School Budgets Caught A Cold In 2000s, But Michigan Taxpayers Suffered Economic Pneumonia

Spending advocates’ budget comparisons ignore how Michigan’s ‘lost decade’ crushed taxpayers

By Tom Gantert | January 30, 2019

As part of an ongoing effort to portray public schools as underfunded, the impact of the devastating Lost Decade on taxpayers is being overlooked as spending advocates point to budget cuts made 15 years ago.

With Michigan approaching the 10th anniversary of its worst days of the nationwide Great Recession – a state unemployment rate of 14.6 percent in June 2009 – memories of the devastating one-state recession that preceded it in the early 2000s are fading.

At the same time, proponents of increased public school spending have changed their talking points. Beginning around 2013, politicians, public school administrators and teachers unions began to claim that public school funding had been cut during the term of former-Gov. Rick Snyder, who took office in 2011.

The truth, however, is that starting in 2013, state funding for Michigan’s public K-12 schools (not including local or federal revenues) has increased by nearly $1 billion, even after adjusting for inflation. It rose from $10.8 billion in 2010-11 (the equivalent of $12.16 billion in 2018 dollars) to $13.04 billion in 2018-19.

School spending interests no longer focus on current or recent fiscal conditions. Instead, they are pointing to school budget cuts made 15 years ago.

Backed by a recent study from Michigan State University, spending interests describe K-12 school funding as having declined since 2003. To do so, they skip over a simple and obvious fact: The period from 2003 through 2018 includes two very different episodes in state economic history, the first, a time of sharp decline and the second, one of gradual recovery.

Before 2003, the state school aid budget had risen sharply for several years, from $8.01 billion in fiscal year 1994-95 to $12.34 billion in 2002-03. (These figures include federal dollars, not just state money.)

That strong economy began winding down after the dot-com market crash of 2000. Beginning in 2004, state budgets also went into decline in inflation-adjusted terms.

As a result, Michigan school aid budgets were stagnant and even in decline from 2004 through 2012. Budgets recovered starting in 2013, but after adjusting for inflation, school funding is down for the entire period from 2003 to 2018.

To sum up the historical record, school spending rose sharply during the go-go years from 1994 to 2002, was flat-to-lower from 2003 to 2012, and has gradually risen since then.

What all these raw numbers fail to show is the devastating impact the one-state recession, which began in the early 2000s, had on Michigan workers, homeowners and taxpayers.

Michigan lost 805,000 jobs from 2000 to 2009.

Not surprisingly, the per-capita personal income of Michigan residents tumbled, falling from the nation’s 18th-highest in 2000 to 38th place in 2009. (The actual numbers were $30,310 in 2000, which was equivalent to $37,913 when stated in 2009 inflation-adjusted dollars, and $33,938 in 2009.) That decline was the fourth-largest for any state in the country during any nine-year period going back to 1929.

The relative decline in school funding, then, came during what some observers called the Lost Decade, when Michigan taxpayers were suffering economically.

“This is a classic case of ‘You always find what you are looking for.’ YAFWYALF,” said Sen. Mike Shirkey, R-Clarklake. He was referring to a recent Michigan State University study that documents school spending declines but fails to provide context. “The MSU study is not necessarily technically inaccurate. It simply doesn’t tell a complete story and seemingly attempts to lead readers to a specific conclusion. School funding is one of our highest priorities — right after safety. In the last eight years, we have improved K-12 funding. Significantly beyond inflation. I am not opposed to a fair assessment of where we are and an equally frank discussion about where we need to go. But we have to start with a full, complete picture.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

MSU Uses Obscure ‘Government Purchases Index’ To Claim School Funding Down

The common CPI inflation measure shows funding up, not down

By Tom Gantert | January 29, 2019

In a new study that has received extensive media coverage for declaring that Michigan public school spending has had the sharpest decline in the country since 1994, Michigan State University researchers relied on an obscure method to adjust for inflation.

The researchers compared past school spending levels by using an inflation index that is based on changes in state and local government purchase prices. As a result, their analysis overstates past school spending compared to what an analysis using the familiar Consumer Price Index would show.

The authors of the report used the U.S. Commerce Department’s GDP price deflator for state and local government purchases as their index of inflation. As a result, their work generated an inflation estimate that is 50 percent higher than what the Consumer Price Index shows, according to an analysis by the Mackinac Center for Public Policy. This allowed the authors to claim in a press release that “funding for Michigan’s public schools has fallen more sharply than any other state over the past quarter-century.”

David Arsen, lead author of the MSU study, said in the press release, “Michigan has tried to improve schools on the cheap, focusing on more accountability and school choice.”

Ben DeGrow, education policy director at the Mackinac Center, ran the same numbers using the CPI. He came up with numbers that were very different from those obtained by the MSU authors, whose adjustment suggested that Michigan public school revenues in 1994-95 would be 91 percent higher if stated in 2014-15 dollars.

In contrast, when DeGrow used the CPI inflation adjustment, he found that the 1994-95 school spending levels are just 60 percent higher when stated in 2014-2015 prices. The 2014-15 fiscal year was the last year included in the MSU study.

This is important because choosing one method versus the other can create a very different impression of how school funding has changed over time.

Because they used the less common cost index, the MSU researchers were able to conclude that 2014-15 Michigan school revenues declined more than 14 percent from 1994-95 after adjusting for inflation. In comparison, using the Consumer Price Index indicates that over the same period, school revenues actually increased by 2.1 percent in real, inflation-adjusted terms.

DeGrow said the discrepancy is even larger when the different methods are applied to per-pupil funding, rather than overall school funding.

“The index Arsen uses shows that per-pupil funding dropped around 10 percent. Using CPI instead flips the direction and says that per-pupil funding increased 8 percent,” DeGrow said in an email.

Michael Van Beek, director of research at the Mackinac Center, said neither method is necessarily invalid, but the MSU researcher’s narrative relies on figures produced using the inflation index that is based on the cost of government purchases.

“The GDP deflator produces the most dramatic results. The other methods produce a much less shocking one: real school funding is up slightly from 1994 and down slightly from 2002.” Van Beek said in an email.

Arsen said in an email that the government purchases inflation index was the appropriate inflation index for this study.

Antony Davies, an associate professor of economics at Duquesne University, said he had never seen the government purchases index used before, but it was appropriate for MSU to use it.

University of Michigan-Flint economist Mark Perry agreed that Arsen selected the appropriate inflation index.

“Overall, I think it’s reasonable for them to use that deflator,” Perry said in an email.

The MSU authors explained why they chose the less-known inflation index:

“The conversion of nominal to real dollars is common in economic analyses and requires use of the proper price deflator. Price deflators measure changes in the price level of goods and services from year to year. The consumer price index, generated by the U.S. Bureau of Labor Statistics, is well known as the composite measure of inflation for a fixed basket of household consumption items. The CPI market basket, however, is poorly matched with what K-12 public schools spend money on. Compared to the CPI basket, school purchases are far more concentrated in labor services than goods and far less concentrated in expenditures on housing and food. The best available deflator for school district finances is the U.S. Commerce Department’s GDP price deflator for state and local government purchases. We use this price index to adjust education revenues for inflation in this section.”