Ep. 323: Michigan Student Opportunity Scholarship with Ben Degrow

June 2, 2022

In this episode we talk with Director of Education Policy at the Mackinac Center for Public Policy, Ben DeGrow. He and EdChoice’s Director of Fiscal Research and Education Center, Marty Lueken, co-wrote a report that discusses the potential impacts of a proposed ESA program in Michigan.

Marty Lueken: Hi, everybody. Welcome to EdChoice Chats. I’m Marty Lueken, Director of EdChoice’s Fiscal Research and Education Center. On this episode, we’re joined by Ben DeGrow, he’s Director of Education Policy at the Mackinac Center for Public Policy.

Ben and I co-authored a policy report titled Michigan Student Opportunity Scholarships: Overview and Fiscal Analysis. Incredibly sexy title, I know, but not as much as the content. All right. So in this report, we analyzed the potential physical impacts of a proposed ESA program. That’s Education Savings Account program that passed the Michigan legislature in fall of 2021, but was vetoed by the governor. Ben is here to discuss the report, and hopefully to also teach us some cool and interesting things about his wonderful state of Michigan as well. So, Ben, thank you for joining us.

Ben DeGrow: It’s good to be with you today, Marty.

Marty Lueken: Before we get into the nitty gritty of the report, why don’t you tell our listeners a little bit about the K-12 landscape in Michigan. And as this is a podcast on school choice related issues, can you also tell us about the kinds of school choice programs that Michigan operates right now?

Ben DeGrow: Certainly. Michigan is a mixed bag when it comes to school choice in some really dramatic and noticeable ways. We’ve been a declining enrollment state for years, which goes along with our declining population. And we’re a state where academic achievement has been, shall we say, at or below the norm nationally. There’s a lot of broad interests out there in finding ways to help kids learn more, but there are also different approaches and solutions to that. Michigan is formally a union dominated state. So the lingering influence of the teacher’s union is an issue as groups try to reform and approve education in Michigan. But since we passed a right-to-work law almost 10 years ago, their influence has been waning. It just takes time to affect change.

When it comes to choice in Michigan, Michigan is one of the leading states, as far as the number of students who exercise choice within the public school system. More than one in 10 public school students go to a charter school, and even more students than that attend a district school outside of their residence. So beyond the typical choice that families exercise by enrolling in a residence and buying a home in that district, Michigan has a lot of public school choice. We also have a good deal of homeschool freedom. We’re one of the friendliest states for homeschoolers. But when I talked about the mixed bag, Michigan has a long way to go when it comes to private school choice. That’s because our constitution has arguably, or as some say, no argument at all, the worst anti-aid, Blaine-like amendment in the nation.

Marty Lueken: So, got a lot of public choice and you’ve had stumbling blocks vis-à-vis the Blaine Amendment from enacting private choice programs. Do families in Michigan need private choice, or specifically, policies like an Education Savings Account? How can they benefit from those? And who do you think would benefit most from them?

Ben DeGrow: Yeah, there’s several different ways I can answer that question. The first I would point out is from EdChoice’s own survey work we’ve seen in Michigan, a great question you ask voters in different states. Parents, particularly, “Which kind of schooling would you choose for your child if costs weren’t an issue? What is your preference?” Far more families, well over 30% in Michigan would choose a private school if they had that perfect choice, whereas less than 10% currently do. So we know there’s greater demand just from public opinion polling.

We also have seen during the pandemic experience in the last couple of years, and have talked to many of these families directly and personally. The private schools by and large, like they did in many other states, have a more reliable record providing consistent in-person instruction that parents depended on for their kids. So while private school enrollment had been declining in Michigan, along with public school enrollment for years, we saw kind of a rebound there as more families tried to seek out that kind of education for their kids. But we also recognize that a lot of families can’t afford that opportunity. And we also know that kids learn differently and have different needs.

We saw an uptake in homeschooling. We’ve seen an increase in things like hybrid homeschooling and these other innovations. We know parents are seeking out options, even beyond what’s currently existing in the public school system. The Student Opportunity Scholarship Program is really tailored for the moment and designed for that because it would enable families either to choose to spend the money on a private school and that tuition, or they could use the money to help supplement homeschooling or supplement tutoring services for their kids still enrolled in public schools, or to support innovative things like hybrid schooling, micro schooling, and the like. So we’re very hopeful about what this program could offer families.

Marty Lueken: Well, it’s certainly encouraging to see these new models come around. You mentioned our survey work, where we poll parents about what they want. We also put under that chart of what they want, what they actually get. There’s such a huge disparity between what families actually want, if cost and other factors weren’t an issue, and what they actually get.

In the report that you and I did … Which by the way, The Wall Street Journal had a very nice writeup about this report. For our listeners, I encourage you to check that out. We’ll put a link on the page of this podcast. In this report, we conducted a fiscal analysis of the Michigan Student Opportunity Scholarships Program. This is a Tax-Credit-Funded Education Savings Account Program or Tax-Credit-Funded ESA program. What are Tax-Credit-Funded ESAs, and can you describe this program in particular for our listeners?

