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State Funding Allocation to Local School Districts

Module by: William J. Price. E-mail the author

Summary: As America begins the second decade of the twenty-first century, there is little question that the education of our youth is critical to the continued political and economic health of our nation. To ensure that societal demands for education are met, politicians and other policy makers must make decisions about what kind of educational system should be provided and how such a system will be funded. In addition, they must ensure that equal educational opportunity is available and accessible to all our students, regardless of their socio-economic status or where they may live. This is a tall order, but one that is crucial to the full development of human capital in our state and nation. Expenditures for education are the largest single budgetary expense for state and local governments in the United States. Estimates are that as much as eight per cent of the nation’s gross domestic product is spent for all levels of educational service. With an estimated annual expenditure of over 600 billion dollars to support the education of record levels of K-12 student enrollments, and approximately six million teachers and support staff nation wide, education is indeed big business. As with any business it is important that a continued source of revenue be available to successfully meet increasing demands, while at the same time using existing resources as wisely and efficiently as possible. Since support for public education relies primarily on public tax dollars, positive public perceptions of schools is critical to their continued financial support.

NCPEA Publications



This manuscript/chapter has been peer-reviewed, accepted, and endorsed by the National Council of Professors of Educational Administration (NCPEA) as a significant contribution to the scholarship and practice of education administration. In addition to publication in the Connexions Content Commons, this chapter is part of a complete collection (book) entitled MICHIGAN SCHOOL FINANCE: A Handbook for Understanding State Funding Policy for Michigan Public School Districts , ISBN 978-1-4675-0165-1. Formatted and edited in Connexions by Theodore Creighton and Brad Bizzell, Virginia Tech.


At this point we have identified the specific types of revenue that are earmarked annually for the State School Aid Fund. This revenue derives from a complex system of taxes that are dedicated to providing state support for Michigan’s public schools. We have noted that the SSAF currently provides approximately 80 percent of the total costs necessary to operate Michigan’s public schools.

Beyond the annual collection of tax revenues, however, is the other half of the problem of funding Michigan’s schools. The Michigan Legislature must annually decide the basis upon which SSAF revenues are allocated to each local school district. Such an allocation system must be rational and equitable and be adequate for each student to achieve the state’s educational objectives. To accomplish this task, each year the Legislature must pass a State School Aid Bill that describes in detail how state revenue from the SSAF shall be distributed to each school district.

Historically, local school districts receive their state funding annually through a combination of per-pupil membership aid and categorical aid. The actual amounts each school district receives is different from district to district and depends upon their pupil enrollment, the socio-economic level of the students served, and the taxable value of the property located within the school district. To make sense of this allocation system it is necessary to examine each part separately.

Per-pupil Membership Aid

Beginning with the 1994-95 school year, Michigan returned to what is referred to as a foundation allowance system. A foundation allowance is the amount of per-pupil funding guaranteed for each pupil in a school district. The actual amount of the foundation allowance differs from district to district based upon the district’s per-pupil spending prior to the 1994-95 school year. This will be examined more closely in a later discussion of Proposal A.

For purposes of our discussion now, however, it is important to understand that the vast majority of the SSAF money received by a local school district annually comes to the district in the form of per-pupil membership aid. For the 2010-11 fiscal year the minimum foundation allowance set by the legislature was $7,316 per child. This means that no child will have less than that amount of membership aid no matter where he/she lives in the state. It is, in fact, the state’s definition of adequacy, or the minimal amount necessary to achieve the state’s educational learning objectives for each child. It is also an attempt by the Legislature to establish equity in funding by ensuring that no child will have less than the minimum foundation allowance guarantee no matter which district the child attends. This is sometimes referred to as horizontal equity. As stated earlier, for the fiscal year 2010-11, the minimum foundation allowance across the state was $7,316 per-pupil and for the majority (343) of districts that amount was their actual per-pupil guarantee. This does not mean, however, that a district actually receives that amount from the state for each child but rather receives the difference between the district’s local operating revenue per child and the state’s guarantee per child. The one exception to this mix of local operating revenue per child and state per-pupil membership aid is the case of charter schools. Since charter schools do not levy tax on property, they depend exclusively on state aid. As discussed in the previous section on public school academies, per-pupil membership aid is calculated using the lesser of the per-pupil funding of the school district in which the charter school is located or the PSA maximum foundation allowance which was $7,580 for the 2010-11 school year. In this instance, charter schools receive the full amount of the foundation allowance from the state school aid fund since they receive no local tax revenue. (See appendices, “Oakland County Foundation Allowance Grants by Public School Academy” prepared by Oakland ISD that illustrates the lack of local operating revenue as part of state membership aid for PSAs)

