DEREK GREEN

Political Feature, Reason Magazine

by Derek Green

For many years, Michigan was like most other states when it came to public-school reform: There was a lot of talk, a little legislation, and no real progress on the issue. Even after the Kalkaska School District in northern Michigan made national headlines in 1993 by going broke and closing its schools partway through the academic year, legislators still couldn't find the wherewithal to overhaul the state's inefficient and widely despised 100-year-old system of funding education through property taxes. Property taxes were a major problem in their own right: They increased three-fold from 1972 to 1992. And because there were no assessment caps in place, local governments could raise property taxes with relative ease.

"You can't imagine the level of frustration in this state," says Bob Wittmann, director of education policy at the Mackinac Center for Public Policy, a free-market think tank in Midland, Michigan. "The frustration was felt by everyone. No one liked the status quo, but every time someone tried to do something about it, something went wrong."

The frustration--and desperation--in the governor's office was especially keen. First-term Republican John Engler had squeaked through his 1990 election with a victory margin of one percentage point, campaigning on a platform loaded with tax relief and school reform. But after three years in office, Engler and company had nothing to show for their efforts. And with re-election worries on the horizon, few believed that education or tax reform would come to Michigan any time soon.

Last July, however, everything suddenly changed. In a 24-hour blaze of lawmaking, Michigan legislators stunned even themselves by passing a controversial bill abolishing the practice of funding schools with property taxes. By the end of December, a bipartisan package of school-finance plans and education-quality reforms had passed both houses and gone to the governor's desk for signing.

Somehow, in less than six months, Michigan's leadership had managed to reverse a quarter century of bitter partisan gridlock, dramatically changing the way schools will work in their state and, many are saying, providing a model for public-school reform across the country--one that includes a charter-school provision incorporating significant elements of school-choice logic. It's a story of political hardball and genuine bipartisan achievement that provides a lesson for every state faced with education reform.

Described by The New York Times as "the nation's most dramatic shift in a century" in public-school funding, the new plan essentially transfers the burden of paying for schools in Michigan away from local property taxes to an increased state sales tax and other existing levies. In addition to changing funding sources, the plan addresses the amount spent per student. Every district is guaranteed funding no lower than its 1993 budget, and all districts will now spend at least $4,200 per student, a $1,000 increase over the previous minimum.

A more controversial--and ultimately more significant--provision of the plan allows the creation of "Public School Academies," or charter schools. These "schools of choice" can be established by various entities, such as parent-teacher associations, school boards, departments of state government, and non-profit organizations.

Michigan is unique among states experimenting with charter schools because it has set no limit on their number. Supporters say the move will provide "borderless options" for parents and students unhappy with their own school districts, and spur much-needed innovation in a school system overgrown with regulation and bureaucracy. And because it introduces a significant element of competition into the state's public schools, the charter-school provision acts as a hedge against the spread of uniform mediocrity. When local property taxes largely determine the amount of money spent per student, there are typically good, well-funded schools and bad, poorly funded ones. But state-level funding often means running the risk of losing the good districts where taxpayers feel they are at least getting what they pay for. Competition for students means that good schools will continue to be rewarded and bad schools will either improve or go out of business.

"The system was in desperate need of improvement and flexibility," says state Treasurer Douglas Roberts who, as the official charged with rewriting the state's tax code, was greatly responsible for shaping the reform plan. Michigan's schools, by the state's own reckoning, were doing badly. Per-student school spending in real dollars had increased over 100 percent between 1982 and 1993, but there was little to show for the extra money. District spending per student varied by as much as $7,000, but students statewide scored abysmally on proficiency exams: 62 percent of 10th-graders were found to be deficient in reading; 77 percent performed below grade level in math; 54 percent of 11th-graders did not have acceptable science knowledge. "Not only did the issue of [funding] inequities have to be addressed," says Roberts, "but we had to find a way to inject market-like competition into the system. Something simply had to change."

That change finally came as the result of the toughest political struggle in recent Michigan history. It was a fight that had been brewing for more than two decades, drawing in politicians who had run out of places to hide, citizens fed up with one of the most burdensome property-tax systems in the nation, and powerful lobbying groups determined to protect their interests in the educational status quo. After the first few rounds, the fight became a showdown between an increasingly desperate governor and a deeply divided state legislature.

