While obtaining revenue for the operation of schools has never been easy, it was made even more difficult through state constitutional tax limitations that have placed limits on revenue available to public schools through taxation. The two primary state constitutional limitations on the collection of school taxes are the 1978 Headlee Tax Limitation Amendment and Proposal A, passed by the people of Michigan in 1994.

In 1978 the voters of Michigan amended the State Constitution by adopting Article IX , known more commonly as the Headlee Amendment. This amendment was the result of a state -wide petition drive crafted and led by Richard Headlee, then a successful insurance executive and former candidate for Governor of Michigan. As a fiscal conservative, Headlee was concerned about the amount of state and local government spending, particularly in school districts. He believed that the only practical way to hold back what he believed was excessive spending was to limit the amount of tax revenue that could be legally collected each fiscal year at both the state and local levels.

Sections 25 through 33 of Article IX of the Michigan Constitution require that certain limitations be placed on the collection of taxes. Beginning in the 1979-80 fiscal year and each year thereafter, the Michigan Legislature shall not impose taxes of any kind together with all other revenues of the state (federal aid excluded) that would exceed the revenue limit established by this constitutional amendment. The revenue limit established was that total state revenues can not exceed 9.49 percent of the aggregate personal income of Michigan citizens each year. Taxes collected that exceed this revenue limit by 1 percent or more must be refunded to taxpayers.

Revenues exceeding the revenue limit by less than 1 percent may be deposited in the State Budget Stabilization Fund (Rainy Day Fund). In only one year since 1978 has the state exceeded this revenue limit and the excess tax collections were returned to Michigan taxpayers on their individual state income tax returns.

Interestingly as a result of several years of reducing taxes in Michigan, the state is well below this revenue limit and had the same tax rate structure that existed in 1978 remained in place each year since 1978, the state would have collected billions of dollars more in tax revenue without violating the Headlee Amendment and there would have been no fiscal crisis in Michigan schools characterized by the past several fiscal years cut backs. While this measure had only indirect effect on Michigan schools, two other provisions of the Headlee Amendment continues to have more direct effects.

Local units of government, including school districts, are subject to mandatory roll back of previous voter authorized millage if the property tax base increases from one year to the next at a rate greater than the prior year’s rate of inflation (CPI), assuming the tax rate has stayed the same. Richard Headlee accurately noted that school districts were not voluntarily rolling back a portion of their voter authorized millage rate, and were instead collecting annual increases in local school property taxes at rates far greater than the rate of inflation. While the state’s annual inflation rate might be 5 percent in a given year, for example, the increase in the assessed value of taxable property in a community might be 14 percent and therefore at the same millage rate this would provide school district a 14 percent increase in property tax revenue. Headlee reasoned that local units of government, including school districts, should be held to annual increases at the rate of inflation only. In order to determine whether a millage rate must be rolled back under the Headlee requirement, school districts (and other units of local government) must compute their millage reduction fraction (MRF) annually using a formula provided by the State Treasurer. For example, the 2011 MRF would be (2010 SEV-SEV losses) x inflation rate (CPI) -/- by (2001 SEV-SEV additions). If the resulting MRF is greater than one, a school district would not have to roll back any millage amounts since their property value increases did not exceed the annual inflation rate (CPI). If the MRF was less than one, such as .98, the school district officials could only levy 98 percent of their previously authorized millage so they would not exceed the true rate of inflation in their property tax collections. The Headlee Amendment does allow the option for a local school district to hold a public referendum to ask voters if they wish to override this mandatory rollback, and levy the full amount of millage previously authorized by voters. Such elections are known as Headlee Override elections.

Until 1994 all school district millages except special millages for debt retirement (repayment of school bond loans) were subject to the rollback provisions. With the passage of Proposal A in 1994, the State of Michigan replaced local school operating millages with a 6 mill state education tax that is not subject to the Headlee roll back provision and does not require periodic renewal. It is considered a charter millage designed to guarantee that the state collects annually the full amount on the real taxable value of all the property on the tax rolls. Unfortunately, the state was not so kind to local school districts. The 18 mills of none-homestead local school operating tax on non-homestead property are subject to the roll back provisions and the millage has to be periodically renewed by voters. This means, for example, that a school district whose voters previously approved the levy of 18 mills on non-homestead may only be allowed to levy 17 mills, and therefore lose some of their per pupil revenue for their school district, unless voters through a new election opt to override the mandatory rollback.

Unfortunately, this has kept school districts in the millage election business at considerable cost, and statewide has resulted in the loss of important revenue in all those districts who currently levy less than the full 18 mills on non-homestead property because of this roll back requirement. To avoid losing any part of the 18 mills of local operating revenue due to the rollback requirement, some districts have proactively asked their voters to approve additional millage beyond the 18 mills tax on non-homestead property. Under this procedure, for example, a district could estimate the anticipated potential loss of local operating revenue millage as a result of the Headlee rollback requirement. Continuing the example, let us assume that a district anticipates losing one mill each year for the next three years. Based upon these estimates, district officials would ask voters to approve a 3 mills reserve in addition to the 18 mills previously authorized, with the understanding that only a maximum of 18 mills could legally be levied each year. In year one rather than losing one mill and levying only 17 mills, one mill would be taken from the 3 mill authorized reserve to levy the full 18 mills in year one. This would leave 2 mills in reserve and for each of the following two years this process would be repeated. This strategy, although difficult to explain to voters, protects the district from losing part of their basic foundation grant as a result of the Headlee rollback requirement. School district Sinking Fund millages are also subject to the mandatory rollback provision unless the voters override the rollback. As a public policy issue, the legislature could and should correct this problem as they did with the 6 mills of state tax but so far has expressed no interesting doing so.

