Schmidt v. Department of Educ.

• Citation: 441 Mich. 236,490 N.W.2d 584
• Decision Date: 29 September 1992
• Docket Number: Docket No. 90858,No. 11,11
• Parties: , 78 Ed. Law Rep. 517 Gerald SCHMIDT, et al., Plaintiffs-Appellants, v. DEPARTMENT OF EDUCATION; Department of Management and Budget; and State Treasurer, Defendants-Appellees. Calendar
• Court: Supreme Court of Michigan

Page 584

490 N.W.2d 584

441 Mich. 236, 78 Ed. Law Rep. 517

Gerald SCHMIDT, et al., Plaintiffs-Appellants, v. DEPARTMENT OF EDUCATION; Department of Management and Budget; and State Treasurer, Defendants-Appellees.

Docket No. 90858.

Calendar No. 11.

Supreme Court of Michigan.

Argued Nov. 7, 1991.

Decided Sept. 29, 1992.

Frank J. Kelley, Atty. Gen., Gay Secor Hardy, Sol. Gen., Paul J. Zimmer, Jane D. Woodfin, Asst. Attys. Gen., for defendants-appellees.

White, Beekman, Przybylowicz, Schneider & Baird, P.C. by Cynthia Williams Irwin, Okemos, for amicus curiae Michigan Educ. Ass'n.

Sachs, Kadushin, O'Hare, Helveston & Waldman, P.C., Theodore Sachs, Eileen Nowikowski, Andrew Nickelhoff, Detroit, for amicus curiae Detroit Federation of Teachers.

OPINION

BOYLE, Justice.

The question presented is the proper interpretation of the first sentence of Sec. 29 of the Headlee Amendment, Const.1963, art. 9, Secs. 25-34. The question arises against a backdrop of complex issues including equitable school financing, the intricacies involved in state school aid formulas, and the fiscal problems of the state. These underlying issues shape the arguments of the parties and amicus curiae and color their perspective. However, mindful of the fact that construction of a constitutional provision enacted as a result of voter initiative requires a special emphasis on the duty of judicial restraint, ¹ our interpretation is ultimately drawn from the words of the amendment and our understanding of the purpose the voters sought to effectuate by ratification. ²

The principal theories of the parties may be fairly summarized as a claim by local units of government that they are entitled to funding of mandated state programs on a unit by unit basis and a claim by the state that the Headlee obligation is met by funding a proportionate share of the mandated activity on a statewide basis wherever it is spent. Thus, having examined the language of Sec. 29 supporting their respective positions, Justice Levin's dissent ultimately turns on the belief that the voters intended to preclude any shift of responsibility for mandated services from state to local governments, dissenting op., p. 606, while the opinion of the Chief Justice implicitly accepts the proposition that the voters adopting the Headlee Amendment intended that the state could fulfill its Headlee obligation by discretionary redirection of amounts recaptured from mandatory programs, dissenting op., pp. 609-10.

Because we conclude that the voters intended neither to freeze legislative discretion nor to permit state government full discretion in its allocation of support for mandated activities or services, we hold that the statewide-to-local ratio for calculating the state's funding obligation for existing services and activities under Sec. 29 preserves voter intent by securing a minimum funding guarantee while simplifying calculations and avoiding inequitable anomalies. We further hold that social security coverage is not a state-required activity or service within the meaning of the Headlee Amendments.

I

Section 29 of the Headlee Amendment provides:

"The state is hereby prohibited from reducing the state financed proportion of the necessary costs of any existing activity or service required of units of Local Government by state law. A new activity or service or an increase in the level of any activity or service beyond that required by existing law shall not be required by the legislature or any state agency of units of Local Government, unless a state appropriation is made and disbursed to pay the unit of Local Government for any necessary increased costs. The provision of this section shall not apply to costs incurred pursuant to Article VI, Section 18."

The plaintiffs in this case, fifty-one Michigan school districts and fifty-one taxpayers residing in each of those districts, ³ contend that the state has violated Sec. 29 by reducing the state financed proportion of the necessary costs incurred by the plaintiff school districts in providing certain state-required activities and services.

When the Headlee Amendment was adopted by the voters of Michigan as part of the Michigan Constitution in 1978, state law provided for programs for special education, special education transportation, bilingual education, and lunch and supplemental milk. ⁴ Since the adoption of the Headlee Amendment, the Legislature has appropriated funds to school districts pursuant to the State School Aid Act, M.C.L. Sec. 388.1601 et seq.; M.S.A. Sec. 15.1919(901) et seq., as amended annually. The act generally provides for two types of state funding: "restricted" and "unrestricted." Unrestricted funds can be used for any school-related purpose authorized by law. Restricted or "categorical" funds are earmarked for specific programs, some of which are voluntarily provided by local districts, and some of which are mandated by state law.

