January 7, 2014

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So What Really Happened Last Month In The “Lame Duck” Session?

The 97th Legislature of Michigan closed its final days of session last month. We have summarized several bills that passed the legislature have been presented to the Governor for signature. Two bills we have been following that didn’t make it to the finish line include a restructuring of the teacher evaluation process and the implementation of a school fiscal early warning system. With so much focus on the development of a solution for funding roads, these two areas took a back seat. We’re keeping a close eye on both of these topics as it’s expected the new legislature will pick up the conversation.

Road Funding – School Impact!
By now you’ve seen and heard some details on the deal struck on road funding that will produce $1.3 billion or so for road maintenance and improvements. You’ve probably also heard that schools and municipal funding will not be negatively impacted by the deal, or at least that’s the idea. So what are the components of the funding and what needs to happen to make it a reality? What is the potential impact on the school funding? Here are some details….

House Joint Resolution UU, Senate Bill 847, and House Bills 4593, 5492, and 5493
As described in the House Fiscal Agency (HFA) legislative analysis, HJR UU would amend the State Constitution to:

  • Exempt sales of gasoline and diesel motor fuel from the state general sales tax after October 1, 2015.
  • Increase the maximum sales and use tax by 1% (from 6% to 7%).
  • Dedicate 60% of the “not more than” 5% of the sales tax and 12.3% of “not more than” 5% of the use tax to the School Aid Fund (SAF). (The sales tax earmark currently applies to the first 4% of the tax; the use tax earmark would effectively be a new earmark from that component of the tax.)
  • Provide for the SAF to be used exclusively for:
    • School districts
    • Public community colleges (new)
    • Public career and technical education programs
    • Scholarships for students attending either public community colleges or public career and technical educations programs (new)
    • School employees' retirement system, as provided by law

The language changes effectively remove aid to public universities as an allowable
use of the fund by moving higher ed (described in more detail below), but adds several new areas that could eventually eat into or exhaust any perceived savings of excluding “higher education.” With little information available on the intent of specifying the new allowable uses, we’ll need to pay close attention to this area in the FY2015-16 budget and any negative impact it may have beyond the presumed savings!

Other bills that are “tie-barred” to the HJR UU which impact the SAF are HB 4593 and HB 5492. These bills will go into effect October 1, 2015 if voters pass the ballot question in May 2015, which would amend the General Sales Tax Act, the Use Tax Act, the Motor Fuel Act, and the Motor Fuel Carrier Tax Act.

In summary: gasoline and diesel fuel would be exempt from the current sales and use tax. The motor fuel tax would be converted to an ad valorem tax on the wholesale price of fuel from the current specific tax per gallon at the pump.

Another bill dependent on the passage of a ballot proposal is SB 847, which amends the Income Tax Act and increases the Michigan Earned Income Tax Credit to 20% of the credit allowed under current IRS code. Although seemingly not related to the bills in the grouping, it will provide greater tax relief to the State’s lowest income households, and returns the credit to the level allowed prior to the income tax reform of 2012.

Two additional bills that are expected to positively impact tax revenues were also passed and will become law upon signature. SB 658 and SB 659, which are not dependent on the ballot proposal as they were not part of the overall tie-bar, more clearly define retail sales and the responsibility to collect and remit tax based on those sales. This would include Internet related commerce. A portion of the tax generated would be allocated to the SAF.

State Sales Tax and Use Tax
As noted above, the state sales tax and the use tax would be increased by 1% for transactions subject to those taxes. Due to the fact that the current 6% sales and use taxes are technically broken down into a 4% tax and a 2% tax with the proceeds specifically allocated, it’s important to understand how the new 1% will be distributed. Part of the reason the SAF is expected to see new dollars is due to the “new” tax breakdown.

