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ERIC ED373387: School Finance Reform: Analysis of the Ballot and Statutory Reform Proposals. Issue Paper. PDF

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DOCUMENT RESUME EA 025 944 ED 373 387 and Analysis of the Ballot School Finance Reform: TITLE Proposals. Issue Paper. Statutory Reform Lansing, Senate Fiscal Michigan State Legislature, INSTITUTION Agency. 10 Jan 94 PUB DATE 32p. NOTE General (140) Reports PUB TYPE (090) /Regulatory Materials Legal /Legislative MF01/PCO2 Plus Postage. EDRS PRICE Education; Elementary Secondary *Educational Finance; DESCRIPTORS Taxes; Public Schools; *Finance Reform; Property *Tax Effort *State Legislation; School Funds; *Michigan IDENTIFIERS ABSTRACT Legislature 1994, the Michigan State On December 24, package for the K-12 school finance reform passed a comprehensive school finance reform document analyzes the education system. This by the issues affected comprehensive review of package and presents a financial reviews the overall The first section the proposed reforms. K-12 tax reform issues, package, which include components of the state budget for the impact on the budget impact, and revenue, state discusses statutory and The second section fiscal year 1993-94. (to the ballot proposal would occur under constitutional changes that section proposal. The third 1994) and statutory be voted on in March School Aid Act of Public Act 336, the describes major changes to Code, which pertain changes in the School 1993. Section 4 discusses diplomas, standards, endorsed pupil performance to core curricula, reform improvement plans. The instruction, and school hours of pupil academics and school-security for public school package also provides (LMI) tables are included. measures. Twelve be made EDRS are the best that can Reproductions supplied by document. from the original ******************************":...*************:;:************ SENATE FISCAL AGENCY /7) ISSUE PAPER i \ SCHOOL FINANCE REFORM 1 ANALYSIS OF THE BALLOT AND STATUTORY REFORM PROPOSALS ti JANUARY 10, 1994 "A Series of Papers Examining Critical Budgetary Issues Facing the Michigan Legislature" LANSING, MICHIGAN GARY S. OLSON, DIRECTOR U S DEPARTMENT OF EDUCATION ,,,pforveme, e a Ednd,.0,41. t,e5Ad And 7 "PERMISSION TO REPRODUCE THIS 4,10,JA f ( P EP. MATERIAL HAS BEEN GRANTED BY ThiS AG( ller, has rm., as rw e.ye+11 Ito, oho, ;.,5. . ,lr Mn,,, CanQes na. vl . 11111111111111111111111111111111111111111111 ,PCOdu 1.0n c.,al.t, I va.,1 r. r.5 ya,. F.flontS111viPev resP, fkeni An ne. essa,..v (If Al 2 TO THE EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC)." BEST COPY AVAILABLE ACKNOWLEDGEMENT Senate This paper was researched and written by the staff of the Senate Fiscal Agency. The The Fiscal Agency is fully responsible for any errors or omissions that the paper may contain. assistance on some of the authors wish to thank the Michigan Department of Treasury for numbers contained in the report. The principal authors of the paper were the following: Gary S. Olson, Director Ellen Jeffries, Deputy Director Patrick Affholter, Legislative Analyst Elizabeth Arasim, Legislative Analyst Joe Carrasco, Jr., Fiscal Analyst Suzanne Margules, Legislative Analysis Coordinator Elizabeth Pratt, Fiscal Analyst Jane Schultz, Fiscal Analyst George Towne, Legislative Analyst Jay Wortley, Senior Economist Karen Hendrick, Executive Secretary, produced the report. 3 TABLE OF CONTENTS 1 INTRODUCTION 2 I. SCHOOL FINANCE OVERVIEW 12 H. SCHOOL FINANCE REFORM 12 A. BALLOT PROPOSAL 12 State Revenues 12 Local Revenues under the Ballot Proposal 13 Other Ballot Proposal Issues 14 B. STATUTORY PROPOSAL 14 State Revenues 15 Local Revenues under the Statutory Proposal 16 C. OTHER ISSUES 18 SCHOOL AID ACT III.. PUBLIC ACT 338 OF 1993: 18 A. THE FOUNDATION GRANT 19 B. ADULT EDUCATION 19 FOR AT-RISK PUPILS COMPENSATORY EDUCATION SUPPLEMENTAL C. 19 READINESS D. EARLY CHILDHOOD/SCHOOL 20 E. PROFESSIONAL DEVELOPMENT 20 INTERMEDIATE SCHOOL DISTRICTS (ISDs) F. 20 G. RETAINED CATEGORICALS 20 H. TRANSITIONAL PAYMENTS 20 FINANCING AUTHORITY (TIFA) REVENUE REPLACEMENT OF TAX INCREMENT I. 21 J. GENERAL PROVISIONS 22 N. EDUCATION REFORM 22 REFORM A. SCHOOL CODE: EDUCATION 26 B. PUBLIC SCHOOL ACADEMIES 26 C. SCHOOL SECURITY 4 INTRODUCTION passed and sent to the Governor a comprehensive On December 24, 1993, the Legislature K-12 education system within the State. The proposal to restructure the financing of the December 31, 1993. Governor signed this proposal into law on debate reform package marks the end of the legislative The passage of the K-12 school finance the of 1993 when the Legislature approved and that has been raging since the summer This law eliminated local property taxes as Governor