6
Weissert, & Kleine, 2005) and school districts (e.g., Ammar, et al., 2005; Berney, 1982; DeLuca,
2006 and Smith, 1986). There is no consensus in the literature, however, about either how to
define fiscal stress or how to measure it. A primary object of past studies has been to identify
variables capable of predicting insolvency or serious financial imbalances so that corrective
actions might be taken.
This paper differs from past research in two key respects. First, we utilize fixed effects
methods to identity the causes of local fiscal stress, rather than factors that are correlated with it.
Second we apply them to an institutional context—one that is becoming more common
nationally--in which school funding is highly centralized at the state level and local districts have
limited discretion to raise operational revenue from local tax sources.
3
MICHIGAN CONTEXT
Since the passage of Proposal A in 1994, Michigan has maintained one of the nation’s
most centralized funding systems for K-12 schools. Proposal A established a foundation system
which constitutes the primary source of discretionary operating revenues for all districts and
charter schools. Nearly all funding moves with students when they transfer to other districts or
charter schools, and local districts have very little discretion to raise additional tax revenues.
The horizontal equity of funding has improved under Proposal A; 80 percent of pupils are in
districts and charter schools that receive a foundation allowance at or within $500 of the state’s
minimum foundation allowance of $7,076 in 2014.
4
State funding, however, is poorly adjusted
to compensate for the additional local costs of educating high-cost students, so the funding
system fares less well in terms of vertical equity (Addonizio & Kearney, 2012; Michigan State
3
In contrast to previous literature on local fiscal stress, changes in local district fiscal capacity (for instance, changes
in taxable property value per pupil) have no direct bearing on operating revenues available to Michigan districts.
4
Throughout this paper, we refer to fiscal and academic years by the latter year, so, for example, the 2013-14 fiscal
year is noted as 2014.
7
Board of Education, 2014).
5
Funding for school facilities, by contrast, is unusually
decentralized; the state provides local districts with no state aid for facilities. They are funded
entirely by local property taxes (Arsen and Davis, 2006).
Michigan has high and growing participation rates in its two school choice programs--
charter schools and inter-district choice--especially in urban areas. Over 8 percent of Michigan’s
public K-12 students are enrolled in charter schools and over 7 percent participate in inter-district
choice. In a state-by-state review of conditions that are favorable to charter school growth, the
National Alliance for Public Charter Schools (2014) ranked Michigan third among states--after
Washington, DC and Louisiana--in its 2014 Health of the Public Charter School Movement
Rankings. The Alliance ranks Detroit second only to New Orleans among communities in terms
of its share of students attending charter schools (2013). Other Michigan cities are also among
the nation’s highest in local market charter participation. In recent years, the state’s charter
school policy implementation has been sharply criticized for poorly regulating the supply,
business operations, and quality of schools (Education Trust-Midwest, 2015; Detroit Free Press,
2014)
TRENDS IN FISCAL STRESS
After rising for several years following Proposal A’s passage, real per-pupil funding for
Michigan schools has declined sharply since 2002. As indicated in Figure 1, adjusted for
inflation, statewide general fund revenue per-pupil has declined by roughly 25 percent since
2002.
[Figure 1 about here]
5
For example, the state reimburses only 28.6 percent of approved special education spending by local education
agencies. The state, however, counts the general education per-pupil foundation grant for students with disabilities
towards its special education funding obligation (Citizen’s Research Council of Michigan, 2012).
8
Whereas Figure 1 includes foundation and categorical funding, Table 1 displays changes
in foundation revenue alone since 2002. Foundation revenue is of particular interest since it
constitutes the primary source of discretionary funding available to Michigan districts and
charter schools. Categorical grants, by contrast, typically entail spending obligations and
restrictions on how these funds can be used. Table 1 displays changes in enrollment, per-student
foundation grants, and total foundation revenue by school district type.
6
Most of the
improvement in the horizontal equity of per-pupil foundation grants occurred between 1994 and
2002. The narrowing of the per-pupil gap continued during the 2002-2013 period, as indicated,
for instance, by a larger gain in nominal per-pupil foundation grants in formerly low-spending
rural districts (9.2%) than high-income suburban districts (4.8%). For all community types,
however, the growth of per-pupil funding fell substantial shy of inflation, producing average
declines in real per-pupil foundation grants from 2002 to 2013 in excess of 25% in all district
groups.
The (nominal) per-pupil foundation grants of all Michigan districts remained unchanged
for three consecutive years from 2003 to 2005. By contrast, per-pupil funding declined for all
districts for three consecutive years after 2009. The state’s basic foundation allowance in 2013
was $470 below its level in 2009.
However, differential patterns of district enrollment change had a much more dramatic
impact on total foundation revenue available to local decision makers. Over a span of 11 years,
6
We define a five-way classification of school district community types. Central city districts are those that the
National Center for Education Statistics (NCES) classifies as serving large cities and mid-sized cities. Rural
includes districts classified by NCES as outside a metropolitan statistical area (MSA) plus those within an MSA
with population density less than 20 people per square mile. Suburban district are those classified by NCES as
“serving an MSA but not primarily its central city” and having population density greater than 20 people per square
mile. The suburban classification is disaggregated based on median home value (MHV) in the 2000 U.S. Census--
Low-income suburb: $32,500 iddle-income suburb: $75,001
≤MHV<$170,000; High-income
suburb: MHV
≥$170,000. Low-income suburban districts are very similar to Michigan’s central cities in racial
composition and student poverty rates.
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