Local Operating Revenue Per Child

Each local school district is expected to have their voters pass an 18 mills levy on non-homestead property. These taxes remain in the district as local property tax revenue. The total amount of tax revenue collected in the district from the 18 mills on non-homestead property is then divided by the number of children legally enrolled in the school district. This is referred to as local operating revenue per child and is subtracted from the state foundation allowance for the district. The state then pays the difference between the local operating revenue per child and the state foundation allowance per child for that district. As can be seen in the following examples, the amount of actual state aid received by each district will be different, even with the same foundation allowance guarantee.

Districts A, B, and C, all have a foundation allowance of $7,316 per child. They each enroll 1,000 students. District A’s non-homestead tax base generates $2,000 per child. The state then pays $5,316 per child to bring the district to their guaranteed foundation allowance. District B’s non-homestead tax base generates $3,550 per child. The state then pays $3,816 per child to also bring them to their $7,316 foundation allowance. Finally, District C generated $2,750 per child in local operating revenue. The state pays $4,566 per child to also bring District C to their $7,316 foundation allowance. Note that in these examples, each district received different amounts of state aid but all had the same foundation allowance guarantee. In this way the state takes into consideration the differences in property wealth from district to district to create more equitable funding. (See appendices, “Oakland County Foundation Allowance Grants by Public School District” prepared by Oakland ISD to illustrate the mix of local operating revenue and state membership aid for Oakland County school districts) Since the 18 mills levy on non-homestead property is a key part of the foundation allowance for each district, it is critical that each district’s voters pass the 18 mills tax on non-homestead property. The assumption that the state makes when computing state aid per child for each district is that each district will have passed and levied the full 18 mills on non-homestead property, because the state will only pay the difference between what should be the local operating revenue per student and the district’s foundation allowance. Whatever portion of the 18 mills not levied by a district represents a loss in per pupil revenue for that district in that they would not have the full total foundation allowance per student. Over the past years many districts have lost part of their 18 mills due to the Headlee rollback requirement previously discussed. Unless the district conducts an override election to restore the full 18 mills they will lose operating revenue per student. There are a few districts where the millage rate prior to 1995 was less than 18 mills and those districts are allowed to levy the lesser of the 18 mills or their pre-1995 millage rates.

Establishing Pupil Membership

Since the number of students legally enrolled in a school district is of critical importance to state funding of each district, some uniform process will need to be used to determine how many students are legally enrolled. While some states use an average daily attendance method to determine enrollment, Michigan uses an official count day. On the official count day all students enrolled and actually present are counted.

For many years the official count day was the fourth Friday after Labor Day. Since absenteeism is typically high on Fridays, the legislature changed the count day to the fourth Wednesday after Labor Day. Beginning with the 2011-12 fiscal year, the new count day has been established as the first Wednesday in October to consolidate with federal special education counts.

In recent years a second count day was added to each fiscal year. On the second Wednesday in February a repeat count is taken of students in attendance on that day in each school district. In an unusual procedure the February count of the previous school year is “blended” with the September count of the new school year. For a period of seven years (2004-05 –2010-11) districts were required to use 25 percent of the previous February count and 75 percent of the new September count to arrive at the official blended count which would become the district’s official enrollment. The legislature originally adopted this blended count procedure in 1994-95 to help lessen the impact from the loss of revenue for those districts that were losing students. In 1994-95 the blend was actually 50/50. In other words a district was allowed to include in their official count 50 percent of the students who were actually no longer enrolled in the district. While this blended count helped those districts losing students, it penalized those districts gaining students since they received only partial credit for any new student for the first year of their enrollment.

