Unintended Consequence of Centralized Public School Funding in Michigan Education

1. IntroductionIn an effort to create greater equity among school districts, a number of states have shifted the responsibility for school funding from local school districts to the state. Although many researchers have found that centralizing funding for public schools has been successful in creating greater equity (Murray, Evans, and Schwab 1998; Moser and Rubenstein 2002), other researchers have pointed out that centralizing funding can lead to unintended consequences. For example, Fischel (1989, 1992) suggests that families in wealthier districts, which have a stronger demand for education, are no longer able to match their preference for education under a system of equalized funding. In some cases, this may drive parents to seek private school alternatives (Downes and Schoeman 1998).1 In other cases, families meet their preferences by making private contributions to public schools (Sonstelie and Brunner 1997). Furthermore, Theobald and Picus (1991) argue that centralizing funding forces education, as a state service, to compete with other state services for funds, and as a result, the growth rate of spending per pupil decreases over time.2 These articles illustrate that policies designed to centralize control of public school funding can produce unintended consequences.In this article, we introduce into the literature an additional consequence caused by centralizing control of school funding. We argue that centralized control of public school funding with the objective to equalize operating expenditures (i.e., salaries, supplies, and other ongoing expenses) across school districts while leaving capital acquisitions (i.e., purchases of school buildings and other facilities) under local control results in resource-rich school districts becoming more reliant on debt financing.3 We find empirical support for this theory using data in the state of Michigan during its transition to a centralized school financing system in 1994.In the next section, we present an overview of Michigan's move to a centralized funding policy. In the third section, we present the regression model used to test the theory, followed by the description of the data and the estimated results. The final section of the study summarizes our findings.2. Overview of Michigan's Educational SystemIn 1993, a legislative anomaly lead to an abrupt change in the method of financing public education in Michigan. Prior to 1993, Michigan had one of the most locally controlled school systems in the United States. Over 65% of school operating expenditures came from local revenues, whereas the remaining 35% were derived from state and federal sources (Courant, Gramlich, and Loeb 1995). Property owners argued that local reliance on property taxes created an excessive burden and voiced their complaints to state representatives. Attempts to lower these taxes were defeated annually until Debbie Stabenow, a Democrat senator and candidate for governor, frustrated with the tax debate, proposed an absurdity to eliminate all property taxes without suggesting an alternative funding mechanism (Courant and Loeb 1997). Astonishingly, the legislature passed her bill, leaving the public school system with no means of funding. Seizing an opportunity to create greater equity among school districts, Michigan officials quickly devised a centralized system of financing public school operations, known as Proposal A, that reduces districts' reliance on local property taxes by increasing the state's sales tax. Integrated into Proposal A is a distribution formula that reduces the disparity in operating expenditures across high- and low-spending school districts, in part, by constraining the allocation of operating funds for high-spending districts.However, Proposal A does not affect local control of funding for capital projects (Watkins 2002). Michigan's state operating budget typically provides less than 5% of the total revenue needed to service school debt and no revenue for capital expenditures. …