The level of discontent in Michigan over property taxes and education financ-ing can be gleaned from the number of ballot proposals dedicated to reform. Between 1972 and 1992 there were 11 state ballot proposals either to reform school finance or to reduce or abolish property taxes. Although all of the ballot initiatives failed--some by margins of 60 percentage points or more--there was continuing resentment at Michigan's disproportionately high tax burden: The state ranks eighth-highest in taxes in the country, even though it ranks only 15th in income. Most political observers attributed Engler's 1990 gubernatorial victory to his strong anti-property-tax stance.

But after taking office, Engler had come nowhere close to making good on his ambitious promises to cut taxes. His administration had proposed two more ballot measures, both of which had gone down at the polls. The second defeat, in June 1993, was especially alarming for Engler because prominent Democratic and Republican pols had supported the measure, which would have cut property taxes by 20 percent. In fact, even the Michigan Education Association, the most powerful state teachers' union in the nation and Engler's bitterest enemy, had offered lukewarm support.

But while voters desperately wanted tax reform, they weren't willing to sign on to any plan put in front of them. Deputy Treasurer Nick Khouri notes that the ballot proposal addressed neither the issue of lost revenue nor the cause of school reform. Voters were afraid that any cut in property taxes would simultaneously destroy the schools and be replaced by a huge boost in the state income tax. Khouri says voters were telling their representatives, "`We aren't going to decide this for you.' It was an unsustainable situation."

With elections looming in 1994, the Republicans decided to play rough. In July, backed by Engler, Michigan Senate majority leaders introduced a statutory bill to cut property taxes 20 percent across the board. Even though no provision was made to recoup the lost revenue, Republicans had the votes to ram it through the upper chamber. But since the House was split evenly between Democrats and Republicans (each party held 55 seats), it was not expected to survive there.

After a series of dead-end talks between the governor and Senate majority and minority leaders, the Democrats made a surprising offer: They wouldn't support the 20-percent tax cut proposed by Republicans, but they might consider going along with an amendment that abolished all property taxes. Debbie Stabenow, a Democratic state senator who is challenging Engler in Michigan's gubernatorial race this fall, proposed the new amendment on July 19.

Why would a Democratic senator introduce such a Republican-sounding proposal? Stabenow says she did it because someone had to "break the issue loose. We had incredible inequities in schools and we had the knowledge of how to fix the problem--but we didn't have the political will."

Stabenow believes it was "the lesser of two evils" to abolish all property taxes rather than to go along with the 20-percent cut proposed by Republicans, even though neither plan made provisions for replacing lost revenue. If the legislature completely dissolved the tax base, says Stabenow, they would have to admit the need for a complete overhaul of Michigan's out-of-control finance and education situation. To force the issue, the Democrats' plan set a deadline of the 1994-95 school year for implementing a new way of funding schools.

Others question Stabenow's motives and suggest that pre-election year posturing and political one-upmanship might have played their own large roles. "Maybe in her heart of hearts [Stabenow] thought abolishing property taxes, even given the risk of anarchy, was worth it to get the legislature moving," says the Mackinac Center's Wittmann with a smile. "In a sense, you can commend her. But is that what she was really doing?"

One reason the question nags people is the enigmatic, behind-the-scenes role played by the Michigan Education Association, Michigan's powerful branch of the national teachers' union. Few can imagine that Democratic lawmakers would propose such a radical piece of education legislation without first seeking the group's approval. In Stabe-now's own account, the MEA's chief Michigan lobbyist, Al Short, was kept apprised of developments on the night the Democratic leaders came up with their counter-proposal.

But Short denies that he supported any tax-cut plan that didn't provide back-up revenue for the schools. "In the Senate they took up the 20-percent [property tax] reduction with no replacements," he says. "Then Stabenow says maybe we should cut all taxes, also with no replacements. No one wanted replacements. I was caught off guard." The MEA's role is clouded further because of remarks Short made on July 20 to a Lansing news service that suggest he indeed approved of the plan. Short's waffling strengthens speculation that Stabenow's cloakroom strategy was a ploy to out-shine Republicans on the tax issue.

