Faculty Viewpoint: On Michigan School Finance

AN OPEN LETTER TO MICHIGAN GOVERNOR RICK SNYDER Dear Gov. Snyder, Last summer you requested legislation to profoundly change funding for Michigans K-12 schools with a sweeping replacement of the School Aid Act of 1979. Since financial arrangements decisively influence school operations, many Michigan citizens took note. Your goal was to incorporate the new legislation into the states budget for the 2013-14 school year. You received the proposed Michigan Public Education Finance Act of 2013 in November as planned, but didnt mention it in your recent State of the State address. As one finance nerd to anotheralas, Im an economist (guess what, my wife is too!)I applaud your decision to slow down and give fuller consideration to the proposed changes. These policy decisions will have very far-reaching implications for Michigans public schools, so its important to get them right. The proposed funding system was drafted by the Lansing-based Oxford Foundation, which was established to lessen the burdens of government. You asked Richard McClellan, a distinguished lawyer and one of the founders of the Mackinac Center for Public Policy, to lead the effort. The proposed legislation and related documents are available via www.oxfordfoundationmi.com. The goal of Oxfords finance reform is to facilitate a 21st Century Any Time, Any Place, Any Way, Any Pace learning model in which funding is student-centered, not district-centered, and focused on things that work so it is more cost-effective. The drafters also sought to allow nonpublic school students and home school students maximum access to public education resources. As you know, since Proposal A took effect in 1994, all operational funding for Michigan schools has followed students when they move to another district, to a charter school or recently to an online school. The Oxford proposal, however, embodies two key innovations. First, it unbundles education services. Rather than all state funding following students to a single

school, students could allocate their enrollment and state funding across multiple schools and districts. In a standard six-hour school day, students might take classes in six different districts. Since the challenge of transporting students among multiple schools during the school day could limit choice, the Oxford proposal envisions a robust expansion of online instruction. Districts and charters could offer online and face-to-face courses to any student in the state. The Oxford group calls its second key innovation performance-based funding. Students would take standardized tests at the start and end of each class. Schools would lose a portion (expected to increase over time) of the state funding for every student who did not make sufficient progress. The Oxford proposal was explicitly designed to operate in conjunction with 2012 House Bill 5923, which would allow new entities (private businesses, municipalities, cultural institutions) to establish public schools in virtually any location, with little oversight and without regard to their impact on existing schools. It removes enrollment restrictions on cyber schools. Significantly, HB 5923 authorizes some schools to use selective admissions based on student academic ability, gender or migrant-worker status. Schools established by businesses could give enrollment preference to children of company employees. The Oxford funding proposal and HB 5923 represent a truly dramatic strategy to shift the provision of Michigans educational services outside locally-governed school districts. They would establish the closest approximation to a universal statewide voucher system ever implemented in the United States. This possibility drew the excited attention of observers across the political spectrum. But with so many high-voltage policies commanding Lansing policymakers attention at the end of 2012, progress on these landmark policies stalled, leaving them for the current legislative session. This is an ideal moment for you to offer leadership. The drafters staunchly maintained that they were implementing your vision for Michigan schools, as set forth in an April 2011 address (a few months after you took office while you were getting acquainted with many areas of state policy): http://ow.ly/h8AGE. The opportunity for more reflection makes this is a good time to clarify your views for Michigan policymakers and citizens. In the spirit of constructive dialogue, I offer some initial reactions to Oxfords 300-page proposal. The proposal lacks coherence. Indeed the drafters acknowledge that many elements (like student testing) remain unresolved. Rather than focus on these, I direct attention to a few important considerations that have been overlooked. Michigans current funding system has many problems when assessed against standard evaluation criteria from the field of school finance. Remarkably, the Oxford proposal doesnt simply fail to address these problems; it would make them worse.