Currently, the 4% and 2% rates are used to fund the SAF, the General Fund/General Purpose (GF/GP) and other various areas including Revenue Sharing and the Comprehensive Transportation Fund. Constitutionally, 60% of the 4% portion and 100% of the 2% portion of the sales tax is allocated to the SAF. Of the 6% Use Tax, none of the 4% portion is currently used to fund the SAF, but 100% of the remaining 2% portion is dedicated to schools.

This is important to understand because the change voters will be asked to approve in the ballot question is to provide 60% of “not more than” 5% (4% + voted 1%) sales tax revenue to schools and a new allocation of 12.3% of “not more than” 5% (4% + voted 1%) to the SAF, although the wording is changed to say “not more than 5%” compared to the current language of “4%.” We were told the reason for the change in the wording is to make it consistent with similar language for local revenue sharing as seen in other areas of the law.

The fund would continue to receive 100% of the 2% tax rate for both the sales and use taxes under current law. Even with the sales of gasoline and diesel fuel being exempt from sales and use taxes, it’s expected that the 1% increase in sales tax and the new allocation of use tax will cover any revenue losses due to the motor fuel exemption according to the HFA.

Here is a summary of the impact to the School Aid Fund:


4% rate: Constitutional
Not more than 5% rate: Constitutional
2% rate: Constitutional
2% rate: Constitutional


4% rate: Statutory
Not more than 5% rate: Statutory
2% rate: Constitutional
2% rate: Constitutional

Based on the HFA estimated full-year impact of the proposed funding change, the net impact would be an approximate $300 million INCREASE in SAF revenues. A breakdown of the estimated revenue impacts is as follows:

Removal of Sales Tax on Fuel
Increase in Sales/Use Tax Rate by 1%
Adjust Use Tax Earmarking (12.3% to SAF)
Internet Sales Collections

Things sound pretty positive, but here’s a word of caution. As mentioned above, the resolution also includes language to change the Michigan Constitution to remove “higher education” as an allowable use of the SAF and allows these dollars to be used to aid school districts, public community colleges, public career and technical education programs, scholarships for students attending either public community colleges or public career and technical education programs and the school employees’ retirement system. The SAF has used nearly $400 million per year over the last few years to fund community colleges ($197.6 million) and higher education ($200.5 million). Although it would seem that higher education being eliminated from the allowed use would provide an additional $200 million to be potentially reallocated to K-12 operations, picking up the full cost of community colleges from the state’s GF/GP plus the addition of the community college and career and technical education program scholarships may exhaust any savings. This certainly appears to have the potential to eventually absorb the $300 million increase in the SAF provided by this package! The Governor has already been quoted as intending to pay for all community college costs out of the SAF, including scholarships. We are concerned the use of School Aid Fund dollars for non-K-12 costs will probably grow with inflation and possibly other community college program needs deemed necessary by the legislature and Governor.

Also we can’t forget that the “buy-down” of the retirement rate, which comes off the top of the SAF, is estimated to increase from the current $675 million to $950+ million in FY 2015-16. Planning that there may be additional funds for foundation allowance increases is still not clear at this point, but we could get a better indication from the January 16, 2015 Consensus Revenue Estimating Conference (CREC). It’s always interesting to see what is real “new” revenue versus replacement funds. We’ll have to wait and see!

Bottom Line on the Road Deal:
Although legislatively approved and sent on to the Governor, the constitutional changes required to enact the package requires voter approval. It is expected that a ballot proposal will be submitted and appear on the May 2015, regular election ballot.

Transparency Reporting and At-Risk Funding? –
Senate Bills 80 & 81

Also passed as part of the overall “deal” on roads, additional transparency reporting requirements were passed through the legislature with an unexpected link to at-risk funding. SB 80 expands Section 18 transparency reporting requirements by mandating links to written district policies that govern procurement of supplies, materials and equipment including written policies that establish specific categories of reimbursable expenses. A report of the district’s accounts payable register for the most recent fiscal year or a statement of the total amount of expenses incurred by board members and employees that were reimbursed by the district for the most recent school fiscal year must also be posted and publicly accessible. These reports will be in a form and manner to be determined by the Michigan Department of Education (MDE). We will offer to assist MDE in this process.

