Michigan governor offers budget to aid school funding debate.

CHICAGO -- Gov. John Engler of Michigan yesterday proposed a $7.5 billion fiscal 1995 general fund budget two months early to provide lawmakers with a budgetary blueprint as they deliberate over a school funding plan.

The governor, who would normally wait until February to introduce his budget for the fiscal year, which begins Oct. 1, 1994, said the early release will allow lawmakers to debate the replacement of more than $6 billion of property taxes used by schools for operating purposes "in the context of the entire state budget." The Legislature in July eliminated school operating property taxes effective next year.

The proposed $7.5 billion general fund budget represents a 5.2% reduction from the current year's budget, primarily by earmarking some general fund revenues for schools, according to a press release from Michigan's Department of Management & Budget. Under the budget plan, state appropriations for schools would increase 221% to $9.6 billion in fiscal 1995 from $3.7 billion this year.

Engler has proposed funding schools through a $4,500 annual per pupil grant to replace lost property taxes. Money for the grant would be raised by an increase in the state sales tax to 6% from 4%, the elemination of $774 million in revenue sharing to local governments, along with other new or increased taxes. The Republican governor wants to place his funding plan, along with a restructuring of the educational system, before voters in the form of a single consitutional question in February or March.

However, the Michigan House late last week jumped the gun on the governor's budget and approved their own package of bills that would raise more than $10 billion for elementary and secondary schools.

House members passed most of the bills related to two plans -- one that would be placed on the ballot and one that would be used as a backup plan should the ballot proposal be defeated by voters.

The ballot plan mirrors Engler's proposal to hike the state sales tax to 6%, but does not call for an increase in the single business tax, which Engler proposed increasing by 0.5%. The plans also differ in terms of property taxes. The House plan calls for a 20 mill property tax on nonresidential property, while Engler's proposal contained a 16 mill tax.

Scott Schrager, senior committee analyst with the House Taxation Committee, said the House plan replaces the governor's proposed 4% real estate transfer tax, higher cigarette tax, and the elimination of state revenue sharing with an increase in the state income tax to 6% from 4.6% and a lower real estate transfer tax of $10 per $1,000 of value.

The House's backup plan, which would not require voter approval, does not contain a sales tax increase, but does include a 16 mill property tax on residences in addition to the 20 mill tax on nonresidential property. The higher income tax and real estate transfer tax would remain from the ballot plan, while the single business tax would be boosted to 2.95% from 2.35%.

Andi Brancato, a spokeswoman for House Co-speaker Curtis Hertel, D-Detroit, said the House passed all the tax bills related to school finance with the exception of the bill to place the sale tax increase on the ballot. That bill requires a vote of 74 of the 110 members for passage.

The House also passed legislation to safeguard existing debt of tax increment financing districts that a recent survey showed could face a $35 million shortfall in debt service next year due to the elimination of the school property tax. Last month, Standard & Poor's Corp. placed nearly $92 million of debt issued by the Detroit Downtown Development Authority and the Lapeer Tax Increment Financing Authority on CreditWatch with negative implications because of the state's repeal of the school property tax.

The House bills are now pending before the Republican-controlled Senate, which has only acted on bills to allow school choice, create charter schools, and eliminate the use of capital appreciation bonds by schools.

Jan Ellis, a spokeswoman for Senate Majority Leader Dick Posthumus, R-Alto, said Senate members are looking at "a variety of options" for school funding. Posthumus is "strongly opposed" to an increase in the income tax, saying it would have a "detrimental effect" on the state economy and put Michigan third highest in state income tax rates in the country, Ellis said.

Nick Khouri, the state's chief deputy treasurer, said while Engler is concerned about increasing the income tax, he is encouraged that the House has moved on a funding plan. Engler has set a yearend deadline for passage of a school funding plan.

Ellis said Engler's fiscal 1995 proposed budget will be "a valuable tool to ensure that we are all dealing with the same numbers." There is "a fair amount of support" among Republicans in the Senate for budget cuts, and the members want to ensure that Michigan taxpayers receive a net tax cut when the final school funding plan is done, Ellis said.

The budget is based on projected revenue growth of 4.2% in fiscal 1995.

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