Financing the Milwaukee School Voucher Program.

School vouchers have recently become a hot topic of discussion amongst politicians and pundits seeking to overhaul the public school system. But what is often left out of the debate is any discussion of the financing necessary to send students to private schools. This article highlights how

Editor's note: The Government Finance Officers Association, the publisher of Government Finance Review, takes no position on school vouchers. This article is intended to be informational for readers and should not he construed as an endorsement of the program.

Since the 1990-91 school year, the state of Wisconsin has provided state tax dollars in the form of vouchers to low-income parents in the City of Milwaukee to send their children to participating private schools in the city at no tuition charge. The Milwaukee Parental Choice Program (MPCP), as the voucher program is referred to in state law, has grown from seven private schools, 300 FTE voucher students and $0.7 million in 1990-91 to 103 private schools, an estimated 9,200 FTE students and an estimated $49 million in the 2000-01 school year as shown in Exhibit 1. The table also shows that the maximum voucher amount has increased from $2,446 per student in 1990-91 to $5,326 per student in 2000-01. It should be noted that FTE equals full-time equivalent and is a smaller number than the headcount of students in the program; for example, there were 9,638 students enrolled in September 2000 compared to 9,123.4 FTE students. Voucher students enrolled in four-year-old kindergarten programs are counted as 0.5 FTE and voucher students in five-year-old kindergarten programs are counted from 0.5 FTE to 1.0 FTE depending on the length of the program. Voucher students in grades 1-12 are all generally 1.0 FTE students.

When it was enacted in 1990, the MPCP was the first publicly funded voucher program in the nation. Since then, the state of Ohio in 1995 established a voucher program in the City of Cleveland and the state of Florida in 1999 established a statewide voucher program that allows students in failing public schools to take vouchers to any school that accepts them. However, the Milwaukee program continues to be by far the largest of the three programs in the number of participating schools and students and the maximum amount of the voucher at its current $5,326 per student. The Milwaukee program is on the most solid legal ground of the three programs due to the fact that the Wisconsin State Supreme Court upheld the current program in June 1998 and the United States Supreme Court did not take the case on appeal. In Cleveland, there were 3,761 students receiving vouchers up to $2,500 to offset tuition at private schools in 1999-2000 and an unknown number in 2000-01 before a federal appeals court ruled the use of pub lic funds to send children to parochial schools violated the First Amendment. In 1999-2000, 96 percent of the voucher students in Cleveland were enrolled in sectarian schools. That decision is being appealed to the U.S. Supreme Court, while the current students are allowed to continue in the program for the remainder of this school year. If the high court were to rule the Cleveland program unconstitutional, that decision would likely apply to the Milwaukee program as they are similar programs in many respects. Meanwhile, in the 1999-2000 and 2000-01 school years the Florida program provided vouchers for 57 students from two failing public schools to attend private sectarian or non-sectarian schools at state expense.

Background: Milwaukee Education

It is important to understand Milwaukee and its education system in the late 1980s to understand the dynamics that led to the establishment of the voucher program. This discussion relies in part on John Witte's book on the Milwaukee program entitled The Market Approach to Education: An Analysis of America's First Voucher Program and published in 2000.

While the noted economist Milton Friedman first described the modern idea of educational vouchers in 1955 and a brief federal experiment with public school vouchers occurred in the Alum Rock, California, school district in the 1970s (Bridge, 1978), as of the late 1980s, there had not been a publicly funded voucher program for private schools implemented anywhere. Meanwhile, Milwaukee was changing dramatically in economic, racial, and educational terms, which set the stage for the grass roots support for the idea of a voucher program in the late 1980s. Some figures reflecting those changes are as follows:

* between 1940 and 1990, whites residing in Milwaukee went from 98 percent of the population to 63 percent, while blacks went from less than 2 percent to almost 31 percent;

* from 1970 to 1990 the percentage of Milwaukee households below the poverty line went from 11.4 to 22.2 percent;

* from 1970 to 1990 white students went from over 72 percent of the Milwaukee Public Schools enrollment to just under 20 percent; and

* the percentage of Milwaukee Public School (MPS) students eligible for free or reduced price lunch went from 15 percent in 1970 to 69 percent in 1997.

