On Wednesday, November 19, 1997, the Governor signed three pieces of legislation that provide a resolution of the Durant situation, increase school aid act appropriations for the current fiscal year, appropriate school funding for the 1998-99 fiscal year, and adjust rates, assumptions, and contribution requirements of the Public School Employees Retirement system. Following is a summary of the major components of this package followed by a section-by-section description of the State School Aid Act changes for the current and next fiscal years.

Please note...

• Enrolled Senate Bill 178 was enacted as PA 142 and amends the State School Aid Act.
• Enrolled Senate Bill 719 was enacted as PA 143 and amends the Public School Employees Retirement Act.
• Enrolled House Bill 5083 was enacted as PA 144 and amends the Management and Budget Act.

The "Durant Solution"

Public Act 144 (Enrolled House Bill 5083) amends the Management and Budget Act to transfer funds from the Budget Stabilization Fund (BSF) to the School Aid Fund (SAF). Public Act 142 (Enrolled Senate Bill 178), in part, allocates funds transferred from the BSF and appropriated from the general fund (GF) to the Durant plaintiff and non-plaintiff districts and ISDs, requires a waiver prior to the release of the funds to non-plaintiff districts and ISDs, and describes the permitted use of the funds by the non-plaintiffs. PA 142 also describes the issuance of bonds, the proceeds of which may be used to satisfy half of the settlement amounts determined for the majority of the non-plaintiff districts and ISDs. The two bills combine to provide the following:

• For the plaintiff districts and ISDs: A transfer of $212 million is made from the BSF to the SAF to pay, on April 15, 1998, in one lump sum, underfunding for years ordered by the Court to those 84 local and intermediate districts who were plaintiffs in the Durant case and costs and attorney fees. Language in new Section 11e of the State School Aid Act (SSAA), as added by PA 142, reflects this allocation of funds and also requires the board of each district and ISD to hold a public hearing by July 14, 1998, to discuss how the funds will be used. There is no restriction on the use of these funds.



• To provide for a comparable level of funding (referred to as "the offer of settlement amount") for those local and intermediate districts that were not plaintiffs in the Durant case, a combination of cash payments and bonding opportunities is presented, as reflected in new SSAA Sections 11f, 11g, 11h, and 11i:

• For non-plaintiff local districts⁽¹⁾ with offer of settlement amounts less than $75,000, a single lump sum payment will be made on November 15, 1998. These payments will total $1.7 million, which is part of a $73.7 million transfer from the BSF to the SAF in 1998-99. In order to receive these funds, a waiver of liability must be filed with the State Treasurer by 5 P.M. Eastern Standard Time on March 2, 1998. The funds may be used for school buses, electronic instructional material and software, school security, textbooks, technology, infrastructure or infrastructure improvement, training for technology, or to reduce or eliminate voter-approved debt that was issued prior to November 19, 1997. The board of each district must hold a public hearing before June 30, 1998, to discuss how the funds will be used.

• For non-plaintiff local and intermediate districts with settlement amounts greater than or equal to $75,000, the payment of settlement amounts will be satisfied through a combination of cash payments and bonding opportunities. Each local and intermediate district must hold a public hearing before June 30, 1998, to discuss how the funds will be used:

• A transfer from the BSF to the SAF of $32 million each year for ten years (FY99 through FY2008) will fund one-half of the settlement amounts and will be paid out in ten equal payments (each equal to 1/20th of the total settlement amount) on November 15 of 1998 and the following nine years. In order to receive these funds, a waiver of liability must be filed with the State Treasurer by 5 P.M. Eastern Standard Time on March 2, 1998. These funds may be used for school buses, electronic instructional material and software, school security, textbooks, technology, infrastructure or infrastructure improvement, training for technology, or to reduce or eliminate voter-approved debt issued prior to November 19, 1997. ISDs may also use these funds for nonrecurring instructional expenditures including but not limited to those for vocational education, for debt service for acquiring technology for academic support services, or for the benefit of constituent districts.

• A BSF transfer into the SAF of $40 million in FY99 and GF appropriations of $40 million in FY2000 through FY2013 provide funding to satisfy the second half of the settlement amount for districts and ISDs with amounts of $75,000 or more. Districts and ISDs in this category may borrow money and issue bonds or they may opt for 15 annual cash payments:

• Eligible local and intermediate districts intending to issue bonds must notify the Department of Treasury of their intention by 5 P.M. Eastern Daylight Time on June 30, 1998. The bond proceeds will be paid on or after November 15, 1998. The debt service amounts will be paid by the state through 15 annual allocations beginning on or around May 15, 1999, each equal to 1/30th of the total settlement amount (that is, one-half of the settlement amount spread over 15 years) plus the amount necessary to pay the debt service. The bond proceeds may be used for any purpose specified in Section 1351a of the Revised School Code.

