The Impact of State Centralization on School Spending: Evidence from Michigan

• In Event: Aligning Resources with Student Need: How State Funding Designs Shape Resource Allocation

Abstract

Since 1970, at least 20 states across the U.S. have adopted per-pupil funding systems that base school spending on enrollment, and many have largely centralized school finance at the state-level (Fischer & Duncombe, 2024). Under such funding systems, states allocate dollars to districts according to student enrollment counts and often provide additional dollars to support students and districts with greater needs (Odden & Picus, 2014). While this approach can make funding more equitable, it may also involve reallocating resources from historically high- to historically low-spending districts without increasing total state education expenditures.

Proposal A, adopted in Michigan in 1994, made significant changes to state education funding. In addition to capping local property taxes for K-12 operations, which reduced the impact of local wealth on school funding, it also gave the state control over revenue allocations to districts. Base allocations were centrally distributed through a per-pupil funding model, and Proposal A achieved equalization of base district funding in FY2022 through gradual revenue redistribution between high- and low-wealth districts. As a result, previously low-spending districts experienced improved academic and adult outcomes (Papke, 2008; Hyman, 2017; Baron et al., 2026), while previously high-spending districts shifted funds to protect core instructional expenditures (Chakrabarti & Roy, 2011). Additionally, policymakers limited increases in base funding in favor of increasing ‘restricted’ categorical dollars (Burns & Guzman, 2025). These are often allocated based on proportions of certain student populations (e.g., students with disabilities, English learners, and economically disadvantaged students), providing more funding to districts serving more of these students. Since Proposal A, districts now have much lower base per-pupil budgets (in real dollars) but larger amounts of restricted categorical funds (Burns & Guzman, 2025).

To understand the long-term effects of Michigan’s state centralized school finance system, we consider the impact of Proposal A on district resource allocation. We ask two primary questions:
1) Has the equalization of base per-pupil revenues driven by Proposal A produced alignment in core expenditure patterns between historically high- and low-spending school districts?
2) Have higher proportions of restricted categorical funding influenced district resource allocation and produced proportional spending increases on target populations?

We use district-level school finance data from 1991 through 2025 to explore district expenditure changes. These data contain district-level revenues separated by local, state, and federal sources, and separate revenues by base per-pupil funding versus categorical funds. We will also provide more detailed measures of district spending on instruction and support functions, salaries, benefits, purchased services, and supplies. We use data on district-level categorical revenues by section to disaggregate categorical revenues for student subgroups and will compare revenue increases for student subpopulations and associated equivalent per-pupil increases in district expenditures. Leveraging difference-in-differences and event study models, we estimate the impact of base funding equalization and growing proportions of restricted dollars on district expenditures, focusing on how proportions of spending on instruction, target populations, and other categories have changed over time. Preliminary analyses suggest that district instructional expenditures have converged, although COVID dollars may have exacerbated differences in spending across other categories.

Author

• Matthew Joseph Guzman, Michigan State University
  Presenting Author