Detroit schools and the $715-million Band-Aid

The debt-ridden Detroit Public Schools will almost certainly face more budget challenges in the future without structural changes to how schools are financed.

It’s a lot of money, but don’t call it a fix.

The $715 million cash infusion that the Michigan Legislature is considering giving to Detroit Public Schools would no doubt pay off the school district’s $515 million in debt over 10 years, and provide some reserves.

It’s a big ask, and one that has raised doubts. Doubts that outstate Michigan residents will support more money for Detroit schools due to the state's role in running DPS. Doubts that charter school operators, unions, legislators, Detroit’s mayor, philanthropists and parents can get on the same page to figure out how Detroit’s schools should be governed going forward.

Most of all, there are doubts among researchers and experts that $715 million in itself will save DPS. A cash infusion will dig DPS out of a financial hole, they acknowledge, but it will not ‒ and cannot ‒ ensure that the school system will remain solvent in the future.

If enrollment continues to decline while pension costs and repairs to deteriorating Detroit school buildings continue to take up a bigger portion of the budget, DPS will sink back into deficit in a few years.

“That’s a real possibility,” said Craig Thiel, a senior research associate for Citizens Research Council, a nonpartisan policy research group in Lansing. A report prepared this month by CRC lays out financial trends in DPS and identifies seven key problems that will continue to haunt DPS even if the state provides funds to erase the current debt.

The report finds that DPS is suffering (on a larger scale) the same crises that have pushed dozens of other schools statewide into ‒ or close to ‒ deficit. Schools across the state, led by DPS, have not been able to shake structural funding problems that are compounded by the state’s school funding formula.

Now, after a year of discussions about fixing DPS, finger-pointing in the state legislature has evolved from occasional conversations to daily negotiations because DPS is projected to run out of cash on April 8, according to Steven Rhodes, the retired federal bankruptcy judge who shepherded the city of Detroit through bankruptcy and who was appointed DPS emergency manager earlier this month.

Sen. Goeff Hansen, R-Hart, who sponsored a package of bills that seek to resolve DPS debt, said he expects the legislature won’t leave Lansing for spring break on March 24 without making sure DPS can pay its employees. Nobody, he said, wants Detroit to be the next Kalkaska, the district in the upper lower peninsula that went broke in 1993 and had to shut down months before summer break.

Hansen’s prediction came true on Wednesday, when a House committee approved a stopgap funding bill to give DPS nearly $50 million in funds previously set aside by the state (The committee also passed a measure to place the district under the watch of a financial review commission created as part of Detroit’s emergence from bankruptcy). The full house could vote on the measures today. That money would be enough to get the school district through the end of the school year, school officials said, but merely delays the larger financial decision.

The legislature has been debating a longer-term solution for Detroit’s debt-ridden public schools, with the $715 million in funding as the centerpiece. Other matters under debate include when and how to return the district to a locally elected school board and tussles over union issues. Of the $715 million, $200 million would be paid to DPS upfront, while $515 million would pay off DPS debts over the next decade. The money would come from the state’s share of a federal tobacco settlement as well as local Detroit school taxes.

The problem is, a big payout won’t clear the road ahead of deficits because the money won’t get rid of two DPS problems that are likely to persist after the check clears ‒ declining student enrollment and rising employee retirement costs. The bills amount to expensive, short-term solutions that do not take on the tough subject of structural deficits.

“A financial solution probably won’t guarantee success,” Thiel said.

How it all adds up

Thiel’s skepticism is based on what he sees as seven structural challenges that constantly unsettle the Detroit schools budget: declining enrollment; a state school funding model that is tied to enrollment; high legacy pension costs; a high concentration of special education and at-risk students; responsibility for capital improvements in district buildings; a vast, 140-square-mile area to serve, and term limits in the legislature, which make it tough to hammer out long-term solutions, according to the CRC.

The state’s school funding formula, called Proposal A, stipulates that districts lose money every time a student leaves for another school system. And schools statewide have suffered as a result, Thiel said.

In Detroit, deficit has dogged DPS through most of the past two decades. In 1999, when the state legislature passed a law to replace the elected school board with one appointed by the mayor and governor, the school system had no deficit and very few charter schools were around to compete with DPS for students, state data show. That quickly changed. Through three years of local control by an elected board (2006-09) and during the past eight years under the oversight of a state-appointed emergency manager, DPS lost more than 100,000 students and the state revenue that follows them. DPS enrollment has declined from 156,000 in 2002 to about 46,000 today.

And this year is not the first time DPS has faced the prospect of payless paydays ‒ in 2011, then-emergency manager Roy Roberts refinanced debt to prevent the school system from running out of cash. In 2015, the district borrowed more money to pad cash flow.

All in all, while enrollment dropped in Detroit over the past decade, the amount spent per student on pension costs and debt payments jumped by $2,800 on a per-student basis, even as state funding only increased by $112 per student, an analysis from the House Fiscal Agency shows. The CRC report shows that pension obligations now take up 21 percent of payroll.

Added to that, DPS has a higher concentration of at-risk and special needs students who require more services and extra personnel. In DPS schools, 18 percent of students have special needs compared with 13 percent statewide, according to data from the state’s Center for Educational Performance and Information. DPS also has a student population that is 73 percent economically disadvantaged, compared with 46 percent statewide.

It all adds up to high operational costs that won’t go away even if Lansing clears the district’s debt by approving $715 million in extra money.

“It’s a risky proposition,” David Arsen,a professor of Education Policy and K-12 Educational Administration at Michigan State University. “If enrollment in DPS doesn’t stabilize, then the deficit probably will re-emerge.”