The "white flight" to the suburbs contributed to a decline in private (mainly Catholic) school enrollments (from more than 50,000 in 1966 to approximately 30,000 in 1990) and public school enrollments in Milwaukee (from more than 130,000 in 1970 to less than 100,000 by 1990). As populations changed within the city, racial concentrations in neighborhoods became more extreme and schools became more segregated. This segregation led to a lawsuit by the National Association for the Advancement of Colored People (NAACP) in 1967, which resulted in a desegregation order for Milwaukee in 1976 and forced busing for many minority children as well as the creation of magnet schools in MPS. The historical decline of MPS in average academic performance continued, which masked great variation among individual schools.

Establishing the Voucher Program

The importance of Milwaukee as the state's largest city, the changing demographics of the city, and the declining academic performance of the school district all came together in the late 1980s to create some unlikely political allies in support of school choice. As Witte pointed out in his book, the media has generally given credit for the founding of the voucher program in Milwaukee to African-American state Representative Annette "Polly" Williams, a former welfare recipient and liberal Democrat who was the leader of a grass-roots movement in the African-American community in Milwaukee to find an alternative to failing, segregated Milwaukee public schools for their children. However, it was conservative Republican Governor Tommy Thompson who started the legislative push to establish the voucher program with his introduction of 1987 Assembly Bill 816 that included religious schools.

Governor Thompson was first elected in 1986 and immediately set about trying to establish himself in the state and beyond as a progressive Republican with market solutions to problems. The newly elected democratic mayor of Milwaukee, John Norquist, also supported the voucher idea as a way to keep families in the city and improve the public schools. When Assembly Bill 816 failed in 1987, Thompson modified the proposal to exclude religious schools along with a number of other restrictions. These changes won the support of Representative Williams and other key Milwaukee Democrats, and the program was enacted as part of the budget adjustment bill in the spring of 1990.

The statutory language directed the State Superintendent of Public Instruction to administer the program, which it did through reallocation of staff and resources from 1990 to 1999. The governor and the legislature first provided staff and resources to administer the MPCP in 1999 Wisconsin Act 9 (the state's 1999-2001 biennial budget bill). Despite almost continual legal challenges to the program on state and federal constitutional grounds from its creation in 1990 until the Wisconsin Supreme Court's ruling in 1998 that the legislative inclusion of religious schools in the program in 1995 was constitutional, the program has operated every school year and now includes 103 schools and more than 9,600 low-income children.

How It Works

The financing of the private-school voucher program in Milwaukee is conceptually quite simple, but relatively complicated in practice depending on the level of the financial transaction and the perspective of the individual or group affected by the program.

From the perspective of the parents of students in the voucher program, the financing is fairly straightforward. The state issues four separate checks during a given school year (in September, November, February, and May) that are payable to the parent or guardian of a child enrolled for the entire school year in the voucher program at the same private school in Milwaukee. The state (Department of Public Instruction or DPI) sends the four checks to the private school (one check for every voucher student on the same day in those four months) where the child is enrolled. The parent or guardian is then required by state law to restrictively endorse the check for the use of the school. The law required that the check be payable to the parent or guardian rather than the private school in order to address the constitutional issue of separation of church and state. The checks are sent to the school where the parent then endorses the check over to the school for ease of administration and to prevent possible fraud on the part of the parent. Based on discussions with the participating private schools, the usual practice has been to have the parent or guardian come to the school after the check arrives and sign the check over to the school in the presence of a school official. An unknown number of voucher schools are having parents sign a "power of attorney" form, which authorizes the school to deposit the checks without the necessity of the parent restrictively endorsing the check to the school. The DPI, however, has made it clear to the participating schools that it does not approve of this practice, but has not challenged its use in court.