Julius Maddox, the MEA's charismatic president, forcefully rejects the suggestion that his organization signed off on Stabenow's plan. "I was not there that day," he says. "What I can tell you is that prior to that time, our position had been clearly articulated to the legislature. Our position did not change. If [state legislators] thought there had been a radical change in our position, it would seem to me that they would have checked with the president. This literally happened overnight."

For a few hours that night, it appeared that Stabenow's proposal had checkmated the Republicans. They could reject it and appear to have voted down a more comprehensive tax-cut measure than their own. Or they could support a Democratic initiative and run the risk of falling short of votes from their own party. Worse, if the proposal passed, the issue of replacement school funding--which most likely meant some very unpopular tax increases --would blow up in the Republican governor's lap.

But to everyone's surprise, Engler championed the offer. Meeting with Republican leaders, he developed a strategy in which Senate Republicans would support the bill in the Senate, and House leaders in both parties would expedite its passage in the lower house. If there

was any lingering confusion on the MEA's position, it disappeared as soon as Engler made it known that he would accept the Democratic plan. Early on the morning of July 20, a note personally signed by Julius Maddox appeared on every desk in the house, urging legislators to reject the plan. But by then it was too late to stop the proposal.

"It's a game I've seen all too often since I arrived in Lansing," says Rep. Lynn Rivers, who as party whip was one of only 35 House Democrats who resisted the plan. "It's the game of giving you what you want. It's like playing chicken on the highway. Except you don't play chicken with someone who's willing to crash and burn. John Engler is just that kind of politician."

The proposal opened the way for reform and provided wide tax relief--a big score for Republicans in general and John Engler in particular. But it presented them and their Democratic counterparts with another, more serious problem: No one had yet proposed, let alone conceived, a back-up funding plan for the schools. That meant that the state's lawmakers had less than a single school year to find the $6.2 billion they had just removed from the public-school revenue base.

"It would have been impossible for the Republicans to get something like this through alone," says the Mackinac Center's Wittmann, summing up the strange episode. "Everyone would have claimed they were nuts for not proposing some alternative way to finance schools. But when a Democratic senator proposed the legislation, then they were part of it too. They had all gone nuts."

Editorials across the state criticized the governor and the legislature for the unprecedented move, accusing them of enacting a cynical, politically expedient compromise that made hostages of the state's children. One political cartoon showed a portly John Engler falling from an airplane while frantically knitting himself a parachute. On September 1, The Washington Post criticized the Michigan plan in an editorial called "Honey, I Blew Up The Kids!"

In many ways, John Engler is the last governor you'd expect to be at the center of so much controversy and behind one of the most revolutionary pieces of state legislation in the country. A bland career politician (asked why he personally dedicated himself to education reform, he begins, "I've spent a lot of years in public service"), Engler doesn't exude the sort of charisma that inspires either blind loyalty in supporters or fear in opponents. In an age of MTV politics and jogging presidents, Engler's bulky frame and slight lisp cut the figure more of a 19th-century pol than a 21st-century policy wonk.

Detractors are quick to criticize Engler for what they see as a slash-and-burn approach to policy making. Provoking legislative crises is "a silly way to run government," says James Agee, a first-term Democrat in the state legislature. "Is that the way we ought to make our laws? Let's close the hospitals tomorrow, create a crisis, and then solve health care."

But the governor's supporters claim that beneath Engler's jejune exterior is one of the shrewdest political minds in the United States. By way of example, they point to his handling of the July property-tax showdown, a deft move in which he simultaneously neutralized his primary political rivals and created a windfall for himself and his party. Engler also understood that the legislative crisis gave him the chance to address not just how schools were funded but also how they might be remade.

State Treasurer Doug Roberts says Engler emphasized those two points when formulating the plan. "We had a vast amount of money to recoup," he says. "But that was just one part. The governor kept saying that wasn't enough. He stressed that we had an opportunity to fundamentally change the system. He said over and over that he wanted something that would change itself over time."

Engler's original goals for school reform were even more far-reaching than the plan finally enacted. They included the charter school provision; inter-district public-school choice, with funding following each student; new discipline measures and report-card procedures; multi-tiered school-accreditation procedures; the development of a core curriculum in math, reading, and science; and the implementation of a fast-track teacher certification program.