Revenue Trends

Click to enlarge The Oxford reformers did not consider which revenue sources should fund the system. Nor did they ask how much money is needed. They didnt even consider how earmarked revenues that currently fund Michigans public schools have fared. If they had, they would have observed a striking trajectory. The figure below shows operating revenues for Michigans K-12 public schools, including local and intermediate school districts and charter schools, adjusted for inflation and enrollment. Between 2002 and 2011, real per-pupil funding of Michigans public schools fell by $2,643 or 24.5 percent. Consequently, virtually all schools have cut services. Some of this decline is due to the states decade-long economic contraction which depressed sales, income and property tax collections. But thats not the main story. Sixty percent of the revenue decline can be attributed to declining tax effort in other words, policy decisions. If we had merely devoted the same share of our personal income to public schools in 2011 as in 2002, per-pupil funding would have been $1,589 higher. Massachusetts, the highest-performing state on most student outcome measures, spends about 40 percent more per pupil than Michigan. Our revenue decline has not yet hit bottom. The Oxford proposal does nothing to arrest this disinvestment. Instead it creates new drains on available school aid funds.

Equity, Adequacy and Perverse Incentives

As a school finance specialist, Im surprised to see a statewide plan that completely ignores equity and adequacy. Proposal A narrowed but did not eliminate funding inequalities among districts. Adequacy, however, requires that district revenues match the costs of producing outcomes expected by the state. We rate poorly on this standard. Part of the problem is the collapse of revenues already noted. I focus here, however, on the mismatch between state revenues and local costs. Since the state controls operational funding for all Michigan districts and charter schools, these problems could be solved. Michigans school aid distribution is not adequately adjusted to reflect the differential cost of expensive special-needs students, regional cost-of-living variations or declining enrollment costs

(which arise because revenues decline faster than costs some costs are fixed in the short run which then forces cuts in programs for students left behind) (Arsen & Plank, 2003). School choice policies exacerbate the problem. Funding arrangements give choice schools a strong incentive to enroll low-cost students (elementary versus secondary students, regular versus special education). On average, Michigans local districts devote over 9 percent of their spending to special education services, while the percentage in charter schools is less than half this amount (Arsen & Ni, 2012c). Such cost creaming lowers average costs in choice schools, by simultaneously increasing average costs in the schools their students formerly attended. Michigans school choice policies promote sustained outflows of students and revenue from districts charged with educating the highest-need children (Ni & Arsen, 2011), significantly contributing to fiscal stress (Arsen & Ni, 2012a) and the prospect of state emergency management (Arsen & Mason, forthcoming). The Oxford proposal would surely expand such problems. It does not fix foundation grant inequalities or align them with costs. It simply divides foundation grants among course providers based on their share of a students total classes. Course providers would have a great incentive to attract low-cost students into low-cost classes not special education, for example, or high school science labs. Inexpensive online classes with large enrollments would be preferred. Schools losing students to such ventures would see average costs rise, undercutting their ability to continue offering high-cost classes and other services. Good schools now offer an array of additional serviceslibraries, reading specialists, transportation, student newspapers, sports, assemblies and so on. By failing to allocate revenue to cover the costs of such services, the Oxford proposal would discourage schools from providing them. Over time, these incentives would force district programming and operations to progressively converge to those of stripped-down online vendors. Whereas participation in Michigans school choice policies is currently concentrated in urban areas, participation would grow substantially in suburban and rural districts under the Oxford and HB 5923 choice plans. Indeed, districts with per-pupil foundation grants thousands of dollars above the basic level would be prime targets for external course providers. (Hello, Detroit suburbs.) A third-grade student who cant read could be enrolled in several online classes by his guardian. Under the Oxford plans performance-based funding, if he didnt learn anything in those classes, the course provider would forfeit 5 percent of the state funding. What would prevent a (mostly) home-schooled student from taking advantage of a districts extracurricular offerings, without bringing any corresponding revenue to that district, while the bulk of her foundation grant goes to a company that provides her with a computer used for online classes and the family business, too?