When the voucher program only included nonsectarian schools from 1990 to 1995, the state sent one check payable to the school four times each year. The law was changed in 1995 to require individual checks payable to each parent to allow for the separation of church and state, and the Wisconsin State Supreme Court in 1998 upheld that provision as constitutional. Th DPI in the fall of 1998 began issuing individual checks to parents four times a year to reflect the inclusion of religious schools in the program. This change increased the number of individual checks issued from 92 checks to 23 schools in 1997-98, to approximately 24,000 checks to about 6,000 parents in 1998-99. The parent understands that they do not pay any tuition to the school because their child is enrolled in the voucher program. It should be noted that the November checks sent to the school include any additional payment due if the school operated a summer school for voucher students in the previous summer.

The Schools

Four times a school year a batch of checks arrives from the state DPI, one check for each of the voucher students enrolled in that school. Unless the school has received authorization from the voucher parent to deposit the check, the school must convince the parent to endorse the check over to the school, which they successfully do in almost all cases. There are some parents who refuse to sign the check over to the school for whatever reason; the school must then send the uncashed check back to the state and wait to receive those funds from the state in adjustments.

The voucher school also is affected by the amount of the voucher, which is either an amount set annually by the state or the private school's operating and debt service cost per student (for all its students, voucher and tuition paying alike) whichever is less. The 2000-01 school year voucher amount is $5,326 per full-time student and will increase in future years by the allowable increase per student under the state revenue limits on all school districts in the state. [1] If a school spends $4,000 per student for all its students in a school year and the voucher amount is $5,326 per student, the school will receive $4,000 per voucher student from the state after adjustments are made. The school's cost per student is determined by a financial information report (FIR) prepared for the school by an independent financial auditor and submitted to the DPI by no later than September 1 following the school year. This FIR is prepared on forms issued by the DPI, includes an audit of the number of voucher students enr olled at the school on the two count dates, and does not represent accounting according to GAAP principles.

After DPI staff review the FIR with the financial auditor who prepared it, any overpayments from the state to the school are due back to the state from the school within 60 days of the adjustment determination. These overpayments can result either from costs per student that are lower than the state determined voucher amount or in the case of checks sent to a school for a child who was not enrolled there (and the checks were not returned to the state). Any underpayment by the state for students not listed earlier as enrolled is due to the school from the state within the same 60-day period. The process of reviewing the financial reports from the schools, calculating adjustments, and either issuing a state check to a school or receiving payment from a school takes the better part of four months (from early September until the end of the month of December).

The payments due the state from a school--for overpayments based on a lower cost per student than the voucher amount-- can be substantial in some cases. If a school had costs per student (for all its students) of $4,000 per student and it received vouchers of $5,326 for each of its 100 voucher students during the school year, the school would owe $132,600 back to the state ($1,326 multiplied by the 100 voucher students). For the 1998-99 year (the last year for which audited data is available), the net amount returned to the state's general fund was about $0.8 million. The 86 voucher schools collectively owed the state of Wisconsin about $1.2 million for overpayments and lower costs per student, and the state owed the voucher schools about $0.4 million for underpayments.

The School District

Before the voucher program's financial impact on school districts and property taxpayers in the City of Milwaukee and around the state is explained, a primer on the public school finance system in Wisconsin is necessary. As is the case in most states, Wisconsin public school districts pay for their operations and debt mostly through aid from the state and local property taxes with some federal aid and miscellaneous fees and charges thrown in for good measure. All 426 Wisconsin public school districts are under state imposed revenue limits, which limit the combination of state aid and local property taxes per student that the district can receive in a given fiscal year. Most school districts set their budgets at an annual meeting of the voters sometime in July or August, based on an aid estimate from the state and the districts estimate of its own revenue limit. The school year begins in late August or early September, the state makes a first aid payment to districts at the end of September, and in the middle of October, the state runs the aid formulas and sets the aid amounts by district for the remainder of that school year. Each school district then sets its property tax levy by the end of October for inclusion on the property tax bills to be sent out in early December.