signed into law Public Act 145 of 1993. school year. Over the operating funding beginning in the FY 1994-95 a source of K-12 school has debated a series of proposals to restructure K-12 past several months the Legislature 24, 1993, marks an end to the legislative finances. The passage of the proposal on December portion of the process. by the Legislature does involve input from the The school finance reform package approved special election will be held to provide voters State's voters. On March 15, 1994, a statewide of the primary funding mechanisms for schools. the choice between income and sales tax as one special election, a comprehensive school funding Irrespective of the outcome of the March 15 plan for the 1994-95 school year is in place. reducing the burden of property taxes have Reforming the financing of K-12 education and different Governors over the past 16 years. The been a goal of legislative members and three fund K-12 education coupled with perception of overreliance on local property taxes to within school districts have resulted in inequities among the levels of per-pupil funding Prior to the passage of the reform package in the system. numerous attempts to reform December, all previous efforts of reform had failed. includes three major components. The first is a K-12 The K-12 school finance reform package portion of the package are some tax reform school funding reform portion. Included in this funding of K-12 schools. The second part of the items that do not have a direct impact on the K-12 education funds are distributed to the package involves the reform of how State and local K-12 education reform component that does State's K-12 school districts. The final piece is a not deal directly with K-12 finances. school finance reform package presents a This Senate Fiscal Agency (SFA) analysis of the reform. The first section reviews the overall comprehensive review of the issues affected by the reform issues, K-12 revenue, State budget financial components of the package including: tax State budget. The second section deals specifically impact, and the impact on the FY 1993-94 of the analysis deals with K-12 spending, and with funding reform issues. The third section the fourth section with education reform issues. 1 5 OVERVIEW I. SCHOOL FINANCE series of complex changes in laws that will have The school finance reform package contains a expenditure policy for K-12 school State and local tax structure, State an impact on the other available for expenditure in the State budget for all districts, and the level of resources attempt to clarify the overall K-12 schools. This section of the analysis programs excluding reform package. financial impact of the school finance school finance Legislature essentially approved two different As stated in the introduction, the the approval of a constitutional amendment at reform proposals. The first hinges on voter the second goes into effect if the constitutional March 15, 1994, special election and proposal While both the constitutional. amendment amendment is rejected by the voters. they (statutory proposal) share some similarities, (ballot proposal) and the alternative proposal the funding of K-12 schools. represent quite different approaches to ballot and of the major revenue components of the Table 1 on page 5 provides a summary mixture of State and local taxes to fund partially statutory proposals. The proposals utilize a similar the two proposals would have an imp :ct on the IC-12 education system. In most cases of the example, the ballot proposal would reduce the rate taxes, but with different results. For 4.4% rate, while the statutory proposal would State income tax from the current 4.6% to a The similarity between the proposals is that they increase the State income tax rate to 6.0%. the at similar levels. The difference involves both would fund the total K-12 education system mix of taxes that fund schools. in between the ballot and statutor proposals are outlined The major differences to taxpayers will face voters on /4. arch 15, 1994, is the choice Table 2 on page 6. The general question that plus taxes, a 0.2% income tax rate reduction, between a two-cent increase in the sales and use 1.4% increase in the State tax on the ballot proposal, versus a a six-mill homestead property tax under the statutory plan. The difference income tax rate and a 12-mill homestead property proposals will depend on a yer between the two in actual impact on an individual to and other factors. 