Grosse Pointe Public School System Financial Transparency Series PROPOSAL A AND HOW THE STATE

Transcription

1 Grosse Pointe Public School System Financial Transparency Series PROPOSAL A AND HOW THE STATE OF MICHIGAN FUNDS PUBLIC SCHOOLS

2 Presentation Objectives Deliver a Basic Understanding of: 2 History of Michigan Public School Funding Proposal A, Local Taxes, and how GPPSS compares to others Impact of Proposal A

3 Mill A tax unit equal to $1 per $1,000 in taxable value Property Cash Value State Equalized Value Homestead Property Non-Homestead Property Foundation Allowance The established value of a property 50% of a property s true cash value (aka taxable value) A property that a taxpayer would classify as a primary residence Property that is not a primary residence, typically commercial or vacation homes After Proposal A, a per pupil amount the state authorizes, and primarily funds, for school operations 3

4 4 Before Proposal A Why School Finance and Tax Reform Were Hot Issues in Michigan in 1993 Property Taxes Serve as Primary Source of Revenue Wealthiest Districts Outspent Lowest 3:1 on a Per Pupil Basis Property Taxes were 34% above national avg. (7th in nation) No Restrictions on Millage Increases

5 Proposal A Ballot Forces a Choice Yes on Proposal A Establish 6-mill statewide Property Tax 5 On July 20, 1993 after years of partisan stalemates on tax and school funding reform, lawmakers passed a bill completely eliminating the use of local property taxes for school district operations after December 31, Governor Engler signed it into law. The state had just eliminated the vast majority of school funding sources. On March 15, 1994 Proposal A offers the voters two options to fill the massive revenue gap the state lawmakers had just created: No on Proposal A Establish 12-mill statewide Property Tax Reduce income tax from 4.6 to 4.4% Raise income tax from 4.4% to 6% Raise cigarette tax by $0.50 per pack Raise the state sales tax from 4 to 6% Raise cigarette tax by $0.15 per pack Voters approved Proposal A (voted Yes) by comfortable margin: 69% to 31%

6 Practical Implications of Proposal A Operating revenue is capped by State Significantly reduced School Property Taxes. Taxes and funding based on student enrollment State responsible for majority of public school funding, establishes School Aid Fund Low spending districts get leveled up to close gap Highest spending districts allowed a Hold Harmless Millage Financial Transparency Series School Funding and Taxes 6

7 Proposal A s Impact on Homestead Millages Tax Levy Rates More Than 50% Lower From Local Operating Mills Local Operating Mills Hold Harmless State Mills State Mills State Mills Debt Mills Debt Mills Debt Mills Sinking Fund Sinking Fund Sinking Fund Total Mills Total Mills Total Mills Financial Transparency Series School Funding and Taxes

8 State School Aid Fund Revenue Sources Proposal A Shifts Majority of Tax Revenue Away from Property Taxes Cigarette Tax 4% Business Tax 3% Other 2% 8 Real Estate Transfer 2% Use Tax 4% Lottery 7% Sales Tax 42% State Property Tax 18% Income Tax 18% Budget Year

9 GPPSS General Fund Revenue by Source Local Property Taxes Provide 22% of School Funding 9 Local Hold Harmless 15.1% Local Non- Homestead 7.1% Federal 2.6% Other 1.9% State 20 J 1.6% County 6.4% State Categorical 6.6% State Foundation Allowance 58.6% Budget Year - Projected

10 School Operations Millages Post Proposal A Taxes That Can Be or Are Levied for District Operations 10 State Foundation Millage Non- Homestead Property Tax Hold Harmless Homestead Property Tax A 6 mill levy against all homestead property Local district can t increase or decrease No vote and no option for local districts to opt out Maximum of 18 mills (subject to Headlee rollback) Requires voter approval, available to all districts For districts that spent > $6,500 per pupil in 1994 Requires voter approval (subject to Headlee) Fixed amount per pupil; no increases since 1995

