sight that that money was never truly spent by the local district. It went straight back to Lansing who used it to pay down legacy pension debt for MPSERS.

None of that money could have been used for any other purpose. In a very long-term sense and over the long haul, indeed it will help local school districts by reducing their long term debt. But it would not help a school district who experiences General Fund budget problems caused by, for example, salary or health care costs.

In conclusion, the "2023 MPSERS UAAL funding anomaly" had no positive or negative impact on local school district budgets in 2023 (or any other year). It didn't "cost" the local districts anymore than had it never happened nor did it provide any incremental financial benefit to local school budgets. For any district to claim otherwise would be an inaccurate interpretation of events.

State of Michigan Memo to Michigan Public Schools
Date: February 23, 2023
In FY 2022-23, Section 147c of the State School Aid Act (MCL 388.1747c) was amended to include a one-time distribution to districts, intermediate districts, and other participating entities of the Michigan Public School Employees’ Retirement System (MPSERS) (Section 147c(2)) to forward to the state’s Office of Retirement Services (ORS) as additional assets being contributed to the retirement system. This funding is a one-time, state payment toward the MPSERS unfunded liability. Accordingly, districts may not allocate charges related to Section 147c(2) funding to federal grant programs. Section 147c(1) funds may continue to be charged uniformly across all employees (as previously advised by the Michigan Department of Education’s legal counsel). This approach is consistent with federal regulations that permit annual pension costs to be charged to federal funds only as authorized in established state policies [See 2 CFR 200.431(g)]. Michigan-established policies generally authorize districts to charge pension costs across federal and state funding sources in accordance with ORS’s published contribution rate. In this instance, state law prevents ORS from including Section 147c(2) funding in the ORS-prepared contribution rate used by districts to charge pension costs. In addition, Section 147c(2) funds represent a one-time state deposit into MPSERS, rather than being part of the annual required contribution typically included in the established rate. For these reasons, allocating Section 147c(2) costs to federal funds is inconsistent with established federal and state requirements on pension allocations.
In accordance with Governmental Accounting Standards Board (GASB) Statement 68, similar to Section 147c distributions, districts must report these amounts as revenue and an equal amount of expenditures in their general ledger. Given the large amount of this one-time deposit, MDE has requested clarification from the U.S. Department of Education (USED) regarding the exclusion of these funds from maintenance of effort (MOE) and indirect cost calculations. MDE will provide an update to districts when it receives a response from USED regarding the exclusion of these funds from MOE and indirect cost calculations.

Question 6

How and where does the state public school funding get spent? Where does it go?

Accepted Answer

In 2024, the State of Michigan spent $21.5 billion out of the School Aid Fund. The School Aid Fund, or SAF, is one of the state's two primary budget funds. The SAF is dedicated to public school funding. The other is the state's General Fund which pays for anything the state funds that is NOT public school related (think health and human services, roads, corrections/prisons, etc.)

We learn much from where SAF tax dollars go. The largest portion of the SAF (45%) funds the per pupil Foundation Allowance. The Foundation Allowance is the largest source of funding received by Michigan's local school districts used to operate their schools. For districts that experience financial duress - usually caused by declining enrollment - the muted growth of the Foundation Allowance in relation to all of the other uses of the SAF is a source of frustration.

This is best exemplified when we see the second largest proportion of the SAF flows to "MPSERS Payments," which consumes 12% of the SAF. MPSERS stands for the Michigan Public Schools Employee Retirement System. This retirement fund is the source for retired teacher and other school employees post-employment benefits, mainly pensions and healthcare. Elsewhere on this site we address MPSERS and its seemingly ever-growing consumption of the SAF. Suffice for now that it is the SAF's second largest spending area.

Beyond these two largest spend areas is the longer tail of others - Special Education, At Risk Student programs, school lunches/meals, and the like.

Question 7

On average, what proportion of school district spending flows to the major expense categories like instruction, administration, operations and maintenance and the like?

Accepted Answer

Using data from the 2021-22 school year Michigan's non-charter public schools spent $16.5 billion across 536 local  (non-charter) school districts. (While the figures will be different in ensuing years, they don't change enough that the age of this data affects interpretation too substantially.)

A functional breakdown of this spend serves as a valuable benchmark comparison for how each district makes investment choices among Instructional categories and Support Services categories. Ideally public schools want to direct as much of that spend as possible into directly education the state's 1.4 million public school students. But in total, only 60% is applied to direct instructional of general education and special education student needs.