Ben DeGrow: Certainly. It gets kind of confusing for those people who have a high level trying to follow the development of education choice. Tax-credit scholarship programs have been alive and growing and flourishing for the last quarter century. Really, since Arizona adopted its program. About the same time, I have to add that the Mackinac Center and my forebears here published and touted the idea of a universal tuition tax-credit. Though Michigan has been slow to try to catch up, there are more than, I think, 20 states or so have adopted that kind of program. Where it’s not funded directly by state aid, government dollars, but gives a tax benefit or write-off to donors who support scholarship programs.

Typically, those types of school choice programs just enable families to choose from a range of private schools, so they can use it for a tuition. But in the case of what we we’re trying to do here in Michigan, following what two states did last year, Kentucky and Missouri, became the first two states to adopt Tax-Credit-Funded ESAs, we wanted families to be able to, not just have access to spend money on tuition for private schools, but we wanted to serve the broad base of families we were hearing from. That’s including kids who are still in public schools and like their public school environment for many reasons, but may not be getting the extra support to take dual enrollment classes or to get tutoring to catch up after they fell behind in the pandemic, or are low-income and want to exercise interdistrict choice, but can’t afford transportation to a new school. We wanted to help all those families. And families who are, as I said, were doing things like homeschooling, full-time or part-time homeschooling, and want to cover some of those expenses as well.

So the tax-credit funded ESA is kind of a new idea out there. If Michigan were to adopt, we would be the first tax-credit ESA state that allows families statewide the opportunity to participate. So it would be a big breakthrough. Michigan, which has been way behind in the private school choice arena, the Student Opportunity Scholarships would represent a huge step forward.

Marty Lueken: So who would be eligible for Student Opportunity Scholarships and how would those families be funded?

Ben DeGrow: Right. This proposal, as you mentioned, went before the legislature last fall and has kind of reemerged as a citizens initiative. We wanted to make sure that when we put our input into the policy, that it would serve a large number of students. So to be eligible for a Student Opportunity Scholarship, Michigan family, the student has to come from a low income household or a middle income household up to 200% of the free and reduced lunch rate. That currently would be, for a family of four, about $103,000. So that’s significant.

Also, any student who has recognized disabilities, including those with individual education plans, regardless of income, they would be eligible, as would children who are in the foster care system. These being some of the most vulnerable kids, have the greatest need. So the idea behind the plan is that at least half of the money the scholarship organizations give out would have to go to lower income or special needs students. So they’re prioritized, but there are also smaller scholarship caps available for those students as they go into the middle income brackets. We estimate about 70% of students in Michigan would be eligible for some kind of scholarship.

Marty Lueken: Wow. That’s pretty big coverage for this program. That would help a lot of families for sure. Let’s dig into the meat and potatoes now, shall we? We conducted this fiscal analysis of the Student Opportunity Scholarships Program, and we estimated the potential fiscal impact on state taxpayers and on local school districts. We considered a range of assumptions about ESA amounts, and a range of assumptions about switchers. Switchers are students who would be participating in the program who would’ve enrolled in a public school without any financial assistance from the program. So these students are important for this fiscal analysis because they actually offset part or all of the program costs. The idea being that when students leave from public schools, costs in the public school system will go down. So that would generate savings for taxpayers. Can you tell us maybe a bit more about the analysis and what the top line results are?

Ben DeGrow: Sure. First, I want to say, it was great to be able to partner with you on this and to really draw from your expertise in having done these kind of analysis before, and really just knowing the landscape of how these work.

Marty Lueken: Likewise. Yeah, thanks. It was great working with you as well.

Ben DeGrow: As you said, there are a lot of assumptions we had to build into this because, I think in part, we’ve never really seen a Tax-Credit-Funded ESA program operate full scale. But we do have other examples of tax-credit programs and choice programs to estimate how many students would be switching from public to private and trying to estimate what those average ESA sizes are. Even though in the proposal, in the legislation that’s pending, in the signature drive, is tied to the formula in our state for funding students per people. So 90% of the per people funding for a public school student is the maximum amount any student can get. But we know that the average scholarship amount’s going to be somewhere less than that, because not all students will be eligible for the maximum and there’s reasons why scholarship organizations would give out smaller scholarships.

So we estimated somewhere between either a $4,000 average or a $6,000 average scholarship. And then based on the switcher rates that you mentioned, using some of the other national programs that are out there, we tested in four scenarios with the 4,000 average, the 6,000 average, and then each of those with a 60% switcher rate, which would be a very small rate of those switching from public schools, and a 90% switcher rate. The least beneficial of those four scenarios would not surprisingly be the $6,000 average ESA with the 60% switcher rate. But even that only had about $100 million negative impacts on the state and on local taxes. And on the other end, the 90% switcher rate with the smaller ESA average showed a benefit of higher than $380 million. So we’re able to say that, at the worst, the impact is going to be negligible on the state, even as this program gives opportunity and helps lots of students. But the more likely outcome is that it provides a small fiscal benefit in addition to the other advantages it provides.