11 What is the Headlee Amendment? A 1978 Michigan Constitution amendment requiring taxing jurisdictions to roll back tax rates if the taxable value, excluding new construction, increases faster than the rate of inflation. It caps tax rates at the rate of inflation. Why was it implemented? Prior to Proposal A, residential tax rates were rising so rapidly that homeowners feared being taxed out of their homes. What is the problem in the context of Proposal A? When the state calculates the per pupil Foundation Allowance, it assumes a local district is collecting the maximum on Non- Homestead property. The Headlee Amendment can reduce this revenue and the district does not get its full per pupil foundation allowance because of the state reduction. How is the problem addressed? In tax levy ballot language, local districts can propose tax rates that appear to exceed the maximum allowable rate, even though the net effect is to levy what the state anticipates the local district would otherwise be able to but for the Headlee Amendment. 11

12 Non-Homestead Tax Basics All districts have option to levy 18 mills if they did so before Proposal A Term limited tax (GPPSS expires after school year) Subject to Headlee Rollback Contributes 7% of total GPPSS district revenue 94% of Michigan districts levy 17 mills or more Financial Transparency Series School Funding and Taxes 12

13 Hold Harmless Tax Basics Districts that spent more than $6,500 per pupil in 1994 were held harmless from overly harsh spending cuts brought by Proposal A (52 such districts). Formula driven rate that delivers a fixed rate per pupil ($1,893 in GPPSS, same since 1995.) Subject to Headlee Rollback. Contributes 15% of total GPPSS revenue. Term limited, expires after school year. Financial Transparency Series School Funding and Taxes 13

14 Upward Millagee Pressure Formula Driven Hold Harmless Millage Rate Increasing Enrollment Decreasing SEV s Counter Balance Decreasing Enrollment Increasing SEV s Downward Millagee Pressure 14

15 15 Explanation of Section 20J Funds In response to their own budget challenges, the state often threatens to reduce or eliminate 20J funds. 20J Funds account for a substantial portion of the GPPSS budget (roughly $1.6 million). This may serve as a useful explanation of what exactly 20J Funds are. Applicable only to Hold Harmless Districts Corrects Fault in Revised School Code 20J are NOT a Lansing Charitable Offering 52 such districts in the state (including GPPSS) Not an incremental tax charge to the local district Revenue not supposed to exceed rate of inflation 20J funds correct error that short-changes HH districts from receiving full per pupil funding These are funds that are rightfully due to Hold Harmless districts When threatened we must act!

16 Facility Construction and Repair Millages (neither can be used for Operational Expenses) Bonds Sinking Funds Typically levied for larger scale, construction projects with longer financing terms Multiple bond issues can run concurrently Fund capital projects, typically associated with repairs and smaller construction Creates in year revenue. Maximum of 5 mills and 20 years 16

17 A Closer Look at Bond and Sinking Fund Neither Funding Source May be used for District Operation 17 Bond Millage Levied by 86% of Michigan districts Average state-wide rate is GPPSS rate is Will be paid off in 2032 Sinking Fund Levied by 25% of Michigan districts Average state-wide rate is GPPSS rate is.9738 yielding ~$3MM Expires in June, 2010

18 GPPS Strategy for Building Repair and Maintenance 18 GPPSS is well under average in our debt millage level and among a minority that levy a Sinking Fund. GPPSS strategy has been to repair/restore older buildings, many of which are historic sites, the upkeep of which is valued by the community. In relation to this strategy, a Sinking Fund is a more financially efficient model because it does not incur long-term service debt.

19 Benchmarking Local Tax Rates (2009) In 1993 Statewide School Operating Millages Averaged 33.9 mills 19 Hold Harmless Mills Sinking Fund Mills Debt Retirement Mills Total Local Homestead Mills BIRMINGHAM FARMINGTON WEST BLOOMFIELD BLOOMFIELD HILLS TROY E. GRAND RAPIDS GROSSE POINTE CHIPPEWA VALLEY ANN ARBOR HARPER WOODS GROSSE ILE FOREST HILLS ROCHESTER NORTHVILLE PLYMOUTH CANTON