• If a district or ISD does not opt to issue bonds, the second half of the settlement amount will be paid in 15 annual cash payments beginning on May 15, 1999. The funds may only be used for the following and in this order: (1) to reduce or eliminate voter-approved debt issued prior to 11/19/97; (2) to reduce or eliminate limited tax obligation debt; (3) for deposit into a sinking fund.

The important dates and time frames associated with the Durant-related provisions can be summarized as follows:

By 5 P.M. on March 2, 1998, a waiver of liability must be filed with the State Treasurer by non-plaintiff districts and ISDs in order to receive any of the settlement funds.

On April 15, 1998, the Durant plaintiff districts and ISDs will receive, in one lump sum, the underfunding for the years ordered by the Supreme Court.

Before June 30, 1998, the non-plaintiff districts and ISDs are required to hold a public hearing to discuss how the settlement funds will be used.

By 5 P.M. on June 30, 1998, non-plaintiff districts and ISDs with settlement amounts of $75,000 or more that intend to issue bonds must notify the Department of Treasury.

By July 14, 1998, the Durant plaintiff district and ISD boards are required to hold a public hearing to discuss how the funds will be used.

On November 15, 1998, non-plaintiff local districts with settlement amounts of less than $75,000 will receive that amount in a single lump sum payment.

On or after November 15, 1998, non-plaintiff districts and ISDs with settlement amounts of $75,000 or more that opt to issue bonds will receive the proceeds from the bonds in an amount equal to ½ of the settlement amount.

On November 15 of each year from 1998 through 2007, non-plaintiff local and intermediate districts with settlement amounts of $75,000 or more will receive 1/20th of the total settlement amount (for a total of ½ of the settlement amount over the 10-year period).

On May 15 of each year from 1999 through 2013, non-plaintiff districts and ISDs with settlement amounts of $75,000 or more that do not opt to issue bonds will receive 1/30th of the amount (for a total of ½ of the settlement amount over the 15-year period).

On or around May 15 of each year from 1999 through 2013, the debt service amounts due on the bonds issued by the non-plaintiff districts and ISDs will be paid by the state.

Major School Aid Changes for 1997-98

The most notable changes in school aid for the current fiscal year are the reinstatement of at-risk pupil funding, the increase in special education funding, the change in the state aid payment schedule, and the reduction in the public school employees retirement contribution rate. (These are not the only changes for FY98. Refer below to the section-by-section description of State School Aid Act changes for FY98 and FY99.) It is important to note that the foundation allowance amounts for FY98 have not been affected by this package.

• Funding in Section 31a for At-Risk Pupils has been restored at $250 million for FY98. Eligible districts received the equivalent of the October and November 1997 at-risk payment amounts in a separate state aid payment that was released immediately upon enactment of Enrolled Senate Bill 178 as Public Act 142.



• Increases in the Special Education Section 51a allocation for FY98 allow full funding of the prospective Durant requirement of reimbursing districts and ISDs for 28.6138% of special education costs and 70.4165% of special education transportation costs. "Hold harmless" funding is guaranteed in that districts and ISDs will be allocated at least as much in categorical funding in FY98 as they received from Sections 52 and 58 in FY97. This "hold harmless" funding increase will be noticed in the December state aid payment.



• The state aid payment schedule in Section 17b is amended for FY98 and for FY99 and beyond. An expansion to a 10-payment schedule will be reflected immediately in the December 1997 payment by a reduction in the payment percentage from 11.11% to 9.72%. The January through June 1998 payments will continue at 9.72% and the remaining 9.74% will be paid in July. The April, May, June, and July 1998 payments will each be reduced by 1/4 of the amount of the transitional payments that were paid in August and September 1997. The July 1998 payment must be accrued to the 1997-98 school fiscal year. There will be no transitional payments in the summer of 1998.



• The public school employees retirement system (PSERS) contribution rate, as provided in Section 147, is changed from 14.66% to an estimated 11.12% for both FY98 and FY99, effective October 1, 1997. Changes to the Public School Employees Retirement Act contained in PA 143 (Enrolled Senate Bill 719), accomplished the following:

• Assets of the PSERS fund are reassigned their fair market value as of September 30, 1997. Five-year smoothing is resumed on October 1, 1997.

• The assumption on the rate of salary increases is changed from 5% to 4%.