Efficiency

The Oxford proposal would generate inefficiency in many ways. It would increase administrative costs to implement complex and essential student recordkeeping. It introduces new ways for enterprising service providers to game the funding system, requiring costly monitoring procedures to discourage misuse of public funds. And it would increase costs to transport students between classes in different schools, costs borne by schools or families. Educational efficiency is defined by student outcomes relative to the cost of providing them. It is inherently linked, therefore, to instructional practices. The Oxford proposal drafters dont know much about teaching and learning. They appear unaware that effective schools establish cohesive cultures that inspire and coordinate the efforts of all educators and students. Otherwise they would recognize that a plan to encourage students to come and go as they please, without their schools consent, could undermine outcomes for choosers and non-choosers alike. They ignore clear evidence that noncognitive skills and social adaptability matter greatly for student and adult success, so they do not consider the possibility that their preoccupation with cognition as measured in test scores could generate a serious bias in instructional practice, undermining desired student outcomes and efficiency. The drafters assert that the proposals will make Michigans education system more costeffective, but dont really want anyone to check. The proposal eliminates existing requirements for schools to report the costs of their online operations. Many once presumed that new, entrepreneurial education service providers, in contrast to bureaucratic public school districts, would shift spending from administration to classroom instruction. Yet on average, Michigans charter schools spend nearly $800 more per pupil per year on administration and $1,110 less on instruction than the states school districts (Arsen & Ni, 2012c). What would prevent HB 5923 and the Oxford proposal from accelerating this topheavy reallocation of school spending? Many once expected competition from charter schools to improve educational efficiency in district schools, but on balance this has not been found in the accumulating research (Arsen & Ni, 2011, 2012b; Ni & Arsen, 2010). Michigans poorly designed school finance and choice policies are interacting to create a downward spiral in the states urban districts. These are now such extraordinarily turbulent educational settings that comparisons of charter and district performance need to account for the adverse impact of charters on districts (Ni, 2009). What would prevent the proposed reforms from creating similar harm in other districts?

School Facilities
While the state controls funding for school operations, funding for Michigans school facilities is left entirely to local districts. School infrastructure is financed primarily by local property taxes. Variations in per-pupil property wealth across communities create huge inequalities in local districts ability to pay for school facilities. Consequently, dramatic disparities in facility quality across Michigan districts are strongly correlated with local property wealth (Arsen & Davis, 2006, 2008).

Property tax millage rates in some poor districts would have to be 10 times the level in affluent districts to generate the same per-pupil revenue. As a result, facilities in many of Michigans poorest school districts are inadequate. Michigans current system of school facility finance has generated unequal opportunities for students and unequal burdens for taxpayers. It is a shameful situation that courts and lawmakers in other states have rectified (Mason & Arsen, 2010). These problems could be addressed with suitable state policy. Michigan is one of a handful of states that provide no state aid for facilities. The states only role has been to lower local district borrowing costs under certain circumstances by guaranteeing the construction loans. Remarkably, at the very end of 2012, when so many contentious bills awaited your signature, you signed the little-noticed Public Act 437, which within a year will terminate even this meager state support, effectively ending facility construction in most districts.

Further Reflection
Gov. Snyder, the Oxford funding proposal and HB 5923 fail to solve the actual problems facing Michigan schools. Instead they would worsen those problems and create a host of new ones. While claiming to advance a plan for globally competitive schools, the drafters propose a set of policies found in no high-performing nations educational system. While claiming to advance a modern 21st Century system to replace the old factory model of schooling, they in fact offer a plan based on the grim principles of 19th Century piece work production that relied not on collaboration but rather on the coercive measurement of individual effort. The proposals are not based on empirical evidence of what works but rather on faith. This is a plan to privatize Michigans public schools. The Oxford proposal and HB 5923 explicitly seek to undermine local school districts as the providers of education services. But most Michigan citizens like their local public schools, and they like having democratic control over school boards. Their communities are defined by their local school districts. For some, the most pertinent defense of public schools is that the whole is greater than the sum of the parts. What is lost with unbundling is community. Community is real. We know that it matters for health and happiness. And people are willing to pay for it. Real estate markets reflect the value people place on local school districts in home prices. Identical homes on opposite sides of a district boundary can differ in price by tens of thousands of dollars. Destroy the districts where people have paid extra for their community schools, and property values will fall.

Trust Your Judgment

My hunch is that you have a pretty good sense of what makes for a good school. You had the opportunity to send your own child to excellent public schools, but chose Greenhills School, a wonderful private school in Ann Arbor. It is selective. The school has attractive facilities and grounds, a student-faculty ratio of eight and an average class size of 17. Greenhills strives to provide a wide range of stimulating and challenging classes. Teachers and administrators take pride in the schools democratic decision-making; its not top-down.

