Detroit students unfairly pay the price for the district’s debts

The Detroit Public Schools district (DPS) is facing very serious challenges. It was recently reported that DPS ranked last in academic achievement (4th and 8th graders) among large urban districts nationally on the National Assessment of Educational Progress, also known as the Nation’s Report Card. This was the fourth time in a row that DPS ranked at the bottom. Also, the district is grappling with major financial problems, including annual operating deficits and massive legacy debts. Both sets of problems, academic and financial, are interrelated and require immediate attention in order to halt the “death spiral” in which the district currently finds itself.'

One aspect of the efforts to address the district’s ongoing financial problems that has gone unnoticed is the harm being done to intergenerational equity among DPS students. The core notion behind intergenerational equity is that future generations should not have to pay for the government services received by past generations. If today’s taxpayers pay less than the full cost of the services they receive today, either future taxpayers will have to pay more taxes or fewer resources will be available to fund services. To preserve equity, governments must live within their means and balance revenues and expenditures without borrowing from the future.

For public school finances, intergenerational equity means that today’s students should not be on the hook for the costs of educational services delivered to students in the past. Unfortunately, DPS’s current operating budget is paying for educational services delivered over 10 years ago. This is not equitable.

Like every other public school district in the state, DPS receives the bulk of its operating revenue from the per-pupil foundation grant. Each district’s foundation funding is a function of the grant amount and the number of students enrolled. For the 2015-16 school year, DPS’s grant is set at $7,434 per pupil. Based on last year’s enrollment figures (2015-16 student count is not yet available), the district will receive approximately $350 million in foundation funding this year (47,100 students x $7,434).

This funding is used to pay for teachers’ salaries and benefits, lighting buildings, textbooks and other operational expenses. In DPS’s case, a sizeable share of these funds will go toward debt service payments (principal and interest) on previous years’ cash flow borrowings; short-term borrowings that were converted to long-term debts.

Districts across the state regularly issue short-term notes to meet their cash flow needs throughout the school year. These needs arise because of the differences between the timing of receipts and outlays each month. Districts generally engage in cash flow borrowing early in the fiscal year (July 1) and must repay the full amount, plus interest, by August of the following calendar year using the current year’s per-pupil foundation funds. It is effectively a type of cash advance.

Three times over the last five years (2011, 2012, and 2014), DPS has been unable to repay its short-term cash flow borrowings within the 13-month timeframe. Each time, the district’s emergency manager has requested and received authorization from the State of Michigan to extend the repayment period. In some cases, the repayment was extended as far out as 10 years. What this means is that for the next 10 years, a portion of the per-pupil funds that the district receives will go to pay off previous years’ cash flow borrowings. Basically, paying for the educational services delivered to former DPS students.

This violates the notion of intergenerational equity.

In the 2015-16 year, DPS will have to pay approximately $140 million in debt service costs (nearly $3,000 per pupil) for past cash flow borrowings. These payments will have to be made from the per-pupil funds the district receives. The total debt service represents about 40 percent of the per-pupil foundation dollars that DPS will receive. Stated another way, DPS will have just 60 percent of the total per-pupil foundation dollars it receives to deliver services to students this year.

As DPS’s financial condition worsened over the years, state officials in charge of the district often did the expedient thing to address the challenges of the day; pushing costs out into the future. While these actions may have helped balance the budget for a single year, they created a great deal of inequity for today’s schoolchildren. As decision makers coalesce around solutions to the district’s academic and financial failings, they must ensure current students have the financial resources promised to them and avoid burdening them with past legacy costs they cannot afford.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

About The Author

Craig Thiel

A guest author for Bridge Magazine.