The governor himself describes his strategy with a typical lack of animation. "When we put [everything] on the table, it brought everybody into the room," says Engler. "We swept the slate clear so no one was in a position to defend the status quo, because there was no status quo. It was gone."

No status quo also meant nowhere left to run. So in August, Engler created a task force to draft a legislative proposal that had to rewrite the Michigan tax code, create a system for the state-wide allocation of school funds, and improve the fundamental quality of public education. The governor also set a tight deadline for this proposal: October 1.

In retrospect, says Deputy Treasurer Khouri, drafting a plan in two months was the easy part. Passing the bills was infinitely more difficult, taking until the very end of 1993. Time was of the essence, however, because of the legislature's "immediate-effect law." That law specifies that any spending bill not passed by the end of a year must get a two-thirds vote to be put into effect. The supermajority requirement would have meant a small minority could control any revenue-replacement legislation that went into overtime. Neither Engler nor legislators relished the prospect of raising taxes or repealing their own summer legislation to keep schools from becoming insolvent.

"They would have looked ridiculous," observes the Mackinac Center's Wittmann. "Election time was on everybody's mind. And it's always easier to get votes for a tax cut than for an increase. In the end, they were in the boiling pot together and no one wanted to get cooked."

In the history of Michigan, the state legislature had never met after December 15. But session for the school finance and reform bills began at 10 a.m. on December 23 and continued through the entire evening and next morning. When it finally ended shortly after noon on Christmas Eve, 22 new bipartisan bills had been drafted, debated, and passed.

"I'll never forget it," says Dick Posthumus, Senate majority leader and a close ally of Engler's. "It's probably the hardest work I've

ever done in my life. For about two weeks everyone had been getting by on three or four hours' sleep, and for the last two days we went something like 48 hours straight to work out the most complex issue we'd ever faced. It was difficult but very, very successful."

Deputy Treasurer Khouri agrees. "It was a long all-nighter," he says. "The culmination of a lot of long nights. But that's probably how it should be. We knew we were doing something historic. We didn't know whether history would think it was smart or dumb, but we knew it was history. That makes it worthwhile."

Some recall the evening less warmly. "In many ways it was a joke," says Democratic whip Lynn Rivers. "We had no staff, there was no analysis of the bills--people were voting in some cases on legislation they hadn't had time to read. After 26 hours, all people were talking about were their plane tickets home."

Rivers, who is running for Congress, believes that a last-minute vote should have been avoided. "The main reason it came to this," she says, "is because the governor understands that the tighter the time line, the more leverage he has. Unfortunately, good public policy might have been lost in the shuffle." Rivers worries that legislators did not have adequate time to fully read the legislation they passed, much less consider its long-term implications.

Engler signed the legislation that came out of the marathon session on the last day in December. The compromise that had been reached offered two different plans, both of which reinstated a small portion of the property taxes eliminated in the summer. The first plan, introduced by the Republicans, sought to increase the state sales tax from 4 percent to 6 percent. Under the Democratic-supported alternative, the state income tax would go from 4.6 percent to 6 percent. Although not as ambitious as Engler's original proposals, both bills included nearly identical school reform measures, such as charter schools and a standardized core curriculum for all publicly funded schools.

Since Michigan law requires a constitutional amendment to raise the sales tax, there was one final dramatic gesture to be made: a statewide vote to decide the matter. If voters turned down the Republican-backed sales-tax increase ("Proposal A" on the special ballot), the Democratic income-tax proposal, which was a statutory amendment, would automatically go into effect. In the words of one Michigan representative, the voters got to choose between being shot or being hanged.

Still, many observers credit Engler with perceiving that the only way to pass a piece of legislation this sweeping was to force voters to choose between a sales tax and an income tax. He believed all along they'd opt for the sales tax. "I felt that for 20 years, people in this state have proposed higher income taxes and higher property taxes," says Engler. "People always said they would consider trading [lower] property taxes for higher sales tax. I thought it was a good bet."