The state allocates unrestricted funds according to a formula, set forth in Sec. 21(1) of the act, that guarantees to each district a minimum level of funding per pupil. Generally speaking, the amount of unrestricted funds provided per pupil equals the difference between the amount guaranteed and the amount per pupil generated from local revenues. ⁵ Districts are only eligible to receive unrestricted funds if the amount of revenue per pupil generated locally does not exceed the amount of funds guaranteed per pupil by the state. Districts that are so eligible are said to be "in-formula." Districts whose local revenues per pupil exceed the state-guaranteed amount are ineligible for unrestricted funds and are said to be "out-of-formula." ⁶

The act contains a "recapture" or "base revenue deduction" provision appearing in Sec. 21(5) as amended by 1990 P.A. 207 and 1991 P.A. 118. ⁷ This provision authorizes the "recapture" of funds tentatively allocated to an out-of-formula district ⁸ under all other provisions of the act, including funds allocated for mandated categorical programs. The recaptured funds are withheld from out-of-formula districts and are available for distribution to in-formula districts in accordance with the act. The amount of the recapture or base revenue deduction is determined according to a complex set of formulas, the details of which are not relevant here. ⁹

It is this recapture provision that, according to the plaintiffs, has resulted in a violation of Sec. 29 of the Headlee Amendment by reducing the state financed proportion of the necessary costs incurred by the plaintiff school districts in providing the activities and services mentioned above.

The plaintiffs also allege that the state has violated Sec. 29 by reducing its prior one hundred percent proportional funding of the plaintiff school districts' employer share of federal social security taxes paid on behalf of their employees. Since 1987, the state, in accordance with federal law, has required local school districts to remit all federal social security taxes directly to the appropriate federal agency. At the same time, the state has undertaken to appropriate to each district funds sufficient to cover the district's employer share of such social security taxes. See M.C.L. Sec. 388.1746; M.S.A. Sec. 15.1919(1046), originally enacted by 1987 P.A. 128, as amended annually ("Sec. 146"); see also M.C.L. Sec. 38.1341(9); M.S.A. Sec. 15.893(151)(9), as amended by 1989 P.A. 194. ¹⁰

Before 1989, Sec. 146 was included in a list of provisions under which the funds due school districts were exempted from recapture. See M.C.L. Sec. 388.1621(5); M.S.A. Sec. 15.1919(921)(5), as amended through 1988 P.A. 318. The Legislature, however, in 1989 P.A. 197, removed Sec. 146 from that list, thus subjecting to recapture the funds allocated for reimbursement of the social security taxes paid by out-of-formula districts. ¹¹ See M.C.L. Sec. 388.1621(7); M.S.A. Sec. 15.1919(921)(7), as currently amended. ¹² This, according to the plaintiffs, has resulted in the unconstitutional reduction of the state financed proportion of social security taxes paid on behalf of their employees.

The plaintiffs filed their original complaint in the Court of Appeals, pursuant to Sec. 32 of the Headlee Amendment, ¹³ on September 13, 1990, and filed an amended complaint on October 9, 1990. The Court of Appeals, on November 9, 1990, dismissed the complaint for failure to state a cause of action under the Headlee Amendment. ¹⁴ The Court reasoned that the plaintiffs had alleged only a reduction of the state financed proportion of their particular budgets on a unit-by-unit basis, and that Sec. 29 would be violated only by a reduction of the state financed proportion of the necessary costs of any existing state-required activity or service as calculated on an aggregate, statewide basis, covering all relevant units of local government. ¹⁵ The Court, on January 14, 1991 clarified the reasoning of its earlier order and denied rehearing. ¹⁶ The plaintiffs applied for leave to appeal to this Court, which we granted on April 23, 1991. 437 Mich. 974, 483 N.W.2d 25. ¹⁷

In our order granting leave to appeal, we directed the parties

"to include among the issues to be briefed (1) whether the obligation of the state under Const 1963, art 9, Sec. 29 should be measured by one of the following: (a) the ratio of total state aid for a required activity to total necessary costs for the required activity in the base year compared with the ratio of total state aid for the activity to total necessary costs for the activity in the year of challenged funding; (b) the ratio of state aid to an individual local unit of government for a required activity to necessary costs of that unit for the activity in the base year compared with the ratio of state aid to the unit for the activity to the necessary costs of that unit for the activity in the year of challenged funding; (c) the ratio of total state aid for a required activity to total necessary costs...