How Local Schools are Funded in Michigan

Prior to 1994, public schools in Michigan were largely funded through a local property tax millage. Both the operations and infrastructure of a school district were funded when districts went to local voters and asked them for an increase or renewal of a millage.  Proposal A, approved by the voters of Michigan, went into effect for the 1994-95 school year and drastically changed the way schools are funded. While many voters still believe Proposal A was largely property tax relief, for schools it was a new funding mechanism that distributes state funds on a per pupil basis to each district -  also commonly called the school’s foundation allowance.

Under Proposal A, schools still must raise local millage for building projects, but that’s one of the few local options available for schools to raise money since Proposal A. Public schools are now largely funded through a statewide 6-mil tax called the State Education Tax (SET), an 18-mil local tax on non-homestead property, and a combination of other taxes comprised of mostly the state income tax and the sales tax.

The 6-mils are collected directly by the state, while the 18-mil tax is kept locally, but must be levied or districts face a reduction in their foundation allowance. The rough breakdown for school revenues on a statewide basis is 45% from sales tax, 20% from income tax, 20% from SET, and an additional 15% made up of other revenue sources including the lottery. These numbers fluctuate each year based on overall tax collections at the state level.

The foundation allowance for each school comprises approximately 90% of school districts general fund revenue. The remainder is from other state and federal programs and some local revenue related to interest earned, tuition and fund transfers. The money from state and federal programs is often called categoricals, meaning they are designated for a certain category of expenditure, such as at-risk students or for districts with declining enrollment.

As mentioned above, schools are funded based on their individual pupil populations.  There’s a specific formula that is a pupil enrollment blend of 10% of the previous year’s February student count and 90% of the current year’s September count. This blend has changed over the years from 50/50 to its current high. This formula is kept in place to help school districts who are experiencing declining enrollment from one year to the next.

One last provision that should be mentioned is the Headlee Amendment to the Constitution. This is not a specific school issue, but can have an impact on school funding. What Headlee does is limit the increase in the amount of money a unit of government (school district) can raise annually to whatever the rate of inflation is for that year. What this means is when a district is levying the 18-mils on non-homestead property, and property values go up faster than the rate of inflation, there will actually be a millage reduction so that your revenue doesn’t grow at the higher rate. This actually causes a reduction in a district’s foundation allowance because the state expects you to levy the full 18-mils. This situation forces local districts to go to their local voters after a millage rollback to ensure the millage remains at 18-mils. This may seem problematic, but it’s a millage that regularly passes and is usually not a problem for districts.