Perhaps the most controversial aspect of the Headlee Amendment has been section 29 that requires the Michigan Legislature to fund any activities or services required (mandated) of local units of government by the state. Using 1978 as the base year, any local activities or services required by state law that were already in existence as of 1978 were required to be state funded at the same state percentage levels during each successive year. For example, in 1978 the state’s share of funding for special education was 28.6138 percent of the total approved special education costs and 70.4165 percent of the total approved costs of special education transportation, both state mandates under Michigan’s special education law. This means that as costs for these previously mandated services increase annually, the state’s obligation under the Headlee Amendment is to continue to pay the same percentage of those services as were paid in 1978.

Section 29 of Article 9 of the Michigan Constitution also requires that any new mandates beyond the base year of 1978, must be totally paid for by the state. Almost from the beginning these provisions of the Headlee Amendment have been violated by various Michigan legislatures and governors of both parties.

In 1980 Donald Durant, a resident of the Warren Fitzgerald School District, filed a suit in the Macomb County Circuit Court alleging that the State of Michigan had violated the Headlee Tax Limitation Amendment by under-funding state mandated services. The Fitzgerald School District was joined by 82 other school districts and one Intermediate School District in the suit against the State of Michigan. This case went to the Michigan Court of Appeals and ultimately to the State Supreme Court. In July 1997, seventeen years after the initial case was filed, the Michigan Supreme Court found in favor of the school districts, specifically that the legislature had not funded it’s required share of special education, special education transportation, and the Michigan school lunch program, all required by Michigan law. The Supreme Court then ordered a monetary settlement that was based upon the amount of under-funding in 1991-92, 1992-93, and 1993-94 school years. The Court awarded approximately $212 million in judgments, including legal fees, to the 83 districts and one ISD who were plaintiffs in the suit. On April 15, 1998 the state paid the entire amount divided among the plaintiff districts based upon each district’s amount of short funding.

To be fair to the non-plaintiff districts, the legislature also provided an award of approximately $636 million to be divided among the non-plaintiff districts using the same metrics for calculating under-funding as were used with the 83 plaintiff districts. The difference was that plaintiff districts received their funding immediately, whereas the non-plaintiff districts received their payments spread out over several years until the debt to local districts is fully satisfied.

Allegations continue to be made by local school districts against the state, alleging that the legislature continues to ignore section 29 of the Headlee Amendment by under-funding existing mandates and by not funding new mandates recently passed by the legislature. Several lawsuits have been filed by local school districts subsequent to the Durant settlement alleging continued violations of the Headlee Amendment. In a July 14, 2010 opinion of the Michigan Supreme Court in Adair v. State of Michigan, the Court ruled that costs of collecting, maintaining and reporting new school data required by new state laws constituted an unfunded mandate under the Headlee Amendment. In fiscal year 2010-11 the legislature appropriated $25,624,500 to Michigan school districts to pay for this mandate.

Richard Headlee was convinced that at least part of the reason for the rise in annual spending by local school districts, and other local units of government, was the costs associated with meeting state mandate requirements. These forced costs upon local government translated into higher property taxes and greater spending. In order to attempt to reduce local spending, Headlee included as one of the provisions of his tax limitation proposed amendment the requirement that new mandates must be fully funded and mandates that existed in1978 or earlier be funded at required levels. Unfortunately there continues to be controversy over the state’s obligation to fund mandates. In 2007,a Legislative Commission on Statutory Mandates was established by Michigan lawmakers to investigate the costs of unfunded mandates. In January, 2011, the Commission released it’s report finding that the State of Michigan is not living up to it’s legal obligation by failing to cover at least $2.2 billion in services and reporting required by local units of government to meet state mandates. While this Commission report brought new attention to the problem, it is not likely that this issue will be resolved anytime soon and costs will continue to rise.

Michigan is one of a few states that bar public tax dollars to non-public schools. Article 8, section 2, of the Michigan Constitution reads, ‘No public monies or property shall be appropriated or paid or any public credit utilized, by the legislature or any other political subdivision or agency of the state directly or indirectly to aid or maintain any private, denominational or other nonpublic, pre-elementary, elementary, or secondary school”. The legislature may provide for the transportation of students to any school.

This strong and unequivocal constitutional language is the reason Michigan does not have a voucher plan that could be used for students to attend private schools at public expense. In 1978 a state referendum was held to repeal this amendment and was soundly defeated by Michigan voters 74 percent to 26 percent. It is clear that Michigan voters prefer the current prohibition of public funding of private schools.