Property Tax Definitions


A mill is a unit of measure used to describe property tax revenues.  A mill is equal to one dollar of property tax for every $1,000 dollars of traxable valuation.  For example: 1-mill of property tax on a house valued at $50,000 would $50 of tax per year.


A millage is a fixed number of mills levied for a specific purpose on property within the boundaries of a governmental unit. That fixed millage multiplied by taxable property values equals the property tax revenues to be levied. Examples of millages include funding for police, fire fighters, libraries, local public schools, and infrastructure.

Operating Millage:

Millage levied for the purpose of day-to-day operations of the school district or governmental unit. Property tax revenues from an operating millage can be used to pay salaries and benefits of employees, purchase supplies, repair facilities, and any other basic operating purpose.

Non-Homestead Millage:

A local operating millage approved by the voters of the school district on non-homestead property. This includes business and rental property as well as other properties where a homestead exemption has not been granted. In Michigan, all school districts must receive a locally voted 18-mill, non-homestead millage in order to receive the State determined student foundation grant amount. This millage can be levied up to twenty years without needing a renewal. The property tax revenue is paid directly to the local school district.

Hold Harmless Millage:

A millage available only to school districts that have student foundation grant amounts greater than the State determined amount. This local operating millage is approved by the voters of the district. If approved, the millage provides or bridges the gap between the State determined student foundation grant and the school district’s actual student foundation grant.

State Education Tax Millage (SET):

A property tax millage levied by the State on all property that is dedicated to help fund K-12 education and is part of Proposal A. This millage is currently fixed at 6 mills, and applies to both homestead and non-homestead property. The property tax revenue is collected by the State and added to the School Aid Fund for distribution to all school districts and charter schools in Michigan.

Enhancement Millage:

The Proposal A funding system permits schools to seek an additional 3-mills for operating purposes from local voters. Beginning July 1, 1997, Intermediate School Districts were the only entities allowed to request this enhancement millage. If local voters within the ISD approve an enhancement millage, the property tax revenues are shared by all the school districts within the boundaries of the ISD based on the number of students in each district.

Debt Millage:

Millage levied for the purpose of paying the principal and interest payments on a borrowed sum of money (bonds) for the construction and renovation of a fixed infrastructure, such as school buildings and roads and the replacement of other capital assets as permitted by law. Over time, a debt millage rate may not be fixed for a specific number of mills. This is because as property values are adjusted each year, a governmental unit is allowed to levy the millage rate necessary to pay off the annual debt payments. Debt millage cannot be used to pay salaries of employees or other operational expenditures.

Sinking Fund Millage:

A locally voted millage for the purpose of construction or renovation of school buildings and other capital expenditures as permitted by the law. A sinking fund is restricted in use by the language contained in the millage request and is strictly enforced by the Michigan Department of Treasury. The maximum millage that can be levied is 5-mills annually for no longer than ten years. One advantage of a sinking fund millage over a debt millage is property taxes directly pay for the capital expenditures; meaning there is no interest expense for debt. Sinking funds are typically used for smaller type projects or over a longer period of time.

Headlee Rollback/Millage:

 A 1979 Michigan Constitutional Amendment that requires a reduction of operational millage rate IF local taxable values used to calculate the millage increase faster than the rate of inflation after adjusting for property additions and losses between the current and previous year. This rollback does not apply to any debt millage. The rollback in essence limits governmental units to a rate of inflation increase in property tax revenue. A Headlee Rollback does not reverse if property values decrease or have a less than inflationary increase in future years. However, a millage rate can experience additional Headlee Rollbacks in years where the rollback factors occur. The rate(s) can only be re-established to what was originally voted by a Headlee Restoration Millage if approved by local taxpayers.

Types of Funds Used in a School District

General Fund:

The general operating fund of the District. It is the largest fund used to account for all the major activity (revenues and expenditures), such as teaching supplies, salaries, benefits, and capital outlay expenditures related to functions of a K–12 educational system.

Special Revenue / School Service Funds:

These funds account for all the major activity (revenues and expenditures) of programs that have specific sources of revenue and restrictions on the related expenditures. Examples of special revenue programs are: day care, community education, and food service.

Athletic programs used to be considered a special revenue fund because of gate receipt and fee revenue. However, most school districts subsidized the majority of these programs through the General Fund. And since each fund must be balanced, this required a transfer out of funds from the General Fund to the Athletic Fund. As a result, accounting regulations now require athletics to be included in the General Fund.

Special revenue funds such as food service programs may or may not be self-sufficient. Food service programs typically charge for student and adult meals and also receive federal funding through the National School Lunch Program. If the General Fund provides any funding, just as what was described with athletics, a transfer out would be recorded in the expenditure section of the General Fund and corresponding transfer in would be recorded in the revenue section of the Food Service Fund.

