Balancing the Budget in 2026: What It Means for Schools and MPSERS
MARSP Legislative Update
Key Takeaways
- Executive School Aid Budget Proposal – The FY 2026–2027 Executive Budget proposes $21.4 billion for K–12 schools.
- Long-Term Budget Pressures – While the School Aid Fund is projected to maintain a $532 million surplus through FY 2028, the General Fund faces potential deficits. Lawmakers are preparing for a tighter budget cycle and greater cost pressures compared to recent years, and how the School Aid Fund ultimately is intertwined with the General Fund will be a focal point of budget negotiations this spring and summer.
- Proposed Tax Reform: Speaker Hall has proposed eliminating certain property and real estate transfer taxes while expanding sales taxes to some “luxury” services. This includes removing the 6-mill State Education Tax (SET) on property, a key source of K–12 funding, with a goal of holding schools harmless by redirecting revenue raised by the aforementioned expansion of the sales tax, with a net overall tax cut as well.
Governor Whitmer Delivers Final State of the State
In her final State of the State Address on February 25, 2026, Governor Whitmer highlighted student literacy, affordable housing, and medical debt as top priorities.
Literacy is expected to shape both this year’s budget discussions and the campaign for Michigan’s next governor. Michigan’s rank in reading on the National Assessment of Educational Progress (NAEP), also known as “The Nation’s Report Card,” is prompting bipartisan calls for action.
In early February, the Governor released her FY 2026–2027 Executive Budget proposal, which includes one-time funding and ongoing investments for early childhood education, small-group tutoring, and teacher training.
MARSP will monitor and keep members informed as proposals move through the legislative process and campaign conversations continue.
State of the State Capitol Pass photo: MARSP representatives were present for the address, proudly representing Michigan’s public school retirees!
Funding Challenges Ahead for Michigan Lawmakers
The Governor’s $88.1 billion budget proposal, reviewed by both the House and Senate Appropriations Committees beginning February 19, includes $21.4 billion for K–12 education. The School Aid Fund is projected to maintain a $532 million surplus through FY 2028, even as the General Fund faces potential deficits.
Despite this projected surplus in the School Aid Fund, lawmakers must navigate several competing priorities and long-term fiscal challenges:
- Slower-than-needed revenue growth, which reduces funds available for schools and other priorities.
- Michigan’s tax system does not fully capture the modern economy. Sales taxes largely apply to goods, while many services—today’s fastest-growing sector—are untaxed.
- Rising expectations for school funding increase budget pressures.
- Demographic changes, including an aging population, slow job and wage growth and reduce income tax revenue growth.
Together, these trends create pressure on the state budget, including funding streams that support schools and MPSERS.
MPSERS Outlook
Legacy pension obligations within the Michigan Public School Employees’ Retirement System (MPSERS) are projected to decline significantly over the next decade, based on current actuarial assumptions and scheduled contributions.
Reducing this long-term pension debt strengthens the financial stability of the retirement system and could provide greater budget flexibility in the future. We continue to make progress toward eventual elimination of legacy pension debt by 2038.
Speaker Hall’s Tax Reform Proposal
House Speaker Matt Hall (R-Richland Twp.) has announced a proposal to significantly overhaul Michigan’s tax system. The Speaker has suggested a net tax cut of $270 million with the proposed reforms below and summarized here:
- Eliminating the 6-mill State Education Tax (SET): The plan would remove the 6-mill State Education Tax on property, reducing property taxes statewide by an estimated $5 billion. The SET currently helps fund Michigan’s K–12 schools. Because of that, the Speaker has said schools would be “held harmless,” meaning the lost revenue would be replaced with money from other sources.
- Eliminating Real Estate Transfer Taxes: Michigan currently collects a tax when property changes hands. The proposal would eliminate that tax, reducing costs when buying or selling real estate.
- Eliminating the “Pop-Up” Tax: Under current law, when a primary residence is sold, its taxable value resets to the State Equalized Value (SEV). This often results in higher property taxes for the new homeowner. The proposal would eliminate that reset, which supporters say would make housing costs more predictable.
- Expanding the Sales Tax to Certain Services: To offset some of the property tax reductions, the proposal would expand Michigan’s 6% sales tax to include certain “luxury” services. This change is projected to raise approximately $4.73 billion.
Governor Whitmer and Senate Appropriations Chair Sarah Anthony (D-Lansing) have also signaled interest in property tax relief this year through more targeted efforts, such as expanding existing credits or increasing relief for seniors.
