CHICAGO--Michigan's struggle to devise a school funding plan. following the elimination of most school property taxes is attracting interest from public finance officials and educators.
Many people are concerned about the dramatic changes in school financing and structure that a plan unveiled Tuesday by Gov. John Engler calls for. And some officials believe Michigan's efforts could be copied in other states.
The Republican governor proposed raising $6.6 billion a year for elementary and secondary schools in Michigan with new and increased taxes and the elimination of about $774 million in state revenue sharing and other funds to local governments.
The plan also includes options for choosing schools, the creation of charter schools, and a guaranteed level of per-pupil spending.
The money is needed to replace the more than $6 billion of property taxes raised by schools for operating purposes that the Michigan Legislature eliminated in July. The property taxes will cease to exist on July 1, 1994, the start of fiscal 1995 for the school districts. The Legislature left intact school property taxes for unlimited tax general obligation debt.
Voter approval is needed to enact key elements of Engler's plan that call for changes in the state constitution. The elements are: increasing the state sales tax by 50%; instituting a 16-mill property tax on business and non-residential property; and allowing cities, counties, townships, and villages to levy, without voter approval, two to six mills in property taxes to replace the lost state revenue sharing.
Engler has proposed placing the items in the form of a single constitutional question on the Feb. 8 ballot. A two-thirds vote of the the Legislature is required to place the question before voters.
Neither Republican nor Democratic leaders in the Legislature are backing all the elements in Engler's plan, which is feeding speculation of drawn-out debate on the proposal. Engler hopes to have the plan approved by yearend.
Uncertainty about the final structure of the plan and whether or not voters will accept it dominated concerns voiced by rating agencies and state public finance officials.
"Now that there is a proposal, there is uncertainty whether a consensus can be reached in a timely manner on a proposal with a lot of contentious elements," said Paul Devine, a vice president and assistant director of the Great Lakes region at Moody's Investors Service.
"The big question is what's the contingency if the plan doesn't get passed," said Steve Murphy, a director at Standard & Poor's Corp.
Nick Khouri, Michigan's chief deputy treasurer, said the Engler Administration has no backup plan should the Legislature or voters fail to enact the governor's proposal. Khouri said that the 25 bills encompassing the governor's proposal are scheduled to be introduced Tuesday in the legislature.
Joe O'Keefe, a director at Standard & Poor's, said that while placing the state and local governments on CreditWatch has not been "ruled out," the rating agency has put the option on hold.
"If it looks like the final plan is onerous to various governments, then CreditWatch will be a possibility," O'Keefe said.
Officials from both rating agencies said they will have to evaluate credits on a case-by-case basis to determine the impact of the final plan.
Public finance officials in Michigan were generally optimistic about the impact the plan would have on the state. However, many raised concerns about outstanding and future tax increment financing debt that depends on school operating property taxes for about 65% of debt service. The officials also expressed concern over the plan's impact on short-term school district borrowing practices and the elimination of $650 million in revenue sharing to local governments.
But Khouri said there will be "more than sufficient revenues" available to local governments to meet their responsibilities, "and debt obligations will be their first responsibility."
On the plus side, some bond firm officials said the plan could open the door to more capital financings by schools.
"Spreading the burden for school operations frees up more millage capacity for voters to approve long-term capital bond issues," said Glen Watson, director of public finance at Roney & Co.
As for the systemic changes outlined in Engler's plan, Devine at Moody's said that the proposal to allow parents to choose which public school their children attend would cause some uncertainty because of the consequent competition among schools.
"The kids will be carrying around $4,500 around with them, and there will be competition for those kids," said Devine, referring to the annual per-pupil spending level of $4,500 guaranteed by the state under Engler's plan.
Some officials said Michigan's approach could be a blueprint for other states faced with school funding problems. "Almost every state is grappling with inadequate funding or unequal funding of schools," said O'Keefe at Standard & Poor's "All will be watching Michigan. If [Michigan] is successful, we'll see other states adopting similar approaches."
Education groups, also, are watching developments in Michigan closely.
Mary Fulton, a policy analyst for the Education Commission of the States, said that said many states are "keeping an eye" on Michigan because they are trying to find creative ways to fund education in an era when health-care and prison costs are "eating up all new state donors."
"I think [Michigan] has opened the door for other states to walk through. Whether they will is the question," Fulton said.
Andrew Stamp, director of communications for the National Association of State Boards of Education, said that Michigan will encourage other states to implement alternative funding plans for public education.
"Michigan will provide an impetus for states seeking alternatives," Stamp said.
Meanwhile, within the state, Engler's plan is meeting with resistance from teacher groups.
Julius Maddox, president of the Michigan Education Association, said in a press release that the Engler plan is "Politics as usual."
"Any program that calls itself revolutionary shouldn't put funding under the guillotine. It's not enough to say the words ~Math' and ~science.' You've got to provide the resources to teach math and science," Maddox said.