'n patterns, property values, combination of income levels, consu:, be State during fiscal year (FY) 1994-95 will The funding of K-12 education in the Act provided in FY 1994-95 State School Aid accomplished by a combination of State funds The levied and collected by local school districts. (Public Act 336 of 1993) and property taxes the districts may levy and collect is limited pursuant to level of property taxes that local school overall K-12 finance reform package. Act is 1994-95 through the State School Aid Funding for K-12 school districts in FY School Aid Act is funded through a combination summarized in Table 3 on page 6. The State School Federal aid, a transfer from the Public of restricted School Aid Fund revenues, Fund prefunded health reserve, surplus School Aid Employees Retirement System (PSERS) Fund/General Purpose (GF/GP) from FY 1993-94, and a General revenue carried forward schools in the earmarking of new funds raised to finance grant. Due to inconsistencies in the School Aid Fund of new revenues earmarked to the school finance reform package, the amount the School Aid Act understates the Therefore, the GF/GP grant contained in was understated. ballot proposal and fund the bill by $568 million under the amount of funds necessary to fully will be covered by is anticipated that this shortfall $505 million under the statutory plan. It earmarking of Act 336 of 1993 by amending the adjusting the GF/GP grant stated in Public Aid Fund package or by utilizing excess School other taxes contained in the school finance reserves generated in FY 1993-94. 2 6 The combination of funding from the State School Aid Act and property taxes levied and collected by school districts makes up the total of K-12 school aid. Table 4 provides a summary of the total revenues that will be available for K-12 schools under the ballot and statutory plans. The total funding under both plans is $10.6 billion with local property taxes playing a more prominent role under the statutory plan than under the ballot plan. The projected level of FY 1994-95 K-12 funding of $10.6 billion compares with FY 1993-94 funding of $10.2 billion. This represents an increase in funding of 4.0%. The FY 1993-94 total school funding level includes supplemental appropriations of $466 million that were contained in Public Act 336 of 1993, in addition to the $9.74 billion of appropriations originally approved by the Legislature. The school finance reform proposal contains numerous tax changes both under the ballot and statutory proposals. In general the effective date of the tax increases under both proposals is May 1, 1994. This effective date of the tax increases leads to considerable revenue being generated in FY 1993-94 at the same time that the majority of additional State appropriations to schools do not begin until FY 1994-95. Table 5 provides a summary of the FY 1993-94 State revenue impact of the school finance reform package. The ballot proposal would generate $1.48 billion of additional FY 1993-94 School Aid Fund revenue, while the statutory plan would yield $1.42 billion of FY 1993-94 School Aid Fund revenue. The excess FY 1993-94 School Aid Fund revenue is reduced by a $466 million supplemental appropriation to schools during FY 1993-94. The $466 million includes $300 million of transitional payments and $166 million of other supplemental items. The end result is that the State School. Aid Fund will carry forward surplus revenues of $995 million under the ballot proposal and $928 million under the statutory proposal. These funds will be available to finance school expenditures in future years. The existing level of FY 1993-94 GF/GP revenues also would be affected under the ballot and statutory proposals. Under the ballot proposal, the reduction in the rate of the State income tax from 4.6% to 4.4% would reduce FY 1993-94 GF/GP revenues by $117 million. This would be partially offset by $17 million of increased revenue resulting from the expansion of the use tax to include interstate shone calls. Under the statutory proposal, the increase in the income tax personal exemption would reduce FY 1993-94 GF/GP revenues by $107 million. This would be partially offset by $25 million of increased revenue from the interstate phone tax. The combination of a variety of tax increases affecting both the School Aid Fund and GF/GP revenues coupled with the earmarking of revenues leads to an overall impact of the school finance reform proposal on the State GF/GP budget. Table 6 provides a summary of the FY 1994-95 GF/GP State budget impact of the school finance reform package. On an overall basis, the ballot proposal would result in a $591 million negative impact on the GF/GP budget. The statutory plan would result in a $350 million negative impact. The actual extent of adjustments that may have to be made to the Governor's FY 1994-95 budget recommendation depends on revisions in revenue estimates that will be made at the consensus revenue estimating conference to be held on January 14, 1994. The final issue of importance