20 Applying Mills to State Equalized Value Equalized on a Per Pupil Basis Assumes All District Levy Full 18 Non-Homestead Mills Non-HS SEV Per Pupil Homestead SEV Per Pupil 20 Total Homestead Mills Homestead Tax Revenue Per Pupil Non-HS Tax Revenue Per Pupil Total Local Tax Revenue Per Pupil BIRMINGHAM $140,810 $477, $5,130 $2,535 $7,665 BLOOMFIELD HILLS $118,041 $564, $5,006 $2,125 $7,131 ANN ARBOR $204,323 $262, $1,983 $3,678 $5,661 FARMINGTON $140,860 $237, $2,298 $2,535 $4,833 TROY $166,555 $192, $1,677 $2,998 $4,675 WEST BLOOMFIELD $57,597 $265, $2,499 $1,037 $3,535 GROSSE POINTE $47,871 $313, $2,531 $862 $3,371 FOREST HILLS $107,740 $196, $1,279 $1,939 $3,219 GROSSE ILE $35,760 $307, $2,207 $644 $2,850 ROCHESTER $74,500 $261, $1,355 $1,341 $2,696 NORTHVILLE $71,458 $319, $1,246 $1,286 $2,533 HARPER WOODS $82,958 $125, $929 $1,493 $2,422 CHIPPEWA VALLEY $52,486 $192, $1,473 $945 $2,418 PLYMOUTH-CANTON $93,866 $228, $721 $1,690 $2,410 E. GRAND RAPIDS $18,689 $162, $1,375 $336 $1,712

21 GPPSS Local Property Taxes 5 Year History 21 Actual Actual Actual Actual Projected Hold Harmless Tax $16,208,752 $16,620,915 $16,219,184 $15,824,496 $15,496,596 Non-Homestead $6,688,182 $7,353,295 $7,459,200 $7,797,243 $7,801,714 Debt Fund $3,921,778 $4,143,598 $3,972,903 $4,050,000 $4,150,000 Sinking Fund $2,799,694 $2,957,580 $3,040,298 $3,085,628 $2,937,397 TOTALS $29,618,406 $31,075,388 $30,691,585 $30,757,367 $30,385,707 Proposal A has successfully capped local property taxes. Our largest expenses (salaries, retirement, and healthcare) are not equally capped.

22 Per Pupil Foundation Allowance by District From 1995 to 2009 Significant Gaps Persist $13,000 $11,500 $10,000 $8,500 $7,000 $5,500 $4,

23 % 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% GPPSS School Foundation Allowance Annual Percentage Change versus Annual Inflation Rate 23 Inflation Rate Foundation Allowance

24 What is the source of recurring shortfalls? Salaries, Health Care, Retirement, FICA Costs Outpace Revenues $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ Foundation Allowance $10,128 $10,184 $10,184 GPPS Total Employee Compensation Per $10,238 $10,718 $10,802 Pupil Non-Human Resources Costs Per Pupil $2,163 $2,216 $1,943

25 GPPSS Human Resources vs. Other Expenses An Unsustainable Trend of H.R. Costs Portion of Budget Budget Budget H.R. Expenses Non H.R. Expenses H.R. Expenses Non H.R. Expenses 17.1% 15.2% 82.9% 84.8% 961 Employees 8,359 Students 908 Employees 8,171 Students

26 Evaluating Proposal A 15 Years Later Did it deliver what was promised or expected? 26 The Good The Bad The Questions Delivered promised tax relief Pop Up tax issue Did it improve education? Reduced spending gap Balanced state tax code Limited local control Salary, retirement, health care outpace per pupil allowance What will state do to control costs? Are higher taxes the alternative?

27 The Fundamental Differences Before and After Proposal A 27 Before Proposal A Local District in Control Need more money? Raise the millage rate Revenue Management Mindset After Proposal A State Primarily in Control Need more money? Attract or retain students Expense Management Mindset Financial Transparency Series School Funding and Taxes

28 Living With Proposal A Year to year uncertainty of state aid makes multi-year planning challenging. Foundation Allowance has not kept pace with inflation. Land locked and non-schools of Choice districts have limited revenue generation opportunities. Fund Equity becomes of much greater importance. Local Hold Harmless and Non-Homestead millages deliver what Proposal A allows they do not increase over time. 28

29 29 Final Analysis and Summary History particularly that of Proposal A itself - tells us that Tax and School Funding Reform comes very slowly. At this point in time, we should not expect state tax revenue increases to be part of the solution. What can we expect? Like all of the local districts impacted by the current funding model, Lansing must make tough decisions on its expenditures. If Lansing does not find a way to respond to their own structural deficits, the local school district must. School districts cannot make budget and policy decisions based on the assumption that Lansing will fix the problem.