Detroit schools and the $715-million Band-Aid

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.’”

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Thu, 03/17/2016 - 11:17am
Of the many things in this column that deserve comment .... "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." Since we've heard this, seen this, so many times, in so many places - WITHOUT any "academic improvement", then what???? This is more money (a lot more) being thrown at the same people for the same thing and nothing more. They've already proven beyond any debate that they can't do it. This is about power and money not parents and kids. Detroit schools need a totally new model. This isn't. Follow the New Orleans - post Katrina, approach - Charter the whole thing!
Thu, 03/17/2016 - 8:53pm
Matt is exactly right. I love the way Mr. Arsen, the economist from MSU, says that if only the legislature will pay off the debt and, "approve a governance system that will focus on academic improvements, the latter could make all of the difference." I noticed that he didn't specify what kind of governance system, or how focusing on academic improvements would work its magic. So, it's merely a matter of "focusing on academic improvements" is it? How simple. Why hasn't that been thought of before? Fudge factors come in so handy.
Thu, 03/17/2016 - 11:19am
How long will it take DPS, Detroit, Hamtramck, Benton Harbor, Illinois, California, and any other distressed entity to realize that promised pension benefits are just smoke and mirrors. And everyone says that the stock market is too ugly a risk for pension funds, but where do they think the money goes? It all has to be invested in something, so if not the stock market, then some golf resort up north with a relation to a pension administrator that eventually goes bankrupt and defaults on any payment. Over 80 percent of private enterprise has already realized that defined contribution is the better approach. Some will say that public jobs pay less than private jobs, so as a result should have better benefit offerings. When I see some of the salaries and length of service requirements state for Detroit, Wayne County, or other public jobs, I have to say that public employment has been the big golden goose for a long time, and it is no wonder that these pension systems are in dire straits.
Thu, 03/17/2016 - 11:32am
The chances of DPS, and Detroit for that matter, shrank significantly when the city did not declare bankruptcy on its own. At that point local control was eliminated and the state slyly stole at least $4.5 billion in assets while receiving only $150 million in present value. This was done in such a slick manner it still is not widely acknowledged and discussed. Bankruptcy rulings can be appealed and unless this is done, pack your bags and head for the burbs. Everything else reminds me of Mohamad Ali's rope-a-dope. ...
Thu, 03/17/2016 - 1:21pm
The only fair way to fund both public and charter schools would be that if a student switches school, the student comes to the new school with the funding AND the legacy cost for that student.
Chuck Fellows
Thu, 03/17/2016 - 1:23pm
We are surrounded by solutions to problems experienced by Detroit, Michigan and the nations' schools. The core problem is refusal to accept reality, that the only constant in any system is change. Instead efforts continue to game a system that cannot be gamed - the change that affects any and all systems. Education design and funding assumed continued growth and a constant structure. We have clung desperately to a hundred year old system and continue to do so. Along the way politicians and pundits have obfuscated and bloviated and little substantive change occurred. Those that have refuse to give and those that haven't have no voice. Until that paradigm shifts nothing will change. Start by listening to teachers. Ask teachers how funding should be determined with the expectation that they will come up with a solution. Pension funding - we conducted a scam and now we must pay for that scam - promises made and unfulfilled. Determine how much it will cost and fund it - and change the system to prohibit false promises from being realized. Rigid pedagogy and curriculum may have worked in an agricultural era but it no longer does. The student has more access to accurate content than any teacher so stop training teachers to deliver content and allow then to become, coaches, mentors and facilitators with the student being responsible for their own learning. Why do you think has so many millions of users? Why do you think charters are the choice of so many parents? The student should lead and that will require we focus on the learning needs of every individual student, not the fact that they are warming a chair in a classroom. Teacher to teacher and teacher to student and community collaboration and coordination should be encouraged - the traditional schoolhouse separate and distinct from its environment is a dead concept we refuse to let go of. Engaging with reality is risky and by and large we are afraid to do that. What a fine message to send to our children! Ask questions and listen. Why does the Ontario teachers Pension fund prosper? Why is it that successful learning takes place in some classrooms and not others? What are the differences between us and other systems? (Finland, Alberta, Hong Kong, Australia, Big Picture Schools in the US). What is an effective method for determining that learning has taken place (Hint: Ask a teacher and/or a student on a random sample basis continuously - identify what is working and what is not - share). It is not difficult. It is not hard. The hard is getting rid of the opinion that it is hard and difficult. Kids know how to learn. Let them learn and stop telling them what, how, when, where, why (unless they ask) and how much. Allow their teachers to help them on their learning journey - not yours. Let them be accountable (AKA Responsible) for their own learning.
Thu, 03/17/2016 - 3:37pm
Chuck, Could you give an example of how to do that? Let the children lead? I think a problem in the DPS system was that teachers did not correct bad grammar or work with students until they actually learned to read. It's easier to let a kid talk without pronouncing something correctly than take the time to correct it. Those are simple problems, but if the time was taken, more students would speak, read and write better.
Thu, 03/17/2016 - 4:38pm
Students have access to content if they have access to high speed Internet at home. Many households in Detroit lack such access. Put an additional tax on all buinesses in Gilbertsville to pay for high speed Internet delivered to all households in Detroit. That will help.