concerning the overview of the school finance reform package involves the amount of revenues that are being increased to fund K-12 schools versus the revenues saved by taxpayers due to the enactment of Public Act 145 of 1993. This analysis attempts to show whether on an aggregate taxpayer level the overall school finance tax 7 3 package is a tax cut or tax increase for taxpayers. Table 7 provides this analysis for the ballot proposal while a similar analysis for the statutory plan is contained in Table 8. Under the ballot proposal, total increased State and local taxes would be $473 million less than the projected impact of changes the revenues saved from P.A. 145 of 1993. Taking into account of $133 in Federal tax liabilities resulting from the ballot proposal leads to a net tax cut million. Under the statutory proposal, the plan would result in a $212 million State and local after Federal tax impacts are tax cut before Federal tax liabilities and a $91 million tax cut relief to factored in. Therefore, both the ballot and statutory plans would result in net tax taxpayers. Tables 7 and 8 also provide a breakdown between the savings that would accrue to both individuals and business. Under the ballot proposal individuals would receive the larger tax reduction, while businesses would fare better under the statutory proposal. 4 r t e n p e d s t n n e e e c y p c i t e r r d 0 P e 4 p s r e l e o l o l y p a r a t t P s r i C 0 d s o e t l 0 l e t % n e l o u r 0 a n e h C t 5 , % c a o n W 3 7 t h o $ s 5 0 S . ' 2 P r 2 . f % o 6 e o o t e m t 0 s o s s t n % t 0 l l l a . t % o e l l l 0 1 t i i i 0 % R r m s 1 m m 5 f . t r 6 , a 6 3 e 2 e e 2 1 2 2 . . t e s $ s 4 2 1 n 1 1 a a s t a I m e e o m e e e m e y y y k n n n n r r p x x v v v o c o o c c o o o o m a a e e e a r r r n n N N N N T T L L L F F F p I I I E 0 G 0 r A 8 e e K p m e S 2 C d s T a m t u A N G n e l o e P c E c y r o c x i N t f M r r n E 5 P s e O e R ( 7 e p K s e P i O o l t l o M l i a r t a w F t l 1 P s i i t C O E d s e t o a U e t l l e R C l r n l o l e l D r a b a e h n l C E M a B a % % % c n - W o T C t i o s R h t n 5 0 0 4 n N ' P e r 2 f O . . . % e 6 6 4 e o u A d F e m t 0 q s o o o n % N e i t E l . e s s s a t t t o e s l 2 I R l l e r i 0 t a R % % % r F l l m F s R f i i . t e r 6 m m X a 0 0 6 L r e e e e 1 8 ) c t . . . A e t s O s t e p 4 4 4 n 6 6 1 n u a a s t c m T O i a I e o e e e m m m t e i y y y k i v n t n n r r p H x e x t v v v n c o o o c c r s o o o x m a a e e e e a C e r r r n n n N N N T E T L L L F F F S p c I I I I S s x x t n a a n T e T s s o m x x t t y i y c n a a t t u t t e p T s T r r e d m u m e e s o y y j p p e a t d e e r t x s t o g o e r x A P n r t u a r n r e r a e E o P j P T c p a R p o d e i n h o o s c l A d s d r a I n C x r c a r a e a n P P a a e B a e f t e o i x b p s t T t t d d a d s s e n a x o s x a e R e r a t e s T a a T E a e e r m e e s m r T C R P t x e T t t e r s y o a s o n a e t e e x e r x R x h a e T h h i m s e m a a R s a n t U t n t a T u x T T O o o t e o o t o a x B t H N s & H N e e t e L T a n E e m m m ) T o l l r s . e e e s a a a l e o o o e e t t t a x e c c g n a a a c l c c l e s o o a a i a i t t t n n n U R C T L L S S S S S S I I I n . c 9 , . C Table 2 MAJOR TAXPAYER DIFFERENCES BETWEEN BALLOT AND STATUTORY SCHOOL FINANCE PROF2SALF Statutory Ballot Sales and Use Tax Rate 2 cents increase Income Tax Rate 0.2% reduction 1.4% increase Income Tax Personal Exemption $900/dependent ffilVO Single Business Tax Rate 0.4% increase Homestead Property Tax 6 mills 12 mills 24 Mai Nonhomestead Property Tax 24 mills Real Estate Transfer Tax 2.0% 1.0% Cigarette Tax 50 cents/pack increase 15 cents/pack increase Table 3 FY 1994-95 STATE FINANCED 11-12 SPENDING REVENUES AND EXPENDITURES (millions of dollars) Statutory Ballot School Aid Fund Revenues: Existing Sales Tax $ 1,892 $ 1,884 Sales Tax Increase 1,489 Use Tax Increase 271 Interstate Phone Use Tax 20 Income Tax Increase 1,645 Income Tax Earmarking 813 592 Single Business Tax 335 Real Estate Transfer Tax 340 213 Homestead Property Tax 599 Nonhomeetead Property TWA 463 899 Tobacco Tax 365 164 Liquor Excise Tax 21 21 Lottery 464 464 Keno-Lottery 35 PA 198 Industrial Facilities Tax 165 132 SUBTOTAL $ 6,937 $ 6,349 Other Revenues: Federal Aid 92 92 PSERS Health Reserve 140 140 FY 1993-94 SAF Carryforward 300 300 General Fund/General Purpose Grant 438 387 School Aid Fund Adjustment") 568 505 TOTAL REVENUES $ 8,475 $ 7,773 Expenditures: School Aid Fund Appropriations $ 8,475 $ 7,773 $ BALANCE $ o 0 This shortfall results from different revenue earmarking assumptions in the School Aid Mt than in the revenue bills. a) Source: Senate Fiscal Agency estimates. 6

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