There are some circumstances Special Revenue Funds such as food service, day care, and community education actually transfer money into the General Fund. For example, a school district may, in the event that a day care program makes money, require a percent of indirect costs to be recouped if the program turns a profit. This may or may not be allowed or restricted depending on whether the program has any federal or state grant funding versus being fully-funded by parental fees. Indirect costs are expenditures that support the operation of the program such as centralized services, accounting, payroll, personnel, gas, electric, water, and trash removal. On the other hand, food service programs do generally receive a significant share of funding from federal sources. In such cases, there is a prescribed percentage of fund transfers to the General Fund to cover indirect costs.

Custodial / Trust and Agency Funds:

Until the 2019-20 school year, these funds were called Trust and Agency Funds and included student funds acquired by student fundraising activities, PTO or PTA activities, and booster club activities. Other types of funding come from donations, pop machine proceeds, and special funding from a foundation or similar agency for specified purposes. These types of funds are not part of the Proposal A funding and are not considered public funds. School districts act as a fiduciary for the interests of students, student groups, and parent groups and, as such, have an obligation to ensure the funding is properly accounted for and safeguarded. These funds are required to be accounted for separately from other funds.

Governmental Accounting Standards Board – GASB 84 has changed how these funds will be treated starting in the 2019-20 school year. School districts will have to make a determination with trust and agency funds related to “control.” Funds where the school district has some or all control to make decisions regarding spending will be required to report such information in either the Special Revenue Fund or General Fund. Only accounts where an outside organization or individual controls how funds are spent, where the school is a true fiduciary, will be included in the Trust and Agency Fund or what is now known as – Custodial Fund.

Debt Service Funds:

This fund is used to pay principle and interest expenses for long-term bond issues. If taxpayers have approved a millage request to pay the annual principle and interest payments, the property tax revenues are deposited into the Debt Service Fund and the corresponding principal and interest payments are expensed out of that fund.

If these debt payments are paid by another fund such as the General Fund, the transaction is an expenditure from the General Fund called “Transfer Out.” The other side of the transaction is revenue recorded in the Debt Service Fund as a “Transfer In.” Various debts whether bonds, loans, or mortgages are required to have separate Debt Service Funds and all transactions are recorded and maintained separately.

Accordingly, each debt should have a separate bank account for income and investment purposes. Voted and non-voted bonds are required to have separate bank accounts. Other loans that are acquired by school districts could be maintained in one account; however, best business practices would be to have separate accounts.

Capital Project Funds:

These funds pay for capital purchases and facility construction projects. Funds may come from school bond sales, sinking funds, or school district loans. School bond issues passed in a school district have two components: the millage used to pay the principle and interest payments (Debt Service Fund), and the bond proceeds received from the financial institution to pay for the construction or capital expenditures (Capital Project Fund).

A sinking fund is another type of millage where there is no debt. The property tax millage itself is used to pay directly for construction or capital expenditures. Sinking fund millage money therefore is deposited in a Capital Project Fund. Just as with different debts in the Debt Service Fund, capital projects must be separated by the source of the revenue. If a school district has 2 sinking funds, there must be two separate sinking fund accounts.

Sinking Funds

There are two methods available to traditional public schools that involve voter approval of additional property tax millage. These two methods are not available to charter schools. The first is what is known as a sinking fund. Sinking funds allow school districts to levy additional millage for acquisition, improvement, and development of sites and the construction or repair of school buildings. Sinking funds have existed since 1941. Sections 211.201 and 211.117A of the Michigan Compiled Laws and Act 312 of Public Acts of 1993 allow school districts to create a sinking fund for purchase of real estate and construction or repair of school buildings.

A sinking fund is a voted millage where the property tax revenues are put in a separate capital project fund to pay for capital improvements. There are no principal and interest costs for sinking funds because there is no debt. Sinking funds are designed to provide capital improvements on a “pay-as-you-go” basis.

Sinking funds can be used for:

  • The purchase of real estate for building sites
  • The construction or repair of, school buildings
  • School security improvements
  • The acquisition or upgrading of technology

One difference from bond issues is that sinking funds cannot be used for the purchase of school buses or furniture and equipment. There have been periodic debates in the legislature whether to allow school bus purchases with sinking funds, but, as of 2019, this change has not been made.

Historically, sinking funds were not widely used by school districts. Sinking funds have gained popularity in recent years as a borrowing-free way to maintain schools given the school funding difficulties discussed earlier. A sinking fund can be approved by voters for up to ten years. The maximum amount that can be collected is 3-mills on all property per year. The rising popularity of sinking funds has also led to additional legislative limitations. Until 2016, sinking funds could be for as many as 5-mills and up to 20 years.

Bond Issues

The most popular method used by traditional public schools for funding capital expenditures, particularly large ones, is bond issues. Bond issues paid from general fund dollars (non-voted) is discussed above. In contrast, a voted bond is when a school district asks taxpayers to approve a debt millage on all property, both homestead and non-homestead, to pay principal and interest payments on bond proceeds. Public Act 451 of the Public Acts of 1976 as amended provides a regulatory basis for bond issues in Michigan.


Douglas L. Newcombe, MBA, CPA, Understanding Michigan’s Public
School Finance System 6th Edition – 2019