School Funding vs. School Reform Gives Michigan a Test on Balance : Education: Last year, one school district closed months early when money ran out. Now time is running out for a new overhaul of state system.

When the money ran out there was still snow on the ground. So last March, the schools in Kalkaska, Mich., closed 10 weeks early, giving 2,300 students and 124 teachers an unexpected and mostly unwanted vacation.

The crisis in Kalkaska, a small town in the northwest corner of Michigan’s lower peninsula, was precipitated by the refusal of voters to approve a property tax increase.

“The local taxpayers are telling the state to change the way we finance schools,” said Hugh Jarvis, president of the Michigan Federation of Teachers.

Indeed, the situation in Kalkaska highlights the collision of two emerging populist issues in Michigan: a growing revolt against high property taxes used to fund schools and a deepening dissatisfaction with the public school system.

Efforts in Lansing, the state capital, to reconcile school funding and education reform are drawing national attention in part because of the unusual--and some say dangerous--way that Michigan has gone about it.

In July, the Legislature unexpectedly passed legislation eliminating property taxes for schools. This was done without a plan to replace the nearly $7 billion in lost funding for the 1994-95 school year.

The move was followed by months of debate, and on Friday, lawmakers passed a package of tax bills designed to finance the schools and lay the groundwork for school reform. Voters must approve the plan, which calls for increasing the sales tax or the income tax.

Other states under pressure to change their school funding schemes are watching Michigan closely. Since 1989, courts have struck down as unconstitutional inequitable school-funding systems in eight states. School-financing schemes have been challenged in about 25 other states.

In Michigan, the debate is often rancorous and ideological, and one thing is certain: Success is not guaranteed.

“There is some criticism this is just a shell game,” said William Ballenger, editor of the newsletter Inside Michigan Politics. “There are questions whether there will be real tax relief or reform.”

Gov. John Engler, a maverick, conservative Republican, promised property tax relief in his 1990 election campaign. Property taxes provide about two-thirds of the funding for local school districts. But because of differing property values from town to town, there is wide disparity in the amount each district spends per student.

For instance, in affluent Bloomfield Hills, home of many auto executives, the schools spend $9,300 per student. In Detroit, where a third of the families live in poverty, per student spending is $4,950.

Since 1992, voters rejected two ballot proposals by Engler to cut property taxes, fearing it would hurt the schools or result in other, higher taxes. In July, as he was pushing a bill to cut property taxes 20%, Engler was presented with an unexpected gambit from the Democrats: Kill school property taxes altogether and then reinvent the public school system.

Engler, who plans to run for reelection next year with the slogan “Promises made, promises kept,” jumped at the chance. In less than one day, both houses passed the bill with bipartisan support.

The move was decried as disastrous and praised as brilliant. Some feared it would bankrupt the schools; others said it was the only way to break a legislative logjam on school financing and reform.

“This approach is clearly irresponsible,” said Democratic state Rep. Lyn Jondahl, co-chairman of the House Taxation Committee. “We are holding 560 school districts and 1.6 million Michigan children as hostages in order to gain property tax relief.”

Democratic state Sen. Debbie Stabenow, who proposed the tax repeal and is expected to seek her party’s gubernatorial nomination in 1994, said Michigan now has an opportunity to remake the school system. “We are putting our feet to the fire,” she said. “But we need fundamental change, and this is the first step.”

In October, Engler put forth a plan to replace the property tax with a basket of other levies, including an increase in the sales, business and property-transfer taxes; a higher levy on tobacco, and partial restoration of the property tax. The plan would guarantee $4,500 per student statewide.

In addition, Engler proposed creating charter schools, which would allow qualified individuals and groups to start schools and receive state funding. He also advocated school choice, which allows families to decide where to enroll their children regardless of district boundaries.

The governor’s plan was supported by business groups and conservative policy-makers.

The teachers’ union opposed the plan, saying it would result in less local control of public schools.

This month the state House approved a compromise funding bill to raise both the state income tax and sales tax. The House bill also allowed charter schools but not school choice.

That plan was rejected by the state Senate, where Republicans tied a funding scheme to $1 billion in state budget cuts. The Republicans wanted to increase the sales tax but reduce the income tax.

Unless a final plan is enacted before year’s end, any tax proposal will require a two-thirds majority for passage--nearly an impossible hurdle. Failure to pass a new tax plan could throw the state’s school system into disarray.

With the deadline near, Engler gave up the fight for school choice and softened his opposition to an income tax increase. The result was a Christmas Eve compromise that allows voters to chose between an increase in the sales tax or income tax. It would also raise taxes on business.

The compromise is likely to face strong opposition. Engler’s conservative constituents are already complaining that the plan is anti-business and does not go far enough to control costs and change school operations.

And with the defeat of many recent proposals for school tax increases, there is fear that tax-revolt sentiment could kill the reform effort.

“There is real worry that voters won’t go for any kind of tax,” editor Ballenger said. “The final chapter on school reform has yet to be written.”