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Comments

Chuck Fellows
Thu, 11/05/2015 - 9:59am
Michigan's politicians -" I'd gladly pay you Friday for a hamburger today". This is how they operate, and they never show up on Friday. Just as they are afraid to reveal the $500 million in Teacher retirement funds lost in the Lehman debacle, instead required today's students to pay for previous errors by extracting funds from the per pupil allowance downstream so no one will notice, and having the gall to tell the public they have increased per pupil funding. Unfortunately legislators do not understand governance, preferring cute financial games and rewarding themselves for duping the public. Our children's futures lose. I have seen the enemy and they are us . . .
Ardvark
Thu, 11/05/2015 - 10:03am
With all the government oversight in everything we do, why was this allowed to happen? Where is the accountability and responsibility? A little late, but someone should be in prison for this.
Rich
Thu, 11/05/2015 - 10:10am
The plan to wipe DPS debt clean and set up two separate school systems, one to pay off past debt and the other to start operations with a clean sheet, really concerns me. What has been put in place to allow the clean sheet operation to not incur debt that can't be repaid? Ten years down the road I see two "systems", both equally in debt that they have no ability to repay. Someone please tell me I'm wrong? Pretty please??
Tyler
Thu, 11/05/2015 - 12:39pm
" If an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war." A NATION AT RISK 1983 It has only gotten worse since 1983.
Rick
Thu, 11/05/2015 - 11:56am
Funny that this comes out the same time as the article about Michigan farms and the age of the farmers. Talk about 'eating your seed corn'... And the idea that we need to worry more about investment banks and their unwillingness to accept risk so we can choose not to prepare a new generation of kids for the future of our country. Who needs external enemies (you know, the 'terrorists', immigrants, etc. we all hear about so many times from one party) when we're doing their job with our own legislatures?
Gene
Thu, 11/05/2015 - 1:32pm
As a taxpayer, I feel little responsibility for the financial status of the schools. I recall newspaper reports of Detroit school board members riding in limos, yet being re-elected year after year. That won't solve the problems that obviously require attention from outside the city, but please spare the sob stories on us outstaters.
david zeman
Fri, 11/06/2015 - 8:34am
Gene, I don't believe the author is making the case that you should feel responsibility for Detroit's school debt. What he's saying is that the children attending these schools today are being crippled academically by the financial mistakes/mismanagement of adults, wherever the blame is placed.
Matt
Fri, 11/06/2015 - 9:39am
David, please clarify your point that Gene, (As a Mi Tax payer) should be not feeling responsible for the situation in Detroit's school finances against the author's apparent point that this debt (hurting the kids) should be passed off onto... who else?, (the state's tax payers??). Who else is he or you thinking would get stuck with this debt and why shouldn't Gene be a little grumpy about it? Thank you.
Julian
Thu, 11/05/2015 - 2:41pm
Once again we discover that hey children of the city are losing and falling further behind. When are we as a society going to wake up and face the reality that we need to "start over." The system needs to be rebuilt from the ground up. If we are not willing to take the hard steps to rebuild the system which is charged with the responsibility of laying the foundation upon which these children can be educated to become the builders of the future, we will continue to loose generation after generation of student. This madness has to end!
Duane
Thu, 11/05/2015 - 3:22pm
Fairness is a stupid premise for anything; life isn't fair so why should one group be screwed so someone can feel good about who is being treated ‘fairly’. 'Fairness' is always use to stop rational thinking, cause/effect logic, results accountablity, by displacing it with emotional appeal. Until someone defines ‘fair’ such that all of us can use it for each political discussion [since is it a foundation reason for government taking from one to give to another], when they create a means for making something ‘fair’ for one when they are taking money out of their wallet [which was earned from sacrifice] to pay for the all-important 'fairness' of others then there will be a rational means for transferring of the value of one person's time [a most dear and fragile resource] to another; then I will include that in decision process for government spending. Mr. Thiel shows no interest in accountability, no interest in ‘fairness’ to others, not even ‘fairness’ to the students since he makes no mention of how it will deliver better learning results in Detroit Public Schools. The best I can hope for is he has consider what the real cost is of all that money he wants spent, most disappointing is he never considered those whose money/time he wants to spend. If he truly wants support for the DPS then start with how students will learn and the means for program accountablity.
Charles Richards
Thu, 11/05/2015 - 3:52pm