• The one-day realization of fair market value combined with the change in salary assumptions effectively eliminate the $6 billion of unfunded accrued libility and reduce the retirement contribution rate in 1997-98 from 14.66% to 11.12%.

• A Stabilization Subaccount is established into which excess contributions will be deposited in order to reduce or eliminate any unfunded liability in the future.

• Language requiring a defined contribution option has been eliminated.

Section-by-Section -- State School Aid Act Changes in PA 142

Following is a summary of the content of PA 142 (Enrolled Senate Bill 178). A spreadsheet of allocation amounts is displayed at the end of this document. Readers are urged to obtain a copy of the bill itself for the specific language contained in each section.

The title is amended to expand the purpose of the Act to include: "...to authorize the issuance of certain bonds and provide for the security of those bonds..."

The membership definition in Section 6(4) is amended to clarify that the 40%-60% blend is, in fact, in effect for the current fiscal year; additionally, new language (6(4)(x)) is added that will allow a district to claim membership for pupils enrolled within 45 days after the pupil membership count day if the pupils were previously enrolled on the count day in a PSA whose contract with its authorizing body has been revoked. This latter provision is effective for the 1997-98 fiscal year only.

The due date for the Department to report pupil dropout rates to the legislative education and appropriations committees and the Department of Management and Budget (DMB) is changed from March 31 to September 15 of each year (Section 8(2)).

A new Section 8a is included that requires districts to report the average number of pupils per class in grades K-3 in each elementary building to the Department by November 1 of each school year.

A new Section 10 is included that specifies that deposits into the school aid fund from gaming revenue must be kept in a separate account and not be expended unless an appropriation specifically references it.

Changes to Section 11 include adjustments to the FY98 appropriations amounts, specification of the amounts for FY99, and direction that payments under Sections 11f, 11g, and 51a(2) (Durant-related and special education payments) are not subject to proration like other payments are in the event that the appropriations amounts specified exceed the revenue available in the school aid fund.

A new Section 11e appropriates $212 million from the school aid fund, transferred into that fund from the Budget Stabilization Fund (BSF), to pay the Durant plaintiffs the underfunding for the years ordered by the court on July 31, 1997; payments will be made on April 15, 1998. District and ISD boards are required to hold a public hearing to discuss the use of the funds received under this section within 90 days of the receipt of the funds.

A new Section 11f appropriates $33.7 million in FY99 from the school aid fund, transferred into that fund from the BSF, and $32 million from a BSF transfer to the school aid fund in each fiscal year through FY2008 for paying Durant non-plaintiffs that have filed a resolution with the State Treasurer by March 2, 1998, waiving any right or interest in any claim or litigation based on, arising out of, or of the same nature as the claims made in Durant. The required format and content of the resolution is described in Section 11f(8). The funding provided under this section is (1) to pay in full the non-plaintiff districts with an offer of settlement of less than $75,000, and (2) for ½ of the settlement amounts for the remaining non-plaintiff districts and ISDs to be paid out over 10 years. See above under The "Durant Solution" for a more detailed discussion.

A new Section 11g appropriates $40 million from the school aid fund, transferred into that fund from the BSF, in FY99 and $40 million from the general fund in FY2000 and in each fiscal year through FY2013 for paying Durant non-plaintiffs with settlement amounts of $75,000 or more that have filed a waiver with the State Treasurer by March 2, 1998. The funding provided under this section is equal to ½ of the settlement amounts for these districts plus debt service costs attributable to the borrowing and issuance of bonds. See above under The "Durant Solution" for a more detailed discussion.

A new Section 11h identifies the amounts, as determined by DMB, to each non-plaintiff district and ISD. It is this amount that will be paid out under Sections 11f and 11g to districts and ISDs that file a waiver with the State Treasurer by March 2, 1998.

A new Section 11i permits districts and ISDs to borrow from the Michigan Municipal Bond Authority in anticipation of payments under Section 11g and to issue bonds. Payments received under 11g may be pledged and assigned to the Bond Authority as security for the bonds. Proceeds from the bonds will be made available on or after November 15, 1998. Bond proceeds may be used for any purpose as specified in Revised School Code Section 1351a.

The state aid payment schedule, as described in Section 17b, is amended for FY98 and for FY99 and beyond. The expansion to 10 payments in FY98 is described in detail above under Major School Aid Changes for 1997-98. The FY99 payment schedule is expanded to 11 payments, to be made on the 20th of each month (or the following business day) between October and August, and each will be equal to 1/11th of the annual FY99 allocation amounts. The July and August 1999 payments must be accrued to the 1998-99 school fiscal year.