Problems extend beyond Detroit

Similar problems persist across Michigan, though on a lower scale.

Declining enrollment has, for years, pushed schools into a “death spiral” towards deficit. As each student leaves a district to attend charters or other schools of choice, that district loses money. As schools lose money and make cuts, those cuts can scare away other students. School districts have dipped into their reserves, cut costs and closed schools to cope with decreasing enrollment and increasing employee costs.

Supporters of traditional public schools, particularly low-income schools, contend that the proliferation of charter schools and the state’s expansive school choice laws drain districts of needed resources. While proponents of school choice options argue that these alternatives give families the freedom to choose different educational settings and an opportunity to escape a failing local school district.

Statewide, 72 percent of traditional public school districts lost enrollment in 2014-15. That school year also saw 41 school districts and charter schools end up in deficit. That’s down from 56 deficit districts, however, the state identified 11 school districts were in such dire crisis they required preliminary reviews, a process that could lead to the appointment of emergency managers to run those districts.

Reason to hope

A $715 million cash infusion would mean DPS could pay off its debts and perhaps staunch the exodus of wary staff, school officials said. It would help the district fix substandard building conditions in much of the city that were publicized when teachers staged several “sick outs” this winter, shutting down dozens of schools amid complaints about mold, broken heating systems and lack of supplies. The money would also allow DPS to expand programs that are popular with parents, such as bilingual classes, said Steve Wasko, executive director of enrollment for DPS.

And for those who worry that declining enrollment will lead to more deficits moving forward, there is reason to believe that the worst times are in past, he said.

When DPS counted its students in February, the tally showed that fewer families are fleeing. Enrollment is still dropping, but nowhere near the rate of 10 percent per year that pushed DPS toward bankruptcy the past decade. Since September, enrollment is down from 46,305 students to 45,890 for a loss of about 1 percent.

Wasko said the $715 million would not solve all problems, but it will put DPS on a level playing field with the charter schools and schools in inner ring Detroit suburbs that it competes with for Detroit students.

“We have come very, very close to leveling enrollment for two to three years now. It’s a small enough leak that it’s manageable,” Wasko said. “There is reason to hope.”

Thiel, of the CRC, warns that a 1 or 2 percent enrollment decline is manageable, but can spiral out of control in a place like Detroit with there is a lot of competition, and other problems such as crumbling buildings and low test scores. There’s also the evolving debate over who should oversee the money and run the school system starting next school year: more state appointees or a locally elected school board.

“If year over year you are seeing enrollment decline, that’s signaling to people who are looking at your school district that something is going on,” Thiel said. “And that accelerates the loss of students. In a situation like Detroit, there’s more than a few school districts willing to take these kids.”

Crunch time

Most of the debt incurred by the district took place while a succession of state-appointed emergency managers was in control of the district.

Hansen, the state senator who sponsored the first package of DPS bills, said Detroit’s current enrollment data is encouraging and so is the fact that so many factions want to see the schools improve as part of the city’s rebirth after bankruptcy.

But he too acknowledged there are no guarantees the legislation will solve DPS’ entrenched problems.

“I don’t know how you guarantee that, because there are schools of choice. People are going to go where they feel they get the best education for their kids,” he said. “My job isn’t to fix their schools but to stand with them, to help them fix the schools because Detroit has to fix them. This has to be a Detroit solution, not a Lansing solution.”

Gov. Snyder has said the $715 million cash infusion outlined in Hansen’s bills will trickle down and impact the root of DPS’s enrollment problems. With the debt paid, instead of spending $1,100 of the $7,434 the district gets per pupil to pay off debt, DPS will be able to spend that money on educating children.

“This will allow the district to create more competitive and attractive academic programs, among other things,” said Ari Adler, spokesman for the governor.

But Gary Naeyaert, executive director of the Great Lakes Education Project, a school choice advocacy group, said the legislature’s proposed restructuring for Detroit schools is doomed to fail partly because there’s too little focus on improving academic quality.

“If the new district turns out to be nothing more than a DPS mini-me we will see that death spiral continue and nature taking its course,” he said. “Philosophically it wouldn’t bother GLEP if there were no public school district in Detroit. Our highest priority is getting kids in Detroit a quality education, not maintaining the traditional public school district at all costs.”

Mayor Mike Duggan and members of the Coalition for the Future of Detroit School Children, a group that includes business, school and philanthropy leaders, on the other hand, want to save the traditional DPS district. They are pushing for creation of a Detroit Education Commission formed to oversee all schools in the city ‒ traditional public schools and charter schools ‒ to ensure they co-exist in a way that benefits the city. This issue, as well, is a key negotiating point among state legislators.

Wytrice Harris, 45, of Detroit, has a daughter and son who attend Renaissance High School, one of the highest performing schools in the state. She said she wants leaders in Lansing and the city to get DPS out of survival mode and into long-term stability.

“I haven’t heard a lot about academic changes. We need to look at systemic change, not just at what everybody is calling a bailout,” she said.

The stakes don’t get much higher for Detroit’s schoolchildren, said Arsen, the economist from MSU.

If Lansing lawmakers are savvy enough to pay off the deficit and approve a governance system that will focus on academic improvements, the latter could make all of the difference, he said.

“It’s a tragic story, but also a moment where there’s opportunity to move things in a positive direction,” he said. “We’re right on the edge where decisions can be made to dramatically improve public education in Detroit, or alternatively circumstances could just unravel. It’s really high stakes. “My great concern is that the state washes its hands without establishing a coherent set of policies and says, ‘We resolved the financial debt problem. If this goes south, Detroit, it’s your fault.’”