Since a large number of Michigan districts are presently losing students, this blended count has become costly to the state since the legislature is paying for students no longer attending school. While the blended count may eventually be phased out completely for the 2011-12 fiscal year the blended count will change to 10 percent of the February count and 90 percent of the September count. It is estimated that this change will save the SSAF approximately $15 million as a result of lower enrollments statewide. (See “Blended FTE” chart in appendices prepared by Oakland ISD for Oakland County Districts to illustrate the effects of blended counts)

Pupil accounting rules allow a student to still be counted in membership if he/she is enrolled but is absent and unexcused on the official count day but appears in attendance within the next consecutive ten school days. Students who are excused from attendance on the pupil membership count day must attend within the next 30 calendar days to be counted as a membership. Students suspended from school but enrolled on count day must attend school within 45 days to be counted. Each school district’s membership rolls are audited by their Intermediate School District and final audited numbers are reported to the state.

Based upon audited membership totals for each district, the state allocates revenue from the SSAF to each district on a monthly payment schedule beginning in October of each school year. Because the new fiscal year for the state budget does not begin until October 1, school districts receive no payments for July, August, and September for their new fiscal year that begins July 1. This is an annual problem for local school districts in that they must borrow money on the market to maintain cash flow until state aid payments begin in October. If a district has a fund equity large enough (savings account) they can use that money and replace it when state aid payments begin, thereby saving the interest costs of borrowing to meet cash flow.

One of the unresolved policy issues is this discrepancy between the state fiscal year and a school district fiscal year that creates an unnecessary financial burden on school districts. The state legislature originally caused the problem when they extended the state fiscal year by three months to collect more revenue to balance their budget. Over the years they have never changed it back due to the projected costs of reconciling the two different fiscal years.

Finally, another controversial policy issue regarding the counting of student memberships involves the counting of kindergarten students. In the past, districts received a full membership for each kindergarten student, whether the student attended half days or full days of instruction. Beginning with the 2012-13 fiscal year, a kindergarten student must receive the same number of hours of instruction as pupils in grades 1-12 to be counted as full membership. This change assumes a savings of approximately $175 million from the SSAF. A companion issue is whether to move the cut-off date for kindergarten eligibility for enrollment from December 1 to September 1 each year. If this change occurs in the future, fewer kindergarteners would be enrolled each year, saving the SSAF further costs.

State Funding of School Districts Before Proposal A

As noted earlier, Proposal A fundamentally changed the way in which funding for Michigan’s schools takes place. Prior to the implementation of Proposal A in 1994-95, school districts were predominately funded by local property tax coupled with high millage rates for school operations. By 1993-94 property owners were paying on average approximately 33 mills for school operations and accounted for nearly 70 percent of the funding of Michigan schools with the state and federal government providing the remaining 30 percent. Local school districts were free to ask their voters to support increased extra voted millage up to a constitutional limit of 50 mills. By 1993-94 Michigan had become one of the highest property tax states in the nation and Michigan voters were demanding property tax relief.

For a period of 20 years ending in 1993-94, districts received state per-pupil membership aid using a formula referred to as a District Power Equalizing Formula. Basically this formula allowed district voters to decide how many mills they wished to levy to tax property to support the operation of their local schools. The state guaranteed a specific amount of money per mill levied, for each student in the district. For example, in 1993-94, the last year this process was used, $105.50 per mill per student was guaranteed.

Again as noted earlier, this guarantee was through a combination of local operating revenue per student and state aid, to reach the guarantee at that millage rate. For example, for a district that levies 20 mills, the guarantee would be $102.50 x 20 = $2,050 per pupil. All districts that levy 20 mills, therefore, would have the same guarantee, regardless of their local tax base. For a district that levied 30 mills the guarantee would be $102.50 x 30 = $3,075 for each student in the district. All districts that levied 30 mills would have the same guarantee regardless of their tax base. Any district that levied 40 mills would have as their guarantee $102.50 x 40 = $4,100 per student, and so on. This formula was an attempt by the state to allow each school district the option of deciding how much revenue they wished to provide for their local school district through their local property taxes. For each mill that a district did levy, the state would guarantee $102.50 per pupil regardless of the value of the district’s tax base. The higher the local tax base, the less the state had to contribute to reach the guarantee for that district.