Section 20 (the Foundation Allowance section) is amended to increase the FY98 allocation amount by approximately $18 million (to $8,022,595,100), and to allocate funds for foundation allowance payments in FY99 (totaling $8,091,250,000). The individual district foundation allowances will remain unchanged between FY98 and FY99,⁽²⁾ as indicated by a specification of the index for FY99 to be equal to 1.0 in subsection 20(14)(c), except for districts with FY98 foundation allowances below $5,170. The minimum foundation allowance in FY99 will be $5,170 (an increase from $5,124 in FY98). The increase in the Section 20 allocation for FY99 reflects an anticipated increase in statewide pupil membership counts and changes in taxable values. Language is added in a new subsection 20(16) that would allow an increase in the basic foundation for FY99 if the total available revenue in the school aid fund for FY99 exceeds $9,036,198,400.

Funding in Section 31a for At-Risk Pupils is restored at $250 million for FY98 and is set at $260 million for FY99. New language requires districts to spend up to $10 per free lunch pupil in at-risk funds on the school lunch program. (This is in addition to the existing requirement to use at-risk monies for the breakfast program.) It is the Legislature's intent to allow at-risk funding for "hold harmless" districts beginning in FY2000 at half the usual rate (5.75% as opposed to 11.5% of the foundation) if at least 1/3 of the pupils in the district are free-lunch eligible and if that number is equal to at least 5,000. There is also new language indicating the Legislature's intent to increase Section 31a funding for FY2000 and each year thereafter by the rate of increase of the basic foundation.

Small class size project planning grant funding for FY98 is provided in Section 31c totaling $100,000; $20 million is allocated for FY99 for implementation grants ($19,750,000) and for an effectiveness study ($250,000). Small class size project application materials will be made available by the Department by December 15, 1997; applications will be due on February 1, 1998; awards will be announced by April 1, 1998. Districts being awarded implementation grants for FY99 will be allocated a proportionate share of the $100,000 planning grant money to be used for planning activities during the remainder of FY98. The planning grant funds will be paid on April 20, 1998.

A new Section 36a is included that allocates $2 million for FY99 to fund a community-based collaborative early childhood grant for parent training and child development programs for children ages 0 to 3. Funds will be distributed through a joint process established by the Department in conjunction with the Children's Trust Fund and the Interagency Systems Reform Workgroup. Projects must be secondary prevention initiatives, voluntary to consumers, and part of an integrated comprehensive family support strategy; a 25% local match must be provided (although it is waivable).

Changes to Special Education Section 51a and increases in the state allocation amount in that section to $722,853,300 for FY98 and $771,053,300 for FY99 allow full funding of the prospective Durant requirement of reimbursing districts and ISDs for 28.6138% of special education costs and 70.4165% of special education transportation costs. "Hold harmless" funding is guaranteed in that districts and ISDs will be allocated at least as much in categorical funding in FY98 and FY99 that they had in Sections 52 and 58 in FY97. Funding for all special education categoricals is contained within the allocation provided in Section 51a(1). From that allocation, special education funding will be provided in the following order and with the following caps for FY98 and FY99:

(1) Full funding for "Durant" liability (51a(2)), which includes foundation allowance payments for Section 52 special education pupils, has no caps but the estimated totals are $620,906,100 for FY98 and $672,274,000 for FY99;

(2) Foundation allowance payments for non-Section 52 special education pupils (51a(13)) are not capped but the estimated total is $8,370,600 for each year;

(3) Section 53a 100% added cost payments are capped at $15 million in FY98 and $14,500,000 in FY99;

(4) Rule revision cost reimbursement (51a(6)) is capped at $1.7 million in FY98 and $2.2 million in FY99;

(5) Reimbursement for pupils at the Schools for the Deaf and Blind (54) is capped at $1,688,000 for each year;

(6) "Hold harmless" funding to guarantee that districts and ISDs receive at least as much in FY98 and FY99 in special education categorical funding as they did in FY97 under Sections 52 and 58 (51a(3)) has no caps but estimated totals are $29,224,700 for FY98 and $26,056,800 in FY99;

(7) Payments equal to what ISDs received in previous years for "center program FICA and retirement" costs (51a(8)) are capped at $15,313,900 each year; and

(8) Special Education ISD Millage Equalization payments (56) are capped at $30,650,000 each year.

Total funding available for the planning phase of the new Career Preparation System in Section 67 is reduced from $1.5 million to $1.3 million for FY98; $350,000 is added as an allocation for FY99. The $200,000 FY98 reduction is reflected in a change from $250,000 to $50,000 for the Council for Career Preparation Standards for FY98. The new $350,000 FY99 allocation is for required Council and Department functions and technical assistance. The $6 million that had been allocated under Section 68 to begin system implementation in the summer of 1998 is eliminated; however, the FY99 amount is established at $23,850,000.