The next largest proportional spend category is Non-Instructional Support Services which funds the districts' Operations and Maintenance needs, Transportation, and to a lesser extent district-wide administration and business services. Instructional Support Services consumes on average about 16% of General Fund revenues which covers building administration, counselors, curriculum specialists and others who provide support for instructional needs.

Using these proportional views can be instructive when compared to individual district spending patterns. Each district will have its own needs and own profile, but the statewide proportional spend views helps to establish a baseline standard of "normal".

Question 8

How much has the combined General Fund Equity of Michigan public schools grown since 2012?

Accepted Answer

General Fund Equity receives much attention because it offers a helpful barometric view of Michigan public school financial health. After all, General Fund Equity will grow when Michigan school districts' revenues exceed its expenditures. The growth signals that by and large Michigan school districts are able to fund their operations reasonably well.

Of course the plight of individual schools varies and for a variety of reasons, some categories of public schools struggle more than others. For example, districts that experience larger enrollment loss are unlikely to be growing their Fund Equity at the same pace as districts with more stable enrollment.

Since 2012 the aggregate General Fund equity of Michigan's non-charter school districts has doubled (in real / inflation adjusted dollars) from $1.6 billion in 2012 to $3.2 billion in 2022.  The rate of growth has accelerated in coincidence with the pandemic, which brought its own mass of Federal aid for public schools.  This also coincided with favorable state economic conditions which allowed the state to be more generous than normal with the ever-important Foundation Allowance, which is the per pupil funding that follows student enrollment.

In total, as of 2021 the aggregate General Fund equity levels  breached 20% of annual aggregate General Fund revenues, which has been a long-standing target for school districts.

Question 9

How has General Fund Equity growth since 2012 varied by district enrollment size?

Accepted Answer

In aggregate, Michigan public school districts of all sizes have increased their General Fund Equity since 2012. One reason for this: 2012 was a low point for Michigan public schools as districts were reeling from Michigan's "Great Recession" of 2008-2012 and, mor broadly, the country's shock from the financial crisis of that time.

Recovery among district's has varied by their enrollment. Interestingly, the largest among the state's districts (with enrollment between 10,000 and 50,000 students) have fared the worst. Many factors are in play there. Most of these larger districts would be nearer to urban centers and areas with more dense population. Perhaps as the state (and country's) economic models have evolved, lending to higher mobility (e.g. remote / work from home) more families have migrated to suburban or ex-suburban districts.

The extreme growth among most of the smaller enrollment districts supports this theory. But there may be other factors. Consider districts with enrollment lower than 500 students. Perhaps among these more rural (or at least more remote) districts, competition for employee salaries may be more muted.

Many theories may emerge. But one thing we can take away: there is no one size fits all answer as to the state of school funding among Michigan public school districts. For many, times have never been worse. For many more, times have never been better.

Each district must draw its own conclusions and react in accordance with its unique circumstances.

Question 10

What have been Michigan's statewide public school student enrollment patterns since 1995 (the dawn of the Proposal A era)?

Accepted Answer

In 1993 Michigan voters, by approving the ballot question posed by Proposal A, radically changed how Michigan funded public schools. Gone were the days of local school district's deciding by local millage measures how much tax revenue they would collect. From that moment on, the primary levers of funding for Michigan public schools became the district enrollment multiplied by the state-decided per pupil funding amount, known as the Foundation Allowance.

Generally the health of the state economy (and its tax revenues) determine the changes in the Foundation Allowance which, over time, is mostly equal among Michigan's 500+ local school districts. (The major exception are the ~20 so-called "Hold Harmless" districts, which we will address elsewhere.)

The other major lever to local school funding is enrollment. The largest proportion of local district revenue is the Foundation Allowance multiplied by enrollment. So these two variables become among the most critical for the financial position of Michigan public schools.

For the first decade of the Proposal A era, rising enrollment helped most school districts. But as Michigan's traditional economic power (manufacturing and the automotive industry) began to wane in response to the rising forces of the digital economy, the worm turned for the worse - at least in terms of student enrollment among others.

From its peak in 2003, Michigan's K12 enrollment has fallen 18%. The pandemic hastened that decline and time will tell what the future holds. But it remains unlikely that enrollment (or statewide population) will ever experience the growth of the late 1990's.

Declining enrollment can have a pernicious effect on school budgets. In some cases, rising Foundation Allowances can offset moderate the mild declining enrollment. But the story is different for every district.