Remember that we have previously established that because of differences in local operating revenue per student, districts that levy the same number of mills may receive different amounts of state aid per pupil. Consider the following examples: Districts A,B,C, and D all levy 30 mills for school operations so that the per-pupil guarantee is $3,075 in each district. When the 30 mills levy is applied in each district, however, a different local operating revenue per student is produced. Continuing the examples above, District A produces a local operating revenue of $1,500 per-pupil. Subtracting that amount from the $3,075 guarantee will result in state aid per-pupil of $1,575. District B has a slightly higher taxable value of property (fiscal capacity) and their 30 mills generates $2,250 per-pupil in local operating revenue. Their state membership aid per-pupil is $3,075 - $2,250 = $825.

District C has an even higher taxable value of property and their 30 mills generates $2,800 per-pupil in local operating revenue. Their state membership aid per-pupil is $3,075 - $2,800 = $275. Finally, District D is the wealthiest in terms of taxable value of property and their 30 mills generates $3,200 per-pupil in local operating revenue per-pupil. In this instance their local operating revenue of $3,200 per-pupil exceeds the state guarantee of $3,075 at 30 mills and therefore this district receives no state membership aid per-pupil.

Districts whose local operating revenue per-pupil exceeded the state guarantee at their millage rate received no per-pupil membership aid and were said to be “out-of-formula”. As of 1993-94 there were 177 school districts out-of-formula and therefore received no state membership aid. These districts relied almost exclusively on local property tax revenue and only received whatever state categorical aid they were eligible for as a district. The remaining 381 districts were considered “in- formula” districts and received state per-pupil membership aid based up the differences between their local operating revenue per-pupil and their millage rate guarantee as explained earlier.

Overtime, what was originally conceived of as an equitable system (power equalizing) became grossly inequitable. It ultimately resulted in vastly different amounts of revenue per child among Michigan school districts and vastly different levels of school taxes from district to district. By 1993-94 school operating millage in Michigan ranged from a low of 8 mills to a high of 50 mills, creating a taxpayer equity issue. Per-pupil spending ranged from a high of approximately $10,300 to a low of approximately $3,000 per-pupil, creating a serious educational equity problem across the state and the gap between so-called rich and poor districts continued to get wider from year to year. As property taxes continued to rise and equity concerns continue to worsen, the Michigan Legislature took unprecedented action to force a change in this system.

The End of the District Power Equalizing Formula

In July1993, the Michigan Legislature suddenly repealed all school district local operating property taxes. This dramatic action that some critics have called irresponsible and others have called courageous, effectively eliminated nearly seven billion dollars of funding for Michigan schools. At the time of the repeal the legislature had no process in place for replacing that huge amount of lost revenue and without replacement, schools would not open the following year (1994-95).

In a frantic effort to replace lost local revenue through the adoption of new state taxes, the legislature established a bi-partisan conference committee to develop a plan to accomplish this task. On Christmas Eve, 1993, the legislature adopted two possible solutions to school finance reform. The first plan enacted by the legislature and referred to as the “statutory plan” called for an increase in the state income tax from 4.6% to 6.0%. It also would restore a local homestead and non-homestead property tax of 12 mills and an additional 12 mills state education tax on non-homestead property. It also imposed a real estate transfer tax at 0.75% and an increase in the cigarette tax.

As an alternative plan, Michigan citizens were also presented with a second option. It would require a constitutional amendment because it involved changing the state sales tax that is imbedded in the state constitution. Adoption of this plan required a public referendum and would become known as Proposal A. If this plan were adopted it would make null and void the statutory plan. Instead of raising the state income tax, it would increase the state sales tax from 4.0% to 6.0% and dedicate those additional revenues to the SSAF. It would also replace some of the local operating property tax by allowing 18 mills of tax on non-homestead property and a six mills state education tax on all classes of property. It would also add a real estate transfer tax and an additional tax on cigarettes at the same rate as the statutory plan. What gave the Proposal A plan a more powerful appeal to Michigan voters, however, was a provision to cap the increases in annual assessments of property values from 5.0% or the state CPI, whichever was smaller. This provision would hold back the rise in property taxes as a result of hyper inflation of property values that been occurring over the past years. It also restored a smaller amount of local property tax than did the statutory plan that also proved to be appealing to Michigan voters. In a statewide vote held on March 15, 1994, Proposal A passed by an overwhelming majority of voters and ushered in a new era of funding Michigan schools.