This background is important because all 426 public school districts (including the MPS district) "pay" for the private school choice program in Milwaukee by having their state aid reduced. The way the program is financed from the 426 school districts' perspective is as follows. In the 2000-01 school year, the state appropriated $3.93 billion for general state aid to local school districts, while the voucher program is expected to cost approximately $49 million, based on an estimated 9,200 FTE voucher students at $5,326 per FTE student. The $3.93 billion in general state school aid to school districts is provided in "equalization aid" (for distribution under the state's formula based on each districts respective number of students, costs and local property value). The appropriation for "equalization aid" is a set amount set by the legislature's joint budget committee. The funding for the private school choice program is provided in a "sum sufficient" appropriation that contains whatever funding is necessary to fully fund the program. DPI estimates the amount necessary for the voucher program by October 15th and the amount is deducted from the appropriation for "equalization aid." One-half of the funding for the voucher program is taken from the general state aid that would otherwise have been distributed to the Milwaukee Public Schools and the other half is taken from the general state aid that would otherwise have been distributed to the remaining school districts in the state.

For the October 15th aid run, the DPI first runs the "equalization aid" formula based on the $3.93 billion appropriated and calculates an aid amount per school district. Based on the estimate that the voucher program will cost $49 million in 2000-01, the Milwaukee Public Schools had its equalization aid estimate reduced by $24.5 million to pay for one-half of the voucher program and the other 425 school districts had their equalization aid estimates reduced by a collective $24.5 million to pay for the other half. Each school district had its equalization aid reduced by the same 0.6 percent that $24.5 million represents of $3.93 billion. This means that a school district due $10 million from the state will lose a greater dollar amount of aid (about $60,000) than a district due only $1 million from the state (which would lose about $6,000). The 426 school districts will collectively receive $3.930 billion minus $49 million or $3.881 billion, and the private voucher schools in Milwaukee will receive $49 million.

The Local Property Taxpayer

Since the revenue limits for school districts were calculated on the basis of $3.930 billion in state aid instead of $3.881 billion, the districts can replace the "lost" $49 million state aid with additional local property taxes to make up the difference. This last wrinkle in the financing mechanism for the voucher program brings in a new participant, namely the local property taxpayer.

From the time revenue limits were imposed on local Wisconsin school districts in 1993 through the 1998-99 school year, only the MPS district had its state aid reduced to "pay" for the voucher program and the formula for doing so was much more complicated. For those reasons, as well as the difficulty in following the budget approval and revenue limit determination process of the Milwaukee school district, it was not easy to determine the extent to which the district replaced the lost state aid with higher property taxes. If the district was doing so, the superintendent and the school board were certainly not making clear what portion of the local property tax levy was related to the voucher program.

Then the state law was changed in the 1999-01 state biennial budget to spread the impact of the voucher program to the other 425 districts around the state as well as the Milwaukee Public Schools, under the mechanism described above. This change was enacted with little public discussion in the budget process and as a result, many school districts and communities in other parts of the state did not realize its impact until the budget had been passed. Supporters of the change would argue that the impact on a school district outside of Milwaukee is minimal--a 0.6 percent reduction in their state aid. However, a counter argument is that a 0.6 percent reduction in state aid still represents $60,000 (or salary and benefits for a veteran full-time teacher) for a district receiving $10 million in state aid (about the weighted state average).