Question 11

Has Michigan's Foundation Allowance (its per pupil funding) kept pace with inflation?

Accepted Answer

The short answer is "no".

At least if we measure back to 2010. And this make sense...because 2010 is the year when Michigan public school funding was hammered by the ravages of the Great Recession. 2010 has become almost a "B.C. / A.D." demarcation of Michigan public school funding. Nothing has been the same since then.

But for now, let's review the basic pattern (as seen in the chart below). 2010 wa the high-water mark of Michigan's per pupil funding. It sharply declined in 2011 and 2012, which was the first and only time that the Foundation Allowance was actually reduced from year to year. The other declines evident in this chart are attributable  to inflation's effects. The 2021 and 2022 data captures this well as the country felt the inflationary impact of the massive pandemic funding (ESSERS).

The result: In real (inflation adjusted) dollars, per pupil funding in Michigan is 9% lower than in 2010.

The implications are significant. After all, what are these monies used for? Well, the largest use is employee salaries. As school employees themselves deal with economic forces in their own lives, we see that the largest source of their salaries (the Foundation Allowance) has not kept pace with inflation. Of course it is most commonly the local school board that endures the discomfort of these circumstances, but the locals can only achieve so much within the confines of a revenue mechanism established by state legislators.

Many factors affect the Foundation Allowance. Readers are encouraged to review many of those, particularly changes in local school districts General Fund Equity levels, enrollment, and state-mandated retirement funding costs (aka MPSERS).

Question 12

How has Michigan's public school employee pension liability affected local school finances?

Accepted Answer

Few factors have had as large an effect on Michigan local school finances as MPSERS, the state operated Michigan Public School Employee Retirement System. The problem created by the liability (costs) the retiree pensions became so enormous that in 2012 the state legislature approved a plan that would gradually migrate from a legacy "Defined Benefit" (or DB) plan to a "Defined Contribution" (or DC) plan. In short, DC plans are more like a traditional 401k where available retirement funds are sourced from individual payroll deductions rather than a state funded pension system.

The 2012 changes were made because the state DB system had incurred over $40 billion of debt. State lawmakers dramatically changed the system. The net effect of the changes was that the state itself would begin paying down the legacy MPSERS debt directly. Up until that time, the MPSERS system depended on local school districts paying a fixed percentage of payroll costs against the retirement system.

But amid the financial crisis of 2008-9 and its subsequent impact on state tax revenues, pension systems nearly imploded under the weight of the funding liability of the MPSERS obligation. To avoid this crisis getting worse, the state made the drastic changes required.

In the long term, this is a good thing for the state to do. But the migration from a DB to a DC system resulted in costs being added to the legacy pension funding problem. Why? Because it woukld not be fair to ask newer employees who would not be eligible to receive DB style pension payments to pay into the funding mechanism.

In response, the state would have to increase its own portion paying into the legacy DB system. So where would that money come from? Well, the same place that funded Michigan public schools before - the School Aid Fund. So the net effect would be that larger and larger potions of the SAF would go to  offset the legacy pension problem which would mean lower potions could be used for the Foundation Allowance.

The chart below tells the tale. In 2010, NONE of the SAF went to pay legacy MPSERS debt (unfunded liability). But over the next 12 years, nearly 20% of the SAF was used to pay down the legacy pension debt.

Interested parties should keep this statistic in mind when the state announces "record SAF payments". Yes, for the responsible citizens in us we applaud the needful effort to pay off legacy pension debt. But for those tasked with managing the finances of local school districts, the net effect is muted growth of the Foundation Allowance which, as shared elsewhere, has not kept pace with inflation since 2010.

Question 13

On a cost per pupil basis, how has public school employee retirement costs changed over time?

Accepted Answer

Short answer: Since 2010, and normalized to 2023 dollar values, Michigan's per pupil retirement costs have nearly tripled - from $1,200 to $3,300 per pupil per year.

Again, as addressed elsewhere on MPSERS / retirement cost related posts, these are not value judgments. These are circumstances placed upon Michigan's local school districts. Local districts have no say in retirement cost issues. They merely must abide what is dictated to them.

The implications? The more that retirement costs consume from School Aid Fund revenue (and from local district budgets) the less than can flow elsewhere (e.g. more salary costs, be it for more employees or higher pay per employee; or to anywhere else a local district might want to increase investment.

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