School Funding After Proposal A

As a result of this huge reduction in local school operating property tax revenues, and a replacement of those revenues by new state taxes, the local/state funding mix changed dramatically. At the end of the 1993-94 school year local property taxpayers provided approximately 63 percent of the costs of Michigan K-12 education with the state providing approximately 37 percent. With the 1994-95 school year the local/state mix was dramatically changed with the state now providing approximately 80 percent of the funding and local property tax providing approximately 20 percent.

From a public policy perspective, this landmark change created in effect, a state run system of Michigan education, rather than a system featuring local control of schools. This state versus local control of public schools continues to be a hot-button issue as local boards of education have seen their authority over schools in their community sharply diminished.

With the state now assuming the major role in funding Michigan’s K-12 schools, a new opportunity was presented to devise a new system for allocating revenue to local school districts. Michigan would eliminate the district power equalizing formula and return to a per-pupil foundation allowance. The legislature succeeded in providing Michigan citizens property tax relief and could now begin to address the issues of equity and adequacy in school funding.

As discussed in detail in Chapter 3, under Hold Harmless districts, in 1994-95 the foundation allowance formula went into effect. While the minimum target foundation allowance was set by the legislature at $5,000 per child, there was only sufficient funding to fund a minimum level of $4,200 for the 1994-95 school year. The legislative goal was to gradually increase the funding annually until the minimum foundation grant matched the minimum foundation allowance established in the annual State School Aid Act as adjusted for inflation annually. From 1994-95 until 1999-2000, those districts below the minimum foundation got increases in their revenue at twice the increase per-pupil as other districts in order for them to “catch up” to the annual targeted basic minimum foundation. (See Appendices: “Effective Foundation Allowance Changes Since Proposal A Fiscal Years 1993-94 through 2010-12”, prepared by the Michigan Senate Fiscal Agency dated 8/25/2011)

In 1994-95 the funding gap between the minimum grant of $4,200 and the maximum state funded guarantee of $6,500 per child was a difference of $2,300. By the 2011-12 school year, the minimum foundation grant had become $6,846 and the maximum state grant had become $8,019, an equity gap of $1,173. The difference between the minimum grant and the highest funded hold harmless district at $11,854 (Bloomfield Hills Schools) was now $5,008 down from a difference of $6,254 in 194-95. It is clear that some progress has been made toward improving the equity gap since Proposal A went into effect. The adequacy level has been improved as well, going from a low of $2,762 in 1993-94 to the current minimum of $6,846 in 2011-12. Note that the per-pupil minimum grant actually reached its’ highest point in the 2008-09 fiscal year when it reached $7,316. Following Executive Orders and legislative reductions due to a weak economy, the 2011-12 minimum foundation per-pupil grant is lower ($6,846) than it was in the 2006-07 school year causing extreme financial difficulties for local school districts. Note also that unlike the previous district power equalizing formula, under Proposal A’s foundation allowance concept, nearly all school districts are once again dependent upon receiving state per-pupil membership aid. (For a complete list of the current {2011-12} minimum foundation grant for all local school districts and public school academies see Appendices: “House Bill 4325(CR-1) Reduction $300 Per Pupil, plus $170 Per Pupil – FY 2011-12 Estimated District Impact (Revised)” prepared by the Michigan House Fiscal Agency 5/25/2011)

To get yet another perspective on the per-pupil equity progress made since the 1994-95 school year, consider that in 1994-95 the number of districts at the minimum grant of $4,200 was 40. The number of districts between $4,200 and the basic allowance maximum target of $5,000 was 268. The number of districts between the basic allowance of $5,000 and the maximum grant of $6,500 was 195. Finally, the number of hold harmless districts (those above $6,500 in 1994-95) was 52. By the 2010-11 school year, 343 districts were at the minimum grant of $7,316, approximately 155 districts were between the minimum grant of $7,316 and the maximum 0f $8,489, and 52 districts were hold harmless districts above the $8,489 threshold. As a result of shortfalls in the 2011-12 fiscal year state budgets, the per-pupil grant for all districts was reduced by $470 making the minimum grant $6,846 and the maximum grant $8,019 per-pupil for the 2011-12 school year.

In summary, although an equity problem continues to exist in Michigan school funding, progress has been made since Proposal A, as evidenced by the fact that 343 districts now have identical foundation grants. As a policy matter, as the economy eventually improves, the legislature will need to continue to address the equity question by providing equity payments to the lowest funded districts to reduce the current gaps in funding.

