Opinion: Schools are closed, but expenses remain and revenues fall

James M. Hohman and Ben DeGrow

School buildings have been closed for the year, and school administrators are worried that the current pandemic will strain their resources unless they get some additional assistance. There are some strengths and weaknesses to Michigan's method of funding schools, and schools can do some things to respond. As with so many things in the crisis, the problems are small if the pandemic is short.

Michigan's public schools get a piece of a number of different taxes, with property taxes, sales taxes and income taxes paying for the lion's share of their expenses.

On the positive side of school funding, property taxes are the largest source of school revenue. They won't change much in the short term, providing around $8 billion annually for education purposes from local and intermediate school districts' direct millages and also through the State Education Tax.

These taxes are based on the assessed value of property and the bills for the winter were sent before the pandemic. Summer property taxes likely won't change much, either. Even if property values dip, tax assessments tend to take a while to come down. During the last recession, the assessed value of homes did not reach its trough until 2012, while the rest of the economy had already been recovering.

The pandemic is halting construction and slowing home sales, so it can decrease property taxes revenue if it lasts a long time.

Other taxes are going to take a hit, however. Sales taxes provide schools with $6.3 billion in the current fiscal year. Many retail businesses are deliberately closed, and the attorney general has attacked some of the stores that remain open for continuing to sell "nonessential" goods. Grocery sales may not be decreasing much, but since they are not taxable anyway, there is likely going to be a substantial decline in taxable sales.

Busses are line up in the Larry F. Brender Support Services Center bus yard at L'Anse Creuse Public Schools in Clinton Twp., Thursday, April 2, 2020.  Michigan Gov. Gretchen Whitmer officially closed all K-12 buildings for the rest of the school year.

State government is likely to collect less from the income tax, which provides $2.8 billion for schools. Not everyone can work from home, and many of those who can't will not be able to work and earn income.

Other revenues that fund schools — real estate transfer taxes, casino wagering taxes and the lottery — are likely to decline, since a number of lottery outlets are closed, casinos are closed, and home sales are down. Again, the effects of these will be smaller if the pandemic is shorter.

Not all districts will be affected in the same way or to the same degree. Local and state property taxes represent about 36% of a typical district's revenues, but a small number of property-rich districts get most of their money from this source, which may leave them unaffected in a short pandemic. Districts that receive less from property taxes, on the other hand, are more susceptible to volatile state taxes. Property taxes account for only 15% in Detroit Public Schools Community District, the lowest among conventional districts.

But even that share is more than the average charter school, which gets some funding through the State Education Tax but has no access to local property taxes. Meanwhile, Michigan's 56 intermediate school districts get half of their funding from local millages.

To summarize: The largest source for education funding should be stable for now, but other sources may fall and some districts will be more affected than others.

The state already budgeted based on expected revenue for the year, and that revenue is unlikely to come in as expected. This puts school administrators in a strange position. Their facilities are closed to students, even as they attempt to keep learning going through online means. Teachers and other staff members will still be paid, but the revenue needed to pay for them may fall.

Since employee salaries and benefits make up over 80% of district operating budgets, that leaves little opportunity for savings on planned expenditures. Still, spending on items like fuel and maintenance for school buses and building utilities should be lower. With the recent passage of the CARES Act, hundreds of millions in extra emergency federal dollars should reach public schools across the state before their fiscal year is complete.

Local officials should focus on setting aside funds for the coming year, when many sources of revenue may see a bigger, sustained hit. They may also have to adjust their expected student counts upward, if fewer families are able to afford private school tuition as a result of being forced out of work. From the state's perspective, larger public school student counts would reduce its ability to cover per-pupil costs.

Given the uncertainties, Lansing policymakers should communicate the best estimates of economic forecasts regularly. To the greatest extent possible, they should prioritize student-based funding streams, like the foundation allowance, over categorical grants dedicated to specific projects or purposes. Some districts may also need extra clearance to revisit provisions in labor agreements that were decided during a rosier economic outlook.

Greater flexibility will help education leaders prepare to weather the fiscal storm, a storm that's hopefully tempered by relief from the growing effects of the virus.

James Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute located in Midland. Ben DeGrow is the director of education policy at the Mackinac Center.