DALLAS — In Michigan it's not just Detroit Public Schools that have fallen victim to the state's population decline. Statewide shrinking enrollment coupled with the expansion of charter schools has stretched state aid dollars and damaged school credit.
The latest quarterly deficit report submitted to the state legislature by the Michigan Department of Education offers mixed news, as some schools make strides and others continue to struggle. Schools accounted for about half the state's downgrades so far in 2016, according to Municipal Markets Analytics.
Of the 40 schools in the state that began the 2016 fiscal year with operating deficits, 18 project they'll be deficit-free by the end of June, and another 15 are planning on reducing their deficits by the end of the fiscal year.
Seven school districts will have deeper debt than in the previous year, according to the state report. Among those were Detroit Public Schools, which is expected to reach an operating deficit of $515 million.
Nowhere in the state has the impact of enrollment decline been felt more than in Detroit. "DPS' main challenge was how precipitous their enrollment decline was," said Moody's Investors Service public finance analyst, Andrew van Dyck Dobos.
A June Citizens research Council for Michigan report shows that the number of Detroit resident children enrolled in schools has been declining. In the last five years that number has fallen to about 110,000 from 144,000. The district has lost close to 30% of its public school enrollment. During the same time the number of school districts that are enrolling Detroit students grew to 233, from 151.
"Most school districts that have a deficit situation are able to get out of it in the two-to-five year period that the state allows," said Craig Thiel, a senior research associate for the Citizens research Council for Michigan. "But for districts that are chronically in deficit, [like DPS] the state has to take extraordinary steps."
On June 21 Michigan Gov. Rick Snyder signed into law a $617 million state aid package to rescue DPS. The plan approved by the Republican led legislature with no support from Democrats pays off $467 million in the district's operating debt. It also provides $150 million to start a new, debt free district.
The financing terms on the $150 million component of the package was rejected by DPS school board members on Monday. The board has up to 7 days to propose an alternative plan. Since the district is under state emergency management, the state appointed transition manager, Steven Rhodes, has the authority to overrule the board's objection. Once the alternative terms are submitted, Michigan's Emergency Loan Board will have up to 30 days to meet to select either the EM's proposal or the alternative submitted by the school board.
Other school districts is the state are experiencing the same problems of student decline coupled with charter school expansion, albeit on a smaller scale than DPS.
"It doesn't matter if you are in Detroit, Flint, Kalamazoo, Pontiac, Battle Creek – you are seeing this situation of declining public school enrollment and increasing number of districts that are competing for less students," Thiel said.
Pontiac School District registers the second largest deficit according to state report registering a $31 million shortfall. The district's deficit has decreased since 2013 when it was $51 million, but that has come at the cost of staff pay cuts and the sale of vacant buildings.
The district has cited the funding challenge created by declining enrollment as it loses many of its student to charters, according to Superintendent Kelley Williams. Between the school years of 2011-2012 and 2012-2013, Pontiac Schools lost 13 percent of its enrollment. Compared to the 2012-2013 school year, the district lost only 4% of the student population this fall – better than the anticipated loss of nearly 7%.
Benton Harbor is the only other district with an eight-figure deficit in the state's report, at $15 million. There too, the district faces the challenge of replacing loss revenue created by the q drop in student enrollment. In the past decade, Benton Harbor's enrollment has dropped 43 percent, from 4,679 students in fall 2004 to 2,684 last September 2015. The district has responded by cutting staff and in June the district announced another round of layoffs that will save the district about $1.4 million.
Along with DPS, Pontiac and Benton Harbor are all currently operating with emergency loans from the state.
The Michigan Treasury implemented an early-warning and intervention law in 2015 designed to address financial problems in school districts before they become emergencies. The law requires that school districts, intermediate school districts and charter schools with reserve funds of less than 5% of their general fund budget send their budgetary assumptions to the state. They must choose between working with the Intermediate School District or the state to build their reserves.
The legislation is intended to allow school districts to receive assistance from their Intermediate School District and the Department of Treasury prior to facing a financial emergency. Currently 17 districts are under state oversight.
Dobos blames Michigan's per pupil funding model for limiting the ways these troubled districts can address their debt burden.
Michigan substantially altered the way public school districts are financed beginning in 1994 with its Proposal A legislation. Prop A limits the taxable value of a property. It can only increase by the rate of inflation or 5%, whichever is less. Under the Proposal A cap there are two ways taxable value can exceed the inflation cap: new or improved property or the sale of existing property. A property's value can decrease, however, which places taxing entities in a precarious position as the amount of money they can assess goes down.
The vast majority of each school district's operating revenue is dependent on its individual foundational allowance, which is determined by the state on a per-pupil basis.
Although Michigan has increased the minimum per-pupil basic funding allowance for five consecutive budget cycles since it was reduced by $450 in fiscal 2010. The latest increase came In June when lawmakers approved a $54.9 billion fiscal year 2017 budget that adds $150 million for K-12 public education for a total of nearly $12.1 billion in state funding. That's an increase of $1.4 billion since fiscal year 2011.
"The year over year increases to the per pupil fund have been modest at best," Dobos said. "The increases haven't been to the point enabling school to really stockpile revenues and turn them into reserves."
Charter school openings further complicate funding, because these schools compete for a share of state aid revenue. The number of charter schools has increased by 26% since 2010, according to the Michigan Department of Education. Michigan allows parents to choose a public school in the district, a public school outside of district, or a charter school. Currently, about 10% of public school students in Michigan attend charters and 8% attend traditional public schools outside their home district.
"Falling enrollment related to out-migration as well as charter school competition has challenged the budgets of many districts because of the per pupil state funding formula and a lack of flexibility to raise additional revenue," said Matt Fabian, Partner Municipal Market Analytics in a report.
The DPS rescue package, which stripped away the new district's oversight of charter school openings in the area, sends a clear indication of where that lawmakers stand on the charter school issue. "This suggests to me that lawmakers aren't really willing to deal with the expanding number of school districts in the states regardless of the financial implications that this policy might have for the traditional Michigan school districts," Thiel said.
Moody's has downgraded 150 of the state's 206 school districts from 2009 through late 2015. Dobos said that the limited revenue raising options for these districts means the trend will continue.