On March 15 this year, Michigan voters went to the polls to decide on Proposal A, which was essentially the Engler plan. It passed by a margin of nearly three to one. The new law raises the sales tax by 2 percentage points, increases the per-pack tax on cigarettes from 25 cents to 75 cents, and hikes the tax on international and interstate phone calls to 6 percent. It also implements a 0.75 percent tax on all real-estate transfers. While stopping short of actually abolishing property taxes, the plan reduces them by between 70 percent and 80 percent, enacts a property-tax assessment cap of 5 percent or inflation (whichever is less), and allows local communities to use a percentage of property-tax money for new school construction and building maintenance.

Just as important to the plan's authors, a number of school-quality reform measures also passed, including the legislation allowing charter schools, additional money for at-risk students, and an increase in the minimum number of school hours required of pupils from 900 hours a year to 1,080 hours. State Treasurer Doug Roberts says the reforms accomplish Engler's goal of setting a new course for education in Michigan because they give parents more options than the old system. "With something like charter schools," he says, "parents will have a choice."

Whether the reforms work out in the long run, the plan is a complete break with tradition in Michigan. Engler and many others believe that such a drastic change was the only way to effect change at all. The governor feels the schools had become too rigid and inflexible, too controlled by unions and the tyranny of the status quo, to cope with the educational needs of students and the instructional interests of parents. "The problem with education [reform]," says Engler, "has been that when you try to approach it piecemeal, to bring about incremental change, the inertia of the status quo is just so difficult to overcome that it really does wear you down."

But while Republicans and a number of Democrats are basking in their success, plenty of difficulties loom on the horizon. Chief among these is the problem of revenue shortfalls in the years to come. Opponents of the reform plan charge that the plan is seriously underfunded and that within the next few years legislators will have to slash school funding, raid the general fund to keep schools open, and enact huge tax increases to make up lost revenue. The MEA claims that when the legislators approved the plan, they knew it was underfunded by $500 million dollars--a figure boosted to $1 billion because of concessions to various interest groups. Other detractors worry that relying on sales taxes, which drop significantly during economic downturns, fails to ensure a steady, predictable source of revenue.

Deputy Treasurer Khouri, whose newest job is to start implementing the plan he helped author, disputes the doomsday claims but admits that the new plan doesn't mean that schools will have ever-growing budgets. "Will there be tough decisions to make when we set spending levels in the future?" he says. "Will spending have to be brought in line with economic realities? Of course." Khouri believes that there will be steady revenue increases in years to come--though not on track with the booming increases of the 1980s.

While the fiscal soundness of Michigan's reform remains to be tested, it seems likely that the plan will serve as an inspiration for similar experiments in other states. More than 40 states are currently mired in lawsuits over inequities in public education, placing Michigan at the forefront of what promises to become a national trend toward massive school-funding reform. As Time notes, "The Michiganders' decision...has tremendous national resonance. It presented itself at a moment when property-tax funding of education had become a multistate catastrophe."

This is not to say Michigan will serve as a model. Although education analysts believe that a few facets of the state's plan--especially the charter-school provisions--will travel well, they are quick to note that Michigan's political and economic conditions were sui generis, making it unlikely that other states will implement the same quick, sweeping changes in education.

"There were a number of political convergences that make Michigan unique," says Chris Pipho, spokesperson for the Education Commission for the States in Denver. "The property taxes were very high but the sales taxes were low. The governor put his weight behind a radical idea to solve the problem. And some people would say the legislature put voters in a guillotine to decide [the issue]." Instead of telling states what they should do, says Pipho, the Michigan experience tells them that something can be done to reform education.

And even though Michigan's reforms have yet to prove themselves, opponents and proponents of the plan agree on at least two points. The first is that John Engler has demonstrated a powerful political acumen that may well propel him to national office. Although he denies that he's gunning for executive positions beyond the governorship of Michigan, Engler has been a conspicuous presence on the national circuit lately, appearing before the National Press Club and co-chairing the National Governors' Association Task Force on Welfare Reform. He is on virtually every handicapper's list of likely GOP presidential or vice-presidential candidates.

The other point that adversaries agree on is more specifically related to Michigan's recent legislative battle: Other states contemplating an educational overhaul face long, hard fights.