Added to SB 80 is an update to Section 31a at-risk funding that appropriates an additional $40 million from School Aid for the 2014-15 fiscal year. The funds may be used for the purposes of ensuring that pupils are proficient in reading by the end of grade 3, that high school graduates are career and college ready, for adolescent health centers, and hearing and vision screenings. Once again, the qualifications for receiving at-risk funds remain the same; simply more funds have been added to the current $317+ million than were appropriated in the original School Aid bill.

SB 81 expands the public record to include the written policy of the specific categories of reimbursable expenses for board members and employees. It also expands the groups covered by this mandate to include the board of a school district or intermediate school district, the board of directors of a public school academy, or an authority board of an Education Achievement Authority.

Statewide Cost Study – Senate Bill 423
SB 423 was also passed during lame duck session. This bill calls for the Department of Technology, Management and Budget to enter into a contract for a comprehensive statewide cost study to determine the sufficient per pupil resources to provide a public education that enables a student to demonstrate the successful completion, in terms of proficiency, of all of the credit requirements of the Michigan Merit standard under Sections 1278a and 1278b.

As part of the requirements, the study shall also insure that it will satisfy all of the following:

a) Considers whether resources are distributed so that all children have an equal opportunity to succeed in school

b) Vendor is qualified to conduct the study and is able to assess at least the following:

i. Whether the data is sufficient in showing a cause-and-effect relationship

ii. The degree to which the data or costs took into consideration efficiency and lowest possible cost of resource delivery

iii. Transparency and reliability of the data generated

iv. How well the data could be applied to recognize existing public school and pupil cost pressure differences

c) Include all the following:

i. A determination of the educational resources and related expenditures that are required to provide a quality elementary and secondary education for each pupil in the public schools, including looking at districts that are low spending but high achieving

ii. Review of geographic cost-of-education indexing in the state

iii. Investigation of additional funding that may be necessary to meet the needs unique to schools and pupils:

a) Socioeconomic status

b) Limited English proficiency

c) Special needs students

d) Scarcity and density of population

e) Issues related to rural, urban or suburban nature of school districts

iv. Examine the impact of food service costs, transportation, community services, adult ed, school building construction and maintenance, and other capital costs, and debt service

v. Determine the cost of pupil population growth and decline

d) Study shall be completed within one year of the effective date of the legislation

e) Report must be provided to the Legislature, Governor, and Legislative Auditor General within 30 days of completion of the cost study

As you can see from the above list of expectations, it’s assumed the study would provide for a comprehensive results based cost/benefit analysis of the current system of education in Michigan. In addition, the study could give rise to a determination of the appropriateness of current funding levels across programs and students on a statewide basis. Although the age-old debate of whether or not Michigan spends enough to educate students properly may not be solved by the study, it will certainly give the legislature and others additional data to make decisions for future funding considerations. We’ll need to pay special attention to the efforts as this process moves forward.

Financially, the bill has an undetermined financial impact as it has no appropriation attached to it. Other states that have entertained a statewide cost study have paid in excess of $1 million for their report. This will be something watch as well.

Freedom of Information (FOIA) Changes – House Bill 4001

The Lame Duck session produced many interesting legislative initiatives, but the changes to the FOIA law are something that you’ll want to take special note of! This is a bill for which you will want to print out the Senate Fiscal Analysis (SFA) and the bill itself for all the details!

HB 4001 makes changes to several areas of the law, but specifically noteworthy are:

  • the calculation of the fees charged for FOIA requests
  • communication requirements for requests
  • establishment of procedures and guidelines of how the district administers FOIA
  • a summary written in a manner to be easily understood by the general public
  • a posting requirement of the procedure and guidelines on the districts website

In addition, punitive damages for non-compliance are increased to $2,000, up from $500, and civil fines on public bodies between $2,500 and $7,500 for willfully and intentionally failing to comply with the act! Needless to say, there is a lot more to this bill than simply saying FOIA has changed!