I was disappointed in this singularly uninformative article. Mr. Thiel, as a Senior Research Associate at Citizens Research Council, should have been much more informative. He says of the debt service payments " These payments will have to be made from the per-pupil funds the district receives." He knows full well that the district receives far more per pupil than the $7,434 per pupil foundation grant. And he goes on to say "The total debt service represents about 40 percent of the per-pupil foundation dollars that DPS will receive." That is quite true, but grossly misleading. He has nothing to say about what proportion of the district's cost are "fixed costs" and how that might have affected their deficits as they lost students. Nor does he offer any analysis of why they ran operating deficits. And he has nothing to say as to the district's prospects of balancing their budget if their debt service was eliminated. In short, there is far too much marketing of debt relief and too little illumination.
Craig Thiel
Fri, 11/06/2015 - 11:01am
Mr. Richards, if you care to contact me offline, I will share with you all of the documentation to support my statement "These payments will have to be made from the per-pupil funds the district receives." A very brief summary of the information that I am happy to share with you. The requirement to make the debt service payment from the per-pupil funds is written into the official statements produced for the purposes of issuing debt. These official statements are 300-400 pages in length. Specifically, the capital markets require that the district "pledge" certain revenues to support the debt service. In these documents (again, I am happy to share with you), you will see specific reference to the per-pupil foundation funds as the source for financing. Effectively, the bondholders have a lien on these payments. These are funds that have to be used to pay the debt service per the legal documents. As an aside, I agree 100% with you that the district receives much more than the $7,434 per-pupil grant to operate the district; however, the per-pupil foundation funds are resources that are completely discretionary. The other funds received by the district, include dollars specifically allocated to programs and students (eg. at-risk, special education, etc.). As for your last comment about the source of DPS's operating deficits, I would suggest you look at all of our other reporting on this topic. I believe we have addressed this in earlier publications: http://crcmich.org/state_assumption_dps_debts-2015/ and http://crcmich.org/managing-school-district-finances-in-an-era-of-declin... Craig Thiel cthiel@crcmich.org
Charles Richards
Sun, 11/08/2015 - 6:54pm
Thanks for the informative reply. You are quite right that if a high percentage of non-per pupil foundation grant money is not discretionary, then the burden of debt service principally falls on the per pupil foundation grant. That was not made clear in your article. Even in your reply to me, you say, "The other funds received by the district, include dollars specifically allocated to programs and students (eg. at-risk, special education, etc.)." That does not make it clear what percentage of those funds are restricted. Nonetheless, I stand by my assertion that the article was not information rich. And thanks for the two links to invaluable Citizen Research Council reports. (I have added both reports to my Citizens Research Council file.)Your article would have been much improved by the inclusion of Table One from the first report. It makes it clear that it was the loss of students that drove up per pupil legacy costs to a crippling level. The report does not, however, make clear where the district over spent. I particularly appreciated the second report, "Managing School District Finances in an Era of Declining Enrollment." It seems to me that the recommendation to adjust per pupil funding on an average of three or four years is the basis of wise policy. Additionally, perhaps the adjustment should be asymmetric for rising and declining enrollments. Perhaps a district with rising enrollment should only get thirty percent of their three year average increase in funding, whereas a district with declining enrollment should only suffer a thirty percent cut in their three year average decline in funding.
KG-1
Sat, 11/07/2015 - 8:07am
Now it is time to address the elephant in the room: Exactly how does Mr. Thiel propose addressing/remedying this problem with DPS's finances?
John Saari
Sun, 11/08/2015 - 7:32am
Start Over, rebuild or anything short of ,French, revolution will be necessary. ALL governments must live within their means, Our leaders must start using' to make decisions, integrity, common sense, equity. If the gov,t stopped paying debt repayments, the extra resources.....
John Saari
Mon, 11/09/2015 - 6:37am
P.S. debts must not be forgotten.
ArtZ
Tue, 11/10/2015 - 7:36am
Yup this is old news and not just in here but from Washington to every local government but it needs repeated and repeated................."As DPS’s financial condition worsened over the years, state officials in charge of the district often did the expedient thing to address the challenges of the day; pushing costs out into the future." ................... Perhaps one would start with correcting this approach of kicking can down the road. Bankruptcy all the wordsmithing will not offer a solution until a knife is put to the spending. Crying wolf for the students will make one feel good but today needs to be the beginning of leadership and pain is due.