William Plumpe
Thu, 03/17/2016 - 4:36pm
Bottom line the financial problems with DPS and other school districts will never be solved until the recurring structural deficit is fixed. You can throw money at the problem and fix it for a while but the cause of the debt is still operating--- ever increasing pension costs, employee raises and operating expenses and the debt comes back in 10 years as bad as before because revenues to cover those expenses are flat or decreasing. You could temporarily raise property taxes but that too is unlikely and has bad effects of its own.. You would have to do something like freeze pension values and wages at current levels and try to save on operating costs wherever you can. But since it is very unlikely that retirees and current employees will agree to such draconian measures even though it will benefit them down the line some type of bankruptcy may be the only viable solution and even that is not a sure bet.
Nick Krieger
Fri, 03/18/2016 - 4:20am
SB 710 doesn't even mention the $715 million plan. That would have to come through separate legislation or amendments to SB 710 as it progresses through the Legislature. As written, SB 710 only references allowing the qualifying district to assume additional debt up to 3% of the district's taxable value (about $200 million or so) to finance transition expenses. And if the $715 million (presumably from tobacco settlement installments) is going to be directly used to pay the $715 million in current debt over a number of years, that will leave nothing to fill the gap created by not allowing the community district to levy the non-homestead 18 mills for operating purposes. Unless other legislation is forthcoming, it seems that SB 710 would leave the new community district with a lower foundation allowance than any other district in the state (or even none at all).
Larry Stephens
Fri, 03/18/2016 - 10:28am
Fiscal responsibility always means balancing the budget. If I don't balance my own budget, I will go bankrupt, and suffer the consequences. Government and governmental institutions are always spending other peoples money! That's always easier than the required accountability of spending your own. When the "other people" don't have the money (i.e. poor economy), then these institutions that depend on that tax income must cut back accordingly to balance their own budget. That doesn't happen. I'm a small business person. When the demand for my services went down by 70% or 80% during the recession, and I was forced to lay off most or all of my employees, our combined tax contribution to the public revenue stream went down accordingly. At the same time, I was reading and hearing all the moaning from the public, tax-supported sector about how they were being asked to pay a greater share of their health insurance premiums, or were being asked to go without a raise for 2 or 3 years in a row. I went without a paycheck at all for months at a time! Back to schools. When schools have less demand for their services (i.e. less students to teach), they should be forced to cut back --- i.e. balance the budget. I don't have a money tree to go to when I spend money carelessly! Why should our miss-managed, tax-funded public institutions? Why ask for the tax payers to dig deeper to bail them out?
Fri, 03/18/2016 - 5:59pm
Don't expect much from Lansing. They can't fund one of the simplest requirements of a state - roads. Auto sales have been good for several years, fantastic in 2015, and yet the state has no money. And we expect a long-term solution for financially strapped school districts? Wait until the next recession and subsequent decline in auto sales, it will get worse very quickly.
Sat, 03/19/2016 - 7:11am
I agree with Mr. Fellows on teachers should be more facilitators than lecturers . With all that is available many of our textbooks are both obsolete and too expensive. Feed children and teach them to read. R.L.
Mon, 03/21/2016 - 9:41pm
Excellent article. What puzzles me is DPS is experiencing declining enrollment while charters are performing only marginally better. It seems the logical thing to do is close charters. All they are doing is adding to the cost per pupil in the district. Further it seems it was far more than irresponsible to give away billions of dollars in art for pennies on the dollar during he city's bankruptcy. It was obvious that the bankruptcy would not solve all of Detroit's problems so why give away assets neelessly? During the bankruptcy the city surrendered ownership of at least $4.5 billion in assets for $500 million of debt in present value terms. I don't understand the Governor's motivstion.
Tue, 03/22/2016 - 9:13am
You only have to keep your eye on one thing. If the legislature refuses to empower the Detroit Education Commission with the ability to decide which schools (both public and charter) remain open and get closed. Its a sure sign that the education privateers own Lansing and that the plan is to totally destroy public education statewide. If they can do it in Detroit, they will export statewide. Only to poor areas with deficits, but then to all school districts. The goal is clear. ALL PUBLIC MONEY GOING TO PRIVATE FOR-PROFIT CORPORATIONS. No oversight...shut up, pay taxes and don't ask any questions. Let the bankers handle it. Nobody who supports for-profit schools sends their kids to public school. Snyder's kids go to private schools and most of the legislator's children are grown, in private schools or home schooled. Someone mentioned "Katrina" Detroit. That is the plan. Then they will Katrina Michigan. How has the Flint water crisis affected the water bottler's? Why does Snyder's Chief of Staff's wife work for Neslte (major water bottler)?
Mary Jo
Mon, 03/28/2016 - 7:50pm
I came away from the WSU Alumnae forum today feeling much more informed about the problems and more convinced that they are structural and financial We need to find an alternative financing for schools statewide that is more equitable and that invests in children in all districts. It was my understanding from the speakers that Schools of Choice and Open Enrollment policies have resulted in further economic and racial stratification. Also the legislature is too ready to try 'solutions' that are not research-based and ignore the research available.