State Categorical Aid

We have so far determined that local school districts and charter schools receive their primary source of revenue from the SSAF and it comes to districts in two forms. The majority (approximately 70 %) of state aid comes in the form of per-pupil membership aid that we have just previously discussed. The second way in which districts and charter schools receive state revenue is through categorical aid.

State categorical aid is revenue that is also allocated from the SSAF in addition to per-pupil membership aid. While generally per-pupil aid may be used for any school district expenditure, categorical aid by contrast may only be used for the express purpose for which it was intended when allocated by the state. Each year the legislature decides which initiatives they wish to assist districts in funding. Categorical funding is often thought of as vertical equity in that much of the categorical aid is targeted toward handicapped and high needs children who require added costs above the general membership aid to support their education. Unfortunately categorical aid is often insufficient to cover the true costs per student and as a result many categorical programs are pro-rated. The legislature allocates a specific amount of revenue for each categorical and when the total number of students state-wide who qualify for that categorical is determined, that number is divided into the total state revenue allocated for that categorical. Each pupil receives a pro-rata share of the total dollars appropriated by the legislature for that categorical program.

The list of categorical programs may change from year to year and is specifically outlined in the Annual State School Aid act passed each year by the legislature. One of the periodic policy questions is whether to keep each categorical program separately funded or include several of them into one block grant amount where districts may exercise some latitude in how much of that total grant they wish to spend on any one category within the total block grant amount available.

The two largest categorical programs are for added costs for educating special education students, and categorical aid for students deemed to be at-risk for school failure. The State School Aid Act defines an “at-risk pupil” as any pupil for whom the district has documentation that the pupil meets at least two of the following criteria: is a victim of child abuse or neglect; is below grade level in English language and communication skills or mathematics; is a pregnant teenager or teenage parent; is eligible for a federal free or reduced-price lunch subsidy; has atypical behavior or attendance patterns; or has a family history of school failure, incarceration, or substance abuse. It also includes pupils who did not achieve at least a score of level 2 on the most recent MEAP English, math, or science tests, or does not achieve proficiency on the reading component of the Michigan Merit Exam or the math or science components of the exam. As a practical matter, the easiest criteria for districts to identify are the free or reduced-price lunch counts and the number of students not meeting proficiency on the MEAP and Michigan Merit scores and is what most districts use to determine their eligible number of at-risk students.

One caveat is that districts that are the highest spending districts (hold harmless districts) are not eligible for at-risk categorical aid. For the 2011-12 fiscal year the total appropriated from the SSAF for at-risk programs was $317,695,500 and will continue at that level for the 2012-13 fiscal year. This amount also includes funding for hearing and vision testing and child and adolescent health centers.

The other large categorical program is special education. Districts receive categorical aid for special education from both the state and federal government. For the 2011-12 fiscal year, the SSAF allocated $977,469,100 and the federal government allocated $363,400,000 for special education costs in Michigan.

In addition to these two large categorical programs, the legislature also provides categorical aid for several other initiatives. Among these are $26,611,300 for vocational education; $22,000,000 for adult education; $8,000,000 for court placed children; $2,558,800 for school bus inspections; $35,194,400 plus $8,250,000 in federal revenue for student assessment costs; $2,515,000 plus $5,249,300 in federal revenue to support Michigan’s 33 math and science centers; $5,000,000 for ISD parent involvement grants for parents of children age 5 or younger to encourage early literacy activities; Great Start Readiness program $95,400,000; $9,625,000 school breakfast programs; 22,495,100 plus 402,506,000 in federal revenue for school lunch programs; $62,108,000 for ISD operations; $5,501,700 for the center for educational performance and evaluation; and $5,900,000 for Great Start collaborative grants to Intermediate School Districts.

Finally, the large amount of federal funds appropriated by Congress for Michigan schools to implement No Child Left Behind requirements also come to local school districts through the SSAF. For the 2011-12 fiscal year $761,973,600 is appropriated for NCLB and an additional $32,359,700 in other federal categorical programs. (For a complete summary of all revenues allocated through the SSAF for the 2011-12 fiscal year, see “School Aid Section-By-Section Highlights” found in the appendices prepared by the Michigan House and Senate Fiscal Agency)

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