Neither placing blame or ignoring the root causes of the current state budget crisis gets us closer to solutions. Michigan must come to grips with the reality of our condition and get on with establishing a new level of economic equilibrium.
I decided to get a closer look at what was happening in our state’s capital and attended the Michigan State Board of Education meeting held on October 26th. The state’s board, unlike local boards, has no authority over K-12 budgets, but they rightly see that the governor’s and legislature’s budget decisions impact the service for which they are responsible, educating all of the state’s public school students.
The state Superintendent of Schools, Mike Flanagan, presided over the meeting which was aimed at helping the state board get a better sense of the economic forces behind the state’s recent budget decisions. Two economists presented loads of data, but this statistic made the greatest impression on me:
In the year 2000 Michigan had the 16th highest per capita income in the United States. By 2006 we had fallen to 33rd. By the end of 2010, we are expected to be in the bottom 10.
According to the testimony of the economists (Lou Glazer of Michigan Future, Inc. and Patrick Anderson of the Anderson Economic Group), this rapid loss of state wealth is unprecedented. The message was clear. No one should be surprised that tax revenues are declining given Michigan’s decade long slide. In very simple terms, the operational expenditures of the state’s K-12 public schools are increasing at a rate that exceeds the rate of its funding sources. Period. This is the indisputable statement of the root cause problem of the K-12 budget crisis.
The political showdown in Lansing rages over the solution to that crisis. The Republicans famously oppose efforts to increase revenues. Unfortunately their “solution” of simply cutting school aid mid-year (exacerbated by Granholm’s childish 20J cut) is not practical nor in anyone’s best interests. K-12 budgets and employee contracts are simply not geared for that kind of rapid retraction. Schools cannot shut down production lines, idle plants or declare bankruptcy like our local auto companies. Our products are not inanimate widgets, but children currently dependent upon us to prepare them as lifelong learners and productive citizens.
The alternative position, best exemplified by calls to simply restore the cuts, is no less immune to criticism. Can we ignore the reality that Michigan simply has less money – indeed FAR less – than we did 10 years ago? The K-12 budget IS among the state’s greatest expenditures. Is it reasonable that it can remain unscathed? Anderson was explicit in his advice: “No [state budget] sector can escape the damage of this negligence.” The “negligence” is, in his words, the state’s failure to establish a coherent economic strategy amidst the meltdown of the last decade.
Economic reality has no political bias. It doesn’t make value judgments. That’s where leadership comes in. Lansing must come to grips with the state’s economic reality.
Toward the end of his testimony, economist Lou Glazer sullenly delivered the line of the day when he said: “It’s hard getting poor.” The sooner we embrace our new reality the sooner we identify long-term solutions.
I was able to address the state board at the meeting. I told them that Proposal A shows us that school districts, despite wide variances in per pupil revenue, can each flourish. This tells us that revenue alone does not dictate success or failure. The key word is equilibrium. With rare exception (e.g. Detroit Public Schools and a few others), the state’s 550 public school districts have found their own equilibrium as evidenced by balanced budgets and track records of success.
However, school districts cannot cope with rapid and immediate reductions in revenue, such as mid-year reductions. The following factors are the most significant impediments:
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Multi-year employee contracts consume typically 85% of district budgets. Employee compensation systems have embedded raises for longevity and mandated post-graduate course work and now per pupil revenue is declining. Unless contracts are indexed specifically to per pupil revenue, these are incompatible characteristics.
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The state continues to raise retirement system costs. According to the State of Michigan’s Financial Information Database, mandatory contributions local districts make to the retirement system have increased by $400,000,000 from 2004 to 2008. Four years ago this consumed 10.84% of statewide education spending. In 2008 it grew to 12.67%. The greatest driver of this spending increase is the MPSERS’ unfunded liability costs. The state cannot raise the MPSERS requirement and cut per pupil funding at the same time. Something’s got to give.
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Like every industry, healthcare spending is a huge problem in the K-12 budget. Despite the reduction thousands of employees statewide over the last few years, health insurance costs have increased by $270,000,000 – all this while the state’s tax base is shrinking at historic rates.
Lansing’s inability or unwillingness to address the obvious structural problem is it’s greatest failure. But there is no time like the present to get on with that needs to be done.
These are heavy problems in both a political and practical sense. Unfortunately, as I’ve been saying for my four years on the School Board, they are getting worse. These are not new trends. It is discouraging to see the discussions in Lansing that are either incredibly short term (e.g. “let’s spend more stimulus dollars now”) or those that amount to rounding errors when put into the overall context of the issue (e.g. let’s freeze income tax credits). Serious and large scale reforms are needed and there is little evidence that Lansing is ready to act.
Is Andy Dillon’s idea to pool all state employees’ health care spending making just a little more sense now given some of the numbers referenced above? Dillon has taken plenty of abuse for this, but who else is coming forward with another solution? Will Dillon’s plan save $900,000,000? I’m not sure, but I am 100% sure that rising health care costs are one of the most significant sources of the budget crisis. The least responsible response would be to not give it proper analysis. The most disingenuous response is to vilify someone who is actively investigating solutions. Share your solution first before criticizing another’s.
Solutions are the name of the game at this point. There will be no single, silver bullet. In my view, the long-term solution to Michigan’s K-12 budget crisis needs to incorporate the following elements:
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Predictable and reliable, multi-year per pupil revenue and state mandated cost projections. Lansing dictates per pupil funding, not local school boards. If Lansing can give local school boards a legally binding two year, rolling forecasts of per pupil revenue and mandatory retirement contribution numbers, even if the news is unpleasant, then better financial decisions can be made in a logical and orderly fashion. Emergency, mid-year cuts don’t work for anyone.
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Reform of the state mandated retirement system. Lansing has tinkered with this issue on and off for years. Now we really need action. The retirement system came into being when we were a “wealthy state.” Again, we’re beyond value judgments at this point. I wish we could afford to keep it like it is, but it is clear we simply cannot afford the status quo.
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Derive every conceivable efficiency to curb health care expense growth rate. Whether the Dillon Plan, some derivative, something at the state level or the local level, health care costs simply cannot continue to escalate at this pace. It is unsustainable in light of revenue options.
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Review of state level investment priorities, particularly Corrections Department spending. Yes, K-12 spending is one of the largest budget areas, but it is arguably the most important. Let’s take a closer look at Corrections spending and policy. Remember, we’re nearing the bottom 10 in per capita income, yet Michigan’s annual cost per prisoner is 8th highest in the country ($32,500/prisoner)! We border a state (Indiana) that ranks 49th ($9,000/prisoner). Can we learn something from the Hoosiers? Furthermore, Michigan today has three times the number of prisoners we had in the early ‘80’s despite having similar crime rates. Something is wrong with this picture. This is a massive spend ripe for reform and cost reductions. Who would argue that we should place greater priority on our students than our prisoners?
Above all else, the state of Michigan needs everyone, not just lawmakers, to understand that change is necessary and change can can be painful.
Either as a result of political courage or economic necessity change is coming for the state of Michigan. This is inevitable, so why not usher in the change in an orderly fashion. The form that change takes, such as has been our experience locally, will undoubtedly be unpopular. It is indeed hard getting poor. We’re going to have the deal with that. Pretty much everyone involved now acknowledges we have a problem. That’s the first step.
The leaders of the state of Michigan need to develop a plan that facilitates an orderly transition to the state’s new level of economic equilibrium that can be executed in such a way so as to do as little damage as possible to our students in both the near and long term. All stakeholders need to be knowledgeable and responsible advocates for reforms that are cognizant of our reality and that legitimately keep the best interests of our students as its first priority.