Marty Lueken: Opponents of choice programs, they argue that these programs will harm public schools and drain them of vital resources. I hear this argument and I see this argument all the time. I imagine that you’ve heard this argument in your work in Michigan as well. So when you’re out and about, having conversations with different people about expanding educational choice in your state, how do you respond to this criticism?

Ben DeGrow: Yeah, it’s the leading argument we hear. I think it’s because it’s poll tested. For the voters not paying attention and just wants to listen to soundbites, the claim that school choice is defunding public schools is a popular argument for them to make. From the perspective of the Student Opportunity Scholarships, there’s a couple ways we respond. One is the more general argument that comes up in these school choice debates. And that is that when school enrollment is increasing and schools are taking on more students, administrators and education officials, they point out all the variable costs that they have, the new teachers they need, the new textbooks they need. But when, which is more typical in Michigan, there’s a declining student enrollment, then they start to complain about all the fixed costs that they can’t handle. Even as students are leaving, they still have to pay the utilities and all these other expenses.

But what we point out in the paper, based on the work of Ben Scafidi, he’s done some great analysis here, we conservatively estimate that about, yeah, I think 61, 62% of the $14,000 per student, the average that’s being spent in Michigan public schools, is actually variable cost. So that’s what they can mark off as the student leaves. So on a per student basis, that 61, 62% is actually a little bit greater than the $8,700 per student allowance that comes from the state. Which means that each student who leaves, whether they leave to take a Student Opportunity Scholarship, or they leave because their parents move or they go to a charter school, or whatever, they actually experience a small, very small, but a real fiscal benefit with each student who leaves. Have more money left per student who remains.

The second thing I point out specific to Michigan is the $500 million tax-credit pool comes out of our state income tax, which is paid by individuals and businesses. A lot of their complaints are that this will defund public schools, but in the way our laws are set up, only about a quarter of the state income tax goes directly into the School Aid Fund. So that means if the $500 million in tax credits were used in a given year, it would only impact about $120 million, or less than 1% of the state’s School Aid Fund, less than 1% of what the state is spending on public schools. So in all, whichever perspective you look at it, their claims are wildly overstated and in many cases just plain wrong.

Marty Lueken: I think those are all really good points, Ben. Especially with respect to the variable cost versus fixed cost question. Really happens in kind of a spectrum. So if you lose a student, if a school loses one student, they’re not going to be able to consolidate classrooms. That wouldn’t make sense to do that for a handful of students, for example. But in that instance, you’re talking about several thousand dollars, maybe several tens of thousands of dollars, in the context of a multimillion dollar budget. That would just be within the realm of their natural enrollment fluctuation that districts tend to experience from year to year, without being in a choice environment.

As you lose more students, then districts have more choices and more opportunities on how they adjust their budgets. So yeah, this argument, it’s funny that we only see this whenever it comes to states wanting to introduce a choice program, but usually we don’t hear it, and I don’t hear it in other situations, such as in the context of public school choice or open enrollment, for example. So yeah, those are good points that you made. Tell me, what’s next for the Wolverine State? Do you think that ESAs have a future there?

Ben DeGrow: You know, Marty, I’m certainly hopeful that they do. We recognize it’s a big lift to get Michigan from zero private school choice to a really ambitious program. If and when the petition process clears that hurdle, that means either it’ll go to the voters in the fall. Or the legislature here in Michigan has kind of a unique feature in Michigan, the legislature could be able to come back and intervene and vote it up or down without the governor who is the political obstacle to them. So, if all those things happen, then we’d be looking at implementing an ESA program in 2023.

Just based on conversations I have with parents, school leaders, teachers, even, who are looking for flexible ways to teach, entrepreneurs in education, I think there’s a thirst for this to see it happen. I don’t know that, based on the track record of these kind of programs, that we get to the $500 million cap in year one or year two, but I would be hopeful that as families and educators see the kind of flexibility and just the ability to match kids with schools that teach their family’s values or match kids with schools that provide the kind of learning experiences that they thrive in. I think, in the years to come, we’ll see this program just grow. Whatever obstacles may come up, I think the ground swell and demand from parents is going to … Like we’ve seen it across the nation with the movement for educational choice, there are a lot of battles that have to be fought, but the momentum is definitely on our side. I think ESAs have a fertile soil here in Michigan in which they can grow.

Marty Lueken: Well, I think, in general, that expanding educational options for families accrues a lot of benefits, not only to the families, but just for society as well, for public schools, even. There’s a lot of research out there. Researchers have studied all sorts of different outcomes. The fiscal effects of these programs and the fiscal benefits that we tend to see with programs in states that have enacted them is just one happy byproduct of these programs. I agree, there are lots of other, I think, good, stronger reasons for having educational choice, more options for families.

Well, I think we have covered a lot of information that’s hopefully helpful and interesting for our listeners. Ben, thank you for joining our podcast today. I appreciate you taking the time to chat.

Ben DeGrow: Well, thank you, Marty. I appreciate the chance to talk with you and your listeners. I hope they join us in the growing enthusiasm for educational choice in Michigan.