One little known school debt program enshrined in the Michigan Constitution has the potential to dramatically affect taxpayers and future school bond issuance. The School Bond Qualification and Loan program provides Michigan’s credit enhancement to new capital bond issues plus subsidizes any debt service gaps in repayment. Of the over $20 billion in Michigan school debt, about 80% is “qualified”, or guaranteed by the State. For qualified debt, school districts can borrow from Michigan to pay shortfalls in principal and interest as long as a minimum 7 mill property tax levy has been approved for providing repayment. In other words, if the millage rate associated with the bond debt isn’t enough to pay the debt service, Michigan will step in and fund the gap.

In theory, this program was designed to be self-funding as the approved millage should generate ever increasing funds as property values increase. In reality, the crash in property values has resulted in ever increasing gaps and ballooning potential debt obligations for the State. From a current balance of $1.4 billion owed by school districts under this gap funding program, the Michigan Treasury projected in 2011 the balance would peak at $4.0 billion in 2026 before starting to be paid down. Of the 122 school districts with outstanding loan balances, 106 are borrowing to fund shortfalls while only 16 are repaying their debt.

The result has been ill advised spending by many school districts under the comfort that Michigan Treasury will fund any deficiency in debt service. In 2012, revisions to the program now require annual adjustments to millage rates and ceased qualification of any new bonds from receiving gap funding once the program balance reached $1.8 billion – which is expected in 2014. But, any school districts already in the program can continue to borrow if their now required annual millage adjustment will not cover debt service.

If the State is no longer writing a blank check, who will pay? The Michigan taxpayer of course. Taxpayers approved the unchecked spending promoted by their local leaders and are now paying the price. Senate Bill 770, which revised the program, requires annual adjustments to millage rates to meet debt service requirements, with a cap of 13 mills. For example, the Chippewa Valley School District in Macomb County now owes $143 million to the State for gap funding and continues to borrow an average of $19 million per year under this program since its current 7.65 mill levy is not enough to pay debt service on $530 million in outstanding debt obligations. Under the new law, this district’s taxpayers are potentially looking at an 87% increase in school related property taxes if the millage is raised to the 13 mill cap.

What happens if even 13 mills is not sufficient to meet the debt obligations? Well, school districts already in the program will still be able to borrow meaning we all pay for the prolific spending of a few irresponsible communities. Michigan has issued General Obligation bonds to fund this program and debt service comes out of the School Aid Fund – to the tune of $60 per student in 2012. I’ve not seen a projection showing by how much the projected $4.0 billion borrowing peak has been mitigated by this mandatory increase in millage rates, but it should help lessen the future per student cost of this program.

While the loan program was developed with the best of intentions to let school districts borrow at the State’s credit rating, unchecked voter approval of capital spending proposals has saddled the State and its school districts with a huge debt burden for decades to come.

Solutions – all are painful as taxpayers now have to pay back debt:

1) Taxpayers in school districts with falling property values and excessive debt will face annual millage adjustments and higher tax bills going forward. It’s only fair and you shouldn’t penalize all 549 school districts when only 122 have accumulated debt that has caused the problem.
2) The new Senate Bill 770 requires all future bond elections to show the millage rate required for repayment so that voters will be better informed on costs.
3) Future construction spending will be constrained as the gap funding will no longer be available and new bond issues must stand on their own from Year 1.

To see the debt balance carried by your school district for the School Bond Qualification and Loan program, visit www.michigan.gov/documents/sblfbalb_2813_7.pdf