January 13, 2012

Consensus You Say?  Better Than Expected Revenues?
But Watch Out For The One-Timers?

As Michigan’s weather changes quickly, so can the revenue forecasts. As we have heard over the last few months, State revenues seem to be greater than what was anticipated. After closer examination for the School Aid Fund (SAF), that could be accurate for fiscal year 2010-11 but it might mean slower growth for future years.

As we think about the general economy, the University of Michigan folks wrapped up their segment saying:

  • the darkest days are in the books,
  • it should be positive from here on out,
  • there’s a ways to go for full economic health,
  • there’s a lot of room for improvement, and,
  • caution is in order

We guess we can agree with what they said, especially with the last one!

If you look back to May, the Consensus Revenue Estimating Conference (CREC) estimated a carryover balance of $645.9 million from 2010-11, but with increased revenues, the carryover into 2011-12 now stands at $724.9 million. Good news we guess, but by the looks of the newly revised revenue picture, we may need a good portion of that carryover to help remain positive at the end of fiscal year 2011-12. The year-end balance for 2011-12 is now expected to be $142.3 million. This year districts received a $470 reduction in the per pupil foundation allowance and the legislature siphoned SAF dollars to community colleges and universities, approximately $255 per K-12 student or almost $400 million.

The only positive news that offsets the reduction of $470 per pupil this year was the new “one-time” appropriations for best practices and MPSERS payments, which statewide averaged about $200 per pupil. Other categorical funds which partially restored Small Class Size Grants and a few other minor categoricals were also included. Although districts appreciate the fact that at least some additional revenues actually stayed with K-12 schools, the fact that additional funds are one-time in nature while the use of SAF for community colleges and universities on an on-going basis is disconcerting. Although 2011-12 is a tough year with a net cut in revenues, we think things can get worse in 2012-13!

Strictly looking at the estimated year-end balances, the 2011-12 fiscal year with a positive carryover to 2012-13 of $142.3 million and with 2012-13’s positive $222.7 million, it sounds like great news right? Not so fast! If you look closer at the appropriations for 2012-13, you’ll notice a few items missing from the mix. The “one-timers” described above were removed from funding in 2012-13 because the current School Aid Act indicates that they go away in 2012-13. If the estimated 2012-13 balance sheet reflected all the funds districts received this year, there would be $472 million in additional appropriations and a negative ending balance of $282.8 million. This means that for the 2012-13 school year, the full impact of the $470 per pupil reduction, the expiration of any carried over Federal ARRA and Educations Jobs Fund dollars, the reduction in funding for kindergarten for less than full time students, and the significant increase in the retirement rate will all be placed on the backs of districts and ultimately students!! Remember that FY 2012-13 is the year we start paying for the retirement incentive from two years ago and this bump in the rate should last for 5 years.

If the public hasn’t liked the reductions in services they are seeing from their local school districts thus far, next year (2012-13) could be a real eye opener if the State does not pump some significant funds into the SAF or cut off colleges and universities funding from the SAF. Although there appears to be excess funds available for a foundation increase, if you count the lost one-time dollars and the reduction to kindergarten funding (about $50 million), districts will be further behind in funding next year in 2012-13 than in 2011-12.

So with all the bad news, or should we just say news, because honestly the story really hasn’t changed much, where are some glimmers of hope in all of the numbers? Although a major impact will be felt with the tax policy changes that were made with the repeal of the Michigan Business Tax (MBT), the SAF will see increases in most all of the remaining tax sources dedicated to the fund in each of the next few fiscal years. Although these amounts fall short of making up for what was received through the MBT, they should continue to grow as the economic factors in Michigan improve. That’s a positive. The other positive is that it's been reported that the Governor has stated schools do not need any more cuts (could it be the election year?). Flat funding will force districts to make cuts to cover inflationary cost increases in your ongoing cost base.

Another factor for the future is the constant buzz about reforming the Michigan Public School Employees Retirement System (MPSERS) and possibly decreasing the contribution rate or at least slowing the increase. This would be a positive for district budgets, but at what cost to current retirees and active members? The issue the individual taxpayer will have to come to grips with is the fact that the tax policy changes that have occurred in Michigan substantially shifting the burden from businesses to individuals. Not only will these changes hit them in the pocketbook, but the services that they have become accustomed to may dramatically diminish due to appropriation reductions and/or cost increases. The reduction in the business tax was touted to increase jobs, the fiscal agencies reports reference that for the state economy to improve markedly, meaningful growth in the financial sector and the housing industry will need to occur on the National level, which is expected to take years. Michigan has lost nearly 243,000 jobs in the auto industry since 2000. Even with something approximating normal employment growth in Michigan, it is unlikely we will ever reach the employment reported in 2000 again for decades.

Bottom Liners:

The carryover from FY2010-11 of $724.9 million will be mostly depleted in FY2011-12, leaving $142.3 million carrying forward to FY2012-13.

The “one-time” appropriations for FY2011-12 are as follows:

    • Best Practice $100 per pupil
$154.0 million
    • MPSERS rate offset payment
155.0 million
    • MPSERS Reserve Fund Payment 
133.0 million
    • Partial restoration of Small Class Size Grants, etc.
13.5 million
$455.5 million
  • FY 2011-12 AND FY 2012-13 Community College and Higher Education- $395.5 million each year
  • FY 2012-13 Appropriations – ELIMINATION OF $455.5 million one timers
  • Other FY 2012-13 Issues:
    • Potentially reduce kindergarten funding
    • MPSERS rate set to significantly climb again
  • FY 2012-13 Final Balance - $222.7 million

What you need to keep in mind is today’s CREC only fills in part of the equation when we start talking about FY2012-13. The consensus meeting estimates the revenues available for appropriation in the current and future years. Carry forward balances are determined based on law. The actual appropriation process will begin with the Governor’s February 9 budget presentation, allowing the appropriation side of the equation to begin taking shape. It is essential that you communicate that the year-end balances that we have detailed above are projections based on the information available as of today. As the debate begins on the FY2012-13 budget, the year-end balances will tighten up. The budget process will continue to evolve and we will keep you informed as we pass the upcoming mileposts on our budget journey. We are just at the start of the 2012-13 budget cycle with months to go and with changes all along the way. Remember, caution is in order going forward!
So what can you do? Stay informed. We have posted all of today’s information on our website on our front page under Consensus Revenue Estimating Conferences. Then look for the January 2012 heading. Monitor this site and the budget pages for additional information. We will post new pieces of information on the budget as they come in.

A final thought, don’t lose the faith. You have repeatedly talked to your superintendent, board, staff and community about these issues for years and there always seems to be a “windfall” or “one-timer” that comes along and saves the day. Maybe this coming year is the year that kind of luck ends, we’ll see. But one thing is for sure, we will continue to keep you informed so you can keep your superintendent, board, staff and community informed of how policy decisions trickle down and impact the local level. This may well be the “cliff” we’ve talked about for years - we hope not, but all indications at this point are that it may be. More districts are at the edge of the cliff than there ever has been.

We will see many of you at the Financial Strategies Conference on Tuesday and Wednesday next week, where we will get further background information on the consensus numbers and their impact on your district.

David and Bob

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