Financially the bill may negatively impact district revenues, which tend to be reimbursement of actual costs, by limiting the wages to be billed to that of the lowest paid staff that could provide the information for the request, even if a higher paid employee performed the duty. The public body is also required to provide the first $50 of information free of charge to certain individuals, an increase from the $20 exemption under current law. Costs of copies are also limited by the bill to $.10 per page.

Once again, this is a bill that we highly recommend you review and discuss these changes with the appropriate staff at your district that deal with FOIA requests. We are definitely planning on covering this topic in detail at our Annual Conference in Detroit! We are also planning a webinar on FOIA, which will include the new requirements and practical applications on March 5, 2015. More details to come on that event, but please mark your calendar!

Senate Fiscal Agency Releases Revenue Forecast!

Well it’s that time of year again! The Consensus Revenue Estimating Conference (CREC) will be held at the Capitol on Friday, January 16 beginning at 9:00 am. The January CREC kicks off the traditional budgeting season, as the participants of the conference will come to agreement on estimates of revenue available for appropriation for the General Fund/General Purpose (GF/GP) and the School Aid Fund (SAF). Estimates of revenue for the close of FY2013-14 and updates to revenue estimates for FY2014-15 and FY2015-16 will be the focus of the meeting. There will also be the first estimates of FY2016-17.

Generally, we see information from both the House and Senate Fiscal agencies regarding the CREC in advance of the meeting. As of today, the House has not released its information, but the Senate has released their estimates. We have added the January 2015 information to our webpage dedicated to the conference information and we will update that page as we receive additional information.

In reviewing the SFA “Economic Outlook and Budget Review” dated December 19, 2015, they expect a negative revision of revenues for both the GF/GP and the SAF for the years covered. The good news to some extent is that the downward revisions to the SAF are minimal and the fund balance estimates are still positive, FY 2014-15 at $172.7 million and FY2015-16 at $326.5 million. Conversely, the GF/GP is estimated to exhaust any carry forward from FY2013-14 and is estimated to end its years in the negative for FY2014-15 and FY2015-16 an estimated ($162.2) million and ($186.4) million respectfully. For the periods covered of FY2014-15, FY2015-16 and FY2016-17, the SAF revenue estimates are being reduced ($44.4) million and the GF/GP revenue estimates are reduced ($842.1) million from the May CREC final agreement. We need to remember, this is just one of several estimates and data sources used to come to a final agreement. The House and Administration will weigh in with their estimates.

Although the estimates of the SAF appear to be somewhat stable, the pressures of balancing the GF/GP shortfall could have a negative impact on the SAF. Based on the House Fiscal Agency (HFA) balance sheet for the SAF from the May CREC, the GF/GP is transferring $180 million the SAF for both FY2014-15 and FY2015-16. Could this transfer be an easy solution to the GF/GP shortfall? Also, we can’t ignore that the CREC is a snapshot of current information and doesn’t take into consideration pending legislation such as the ballot proposal. Meaning, the door could still be open to funding more higher education or community college operations through the use of the SAF to balance the GF/GP for FY2014-15. Things we need to consider as we watch the scenario unfold next Friday at the meeting.

The MSBO School Finance Committee has decided to move their regularly scheduled meeting to the Capitol to take part in the proceedings of the CREC. We welcome you to join us for the meeting. It is an interesting opportunity to see multiple presentations regarding the global, national and state economic outlook as well as specifics on the impact of the auto industry on State funding. We have posted the official announcement of the January 16 CREC on our webpage.

There is a lot happening that will impact the school business official and we are certain that the new legislature will be reorganizing the effort to identify and address the fiscal stability of schools. We are very interested in continuing the conversation and coming up with a systemic approach that helps districts who need it, and doesn’t put an undue burden on those that are not showing significant signs of distress.

David and Bob

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