Annual tuition for Greenhills is nearly $20,000, and, as you know better than I, that doesnt cover all operating costs. If the trend line for Michigan public school revenues looks like a frown, then the one for Greenhills looks a bit more like a smile. I dont question your choice. But this is what puzzles me. Students at Greenhills do not take standardized tests until they apply to college. The schools educators sympathize with their public school colleagues whose professional lives now revolve around tests. Greenhills does not accept credit for online classes, nor offer classes for credit in the summer. It takes a firm position against students taking courses at other institutions, including colleges or universities, unless they have already taken the schools most advanced course in a subject. Greenhills students dont graduate early, but rather all together at a spring commencement. The school is designed around remarkable physical spaces devoted to forums for students in each grade to meet, deliberate and socialize. The school has a thoughtful rationale for these decisions: it wants students to interact with one another and faculty to establish a durable and supportive community. I try to imagine how the families and educators at Greenhills would react if they were forced to operate under the rules embodied in the Oxford proposal and HB 5923. As you search for strategies to improve Michigans public schools, you might consider Massachusetts, the top-performing state, which years ago established broad-based task forces comprised of experts from universities, government and business, along with educators and citizen group representatives to develop long-term plans for funding and other aspects of the states public schools. If you do so, theres a collection of really smart people, just down the road from your office, in a College of Education with top-rated programs in elementary and secondary education and other fields, who, despite the fact that the state is funding an ever-dwindling fraction of their salaries, would be happy to offer assistance. Most importantly, citizens across Michigan care deeply about these issues. Please listen to what they have to say. Sincerely, David Arsen The content of this article reflects the views of the author and not necessarily those of Michigan State University or the MSU College of Education.

References
Arsen, D., & Davis, T. (2006). Taj Mahals or decaying shacks: Patterns in local school capital stock and unmet capital need. Peabody Journal of Education, 81(4).

Arsen, D., & Davis, T. (2008). Underinvestment in capital facilities in Michigans urban schools: Dimensions of the problem and state policy options. Michigan State University Center for Community and Economic Development. Urban Policy Research Series. Report 1. http://ced.msu.edu/publications/reports/public-policy. Arsen, D., & Mason, M.L. (forthcoming). Seeking accountability through state-appointed emergency district management. Educational Policy. Arsen, D., & Ni, Y. (2011). Shaking up public schools with competition. The School Administrator. 68(7): 16-19. Arsen, D., & Ni, Y. (2012a). The effects of charter school competition on school district resource allocation. Education Administration Quarterly, 48(1), 3-38. Arsen, D., & Ni, Y. (2012b). The competitive effect of school choice policies on performance in traditional public schools. In G. Miron (Ed.), Exploring the School Choice Universe: Evidence and Recommendations. Charlotte, NC: Information Age Publishing. Arsen, D. & Ni, Y. (2012c). Resource allocation in charter and traditional public schools: Is administration leaner in charter schools? Education Policy Analysis Archives, 28(31). http://epaa.asu.edu/ojs/article/view/1016 Arsen, D., & Plank, D. N. (2003). Michigan school finance under Proposal A: State control, local consequences. Education Policy Center at MSU. http://education.msu.edu/epc/library/reports.asp. Mason, M. L., & Arsen, D. (2010). The role of state courts in securing school facility adequacy and equity. Education Policy Center at MSU. http://education.msu.edu/epc/library/Policy-andresearch-reports.asp. Ni, Y. (2009). Do traditional public schools benefit from charter school competition? Evidence from Michigan. Economics of Education Review, 28(5), 571-584. Ni, Y., & Arsen, D. (2010). The competitive effects of charter schools on public school districts. In C. Lubienski & P. Weitzel (Eds.), The Charter School Experiment: Expectations, Evidence, and Implications (pp. 93-120). Cambridge, MA: Harvard Education Press. Ni, Y., & Arsen, D. (2011). School choice participation rates: Which districts are pressured? Education Policy Analysis Archives, 19 (October). http://epaa.asu.edu/ojs/article/view/777.