Language is added to Section 101 that would allow up to 1½ hours per week of travel time between instructional sites to be counted as instructional time for elementary pupils in a building located on an island who receive some of their instruction in buildings not located on the island.

Changes in the language in Section 107 for the Adult Education Program removes the one-year limitation on English as a Second Language participants and allows vocational skills instruction, for FY98 only, for employer-referral participants in adult education programs. The $80 million allocation is repeated in FY99. A $250,000 grant to Focus:Hope, however, is for FY98 only.

The public school employees retirement system rate for FY98, as provided in Section 147, is changed from 14.66% to an estimated 11.12% for both FY98 and FY99. See above under Major School Aid Changes for 1997-98 for a more detailed discussion of the changes in the retirement system.

Categorical amounts that are maintained at FY98 levels in FY99 include:

Section 24 - Court-Placed Pupils ($7 million)

Section 26a - Renaissance Zone Reimbursement ($6,584,200)

Section 36 - School Readiness ($55 million)

Section 36(2) - School Readiness Evaluation ($200,000)

Section 41 - Bilingual Education ($4,212,000)

Section 57 - Gifted & Talented ($5 million)

Section 61a - Vocational Education Added Cost ($31,027,600)

Section 62 - ISD Vocational Education Millage Equalization ($7,200,000)

Section 74 - Bus Driver Safety and Auxiliary Services Transportation ($1,625,000)

Section 81 - ISD General Operations Block Grant ($81,266,700)

Section 94 - Technical Assistance for Accreditation ($1,500,000)

Section 99 - Math & Science Centers ($7,693,100)

Section 107 - Adult Education ($80,000,000)

See above for the allocation amounts for special education categoricals.

SCHOOL AID APPROPRIATIONS	FY 1997-98	FY 1998-99
Durant Plaintiffs (11e)	212,000,000	0
First Cash Payment to NonDurant Districts (over $75,000) (11f)	0	32,000,000
One-Time Payment to NonDurant Districts (under $75,000) (11f)	0	1,700,000
Debt Service on Bonds for NonDurant Districts (11g)	0	40,000,000
Transitional Payment Deduction (17b)	(190,000,000)	0
Foundation Allowance (20)	8,022,595,100	8,091,250,000
Transitional Payments (20c)	0	0
Court-Placed Pupils (24)	7,000,000	7,000,000
Renaissance Zone Reimbursement (26a)	6,584,200	6,584,200
At-Risk Funding (31a)	250,000,000	260,000,000
Small Class Size Program (31c)	100,000	20,000,000
School Readiness (36-39)	55,200,000	55,200,000
Interagency Early Childhood Grants (36a)	0	2,000,000
Bilingual Education (41)	4,212,000	4,212,000
Special Education - State Funding (51a)	722,853,300	771,053,300
Special Education - Federal Funding (51a)	95,933,400	120,000,000
Gifted and Talented Pupils (57)	5,000,000	5,000,000
Vocational Education (61a)	31,027,600	31,027,600
ISD Vocational Education Millage Equalization (62)	7,200,000	7,200,000
Career Prep Planning, Council, and Technical Assistance (67)	1,300,000	350,000
Career Preparation System Implementation (68)	0	23,850,000
Bus Driver Instruction / Auxiliary Transportation (74)	1,625,000	1,625,000
ISD General Operations (81)	81,266,700	81,266,700
Accreditation Assistance (94)	1,500,000	1,500,000
Math & Science Centers (99)	7,693,100	7,693,100
Adult Education (107)	80,000,000	80,000,000
Adult Education - Focus:Hope Grant (107(15))	250,000	0
TOTAL	9,403,340,400	9,650,511,900

Questions and comments concerning this document should be directed to:

Elaine Madigan Mills

Michigan Department of Education

(517) 335-0521; e-mail: MadiganMillsE@state.mi.us

December 4, 1997

1. There are no intermediate school districts with amounts less than $75,000.

2. Assuming that the percentage change in the consumer price index between calendar '97 and '98 will be a positive figure, the scheduled increase in instructional time for the 1999-2000 school year will be postponed by a year, as specified in Section 1284 of the Revised School Code, with the basic foundation being unchanged between FY98 and FY99. That is, the "freeze" in the basic foundation next year (FY99) will cause a "freeze" in instructional time requirements in the year after next (FY2000).