Reuters
October 24, 2009 - 12:00 a.m. EST

CHICAGO (Reuters) - Michigan Governor Jennifer Granholm warned on Friday that schools will face teacher layoffs and bigger class sizes if new revenue is not found for education.

"Citizens across our state are speaking out loudly about the need for new revenues for our schools," Granholm said in her weekly radio address.

On Thursday, the Democratic governor announced state aid to school districts will be cut by another $212 million or $127 per student due to a new gap between revenue and the school aid fund budget she just signed into law on Monday.

That budget already included a $165 per student funding cut and Granholm vetoed an addition $54 million from the spending plan.

She called the nascent budget "woefully underfunded" and asked the legislature to come up with more revenue before the new $212 million cut takes effect in 30 days.

However, any moves to raise taxes for schools will likely hit a roadblock in the Republican-controlled Senate. In a letter to Granholm on Thursday, Senate Majority Leader Michael Bishop said the governor was using the school budget "to lay the groundwork for an unnecessary tax increase on Michigan's citizens."

While the cuts will pressure their operations, most school district debt in Michigan is secured by an unlimited property tax pledge, according to Sarah Engle, an analyst at Moody's Investors Service.

About $13.2 billion of school debt is also qualified under the state's school bond loan fund, which requires Michigan to provide districts with money to make timely debt service payments if needed, according to Moody's. Earlier this year, the rating agency revised the outlook on the school bond loan fund's Aa3 rating to negative from stable.

That was done in the wake of a negative outlook given to Michigan due to a weakened economy that led to structural imbalances and diminished reserves, Moody's said.

(Reporting by Karen Pierog)