The State

The state government of Wisconsin has its own financial perspective on the voucher program that affects the school districts and state and local taxpayers. The state has established the voucher program on the basic principle that it will not cost the state additional funds above and beyond its commitment to public schools. The way this principle works in practice is as follows. To the extent that the state's October 15th estimate of the cost of the voucher program cost is too high, the amounts that are either unspent by the state or are returned from the voucher schools do not go back into the budgets of the school districts that had their aid reduced based on the estimate, but rather into the state's general fund. If the DPI estimates in October 2000 that the private school voucher program will cost $49 million in the 2000-01 school year, and in the end after all adjustments are made the program only costs $45 million due to a combination of fewer students enrolled than anticipated and schools returning fund s to the state due to lower costs per student than the voucher amount, the state does not return the difference of $4 million to the 426 public school districts which "paid" for the program through reductions in their state aid. The $4 million, rather, is returned to the state's general fund and thus helps balance the state budget. There are reasonable accounting and budgeting arguments that can be made for this practice, such as the fact that adjustments are made in the following fiscal year. However, an argument can certainly be made against it on the grounds that the state is not meeting its stated commitment to providing two-thirds of K-12 public school revenues. In addition, the 425 school districts located outside the City of Milwaukee have no influence over the size of the voucher program as MPS can through the school choice mechanism, yet those 425 districts must share in the cost of the program.

Conclusion

The financing of the Milwaukee private-school voucher program is complicated for a host of reasons. Some components are complicated for legal reasons, such as the requirement that four times a year the state issue individual checks payable to thousands of parents to address the constitutional issue of a separation of church and state. And the fact that the state has imposed revenue limits on school districts brings the local property taxpayer more directly into the financing as the local taxpayers in each district must decide whether to raise the taxes for schools to replace the lost state aid that is helping to fund the voucher program.

What is notable about this state-established program is that the City of Milwaukee is its only beneficiary. In the end, it is not the state government of Wisconsin or solely the Milwaukee taxpayers who pay for low-income students in the City of Milwaukee to go to private schools, but the all of the public school districts and local property taxpayers around the stare.

CHARLIE TOULMIN was the Administrator of the Milwaukee Parental Choice Program for the Wisconsin Department of Public Instruction from July 1998 to June 2000. He holds a graduate degree in Public Policy from University of Michigan and is currently a candidate for a graduate degree in Education at the Harvard Graduate School of Education.

NOTES

(1.) The state of Wisconsin, beginning in 1993, imposed limits on the combination of state and local revenues per student each school district in the state could raise each year. The law limits the annual increase in per student revenues to a specific dollar amount determined by the state based on the rate of inflation. Under the revenue limits, a school district that "loses" state aid to help fund the voucher program can replace that "lost" state aid with property taxes up so the revenue limit.

                 MILWAUKEE PARENTAL SCHOOL CHOICE PROGRAM
                      MEMBERSHIP AND PAYMENT HISTORY
                        (in total 1999 to present)
            Number            Membership
          of schools                                Aid         Aid per
Year       at start  at end   September  January membership [*] member
1990-91       7         6         387       258      300        $2,446
1991-92       6         6         504       506      512         2,643
1992-93      11        11         591       569      594         2,745
1993-94      12        12         718       687      704         2,985
1994-95      12        12         786       752      771         3,209
1995-96      17        15       1,320     1,199    1,288         3,667
1996-97      20        20       1,606    1,1573    1,616         4,373
1997-98      23        23       1,501     1,416    1,497         4,696
1998-99      86        86       5,830     5,695    5,806         4,894
1999-2000    91        93 [b] 7,645.2     7,498    7,609         5,106
2000-01     103       103     9,123.4       NA     9,200        $5,326
Year       Total paid
1990-91     $ 733,800
1991-92     1,353,216
1992-93     1,630,334
1993-94     2,101,203
1994-95     2,474,139
1995-96     4,607,586
1996-97     7,066,768
1997-98     7,027,564
1998-99    23,413,585 [a]
1999-2000  38,851,554
2000-01   $49,000,000
(a.)Does not reflect any adjustments based on
1998-99 financial information reports.
(b.)Two schools joined the program in January.
(*.)Calculated as the average of September and
January memberships, plus summer school:
Source:State of Wisconsin Department of Public
Instruction, School Management Services.