CHICAGO — The financial strains facing Michigan's school districts continued to mount in fiscal 2013, with a near-record number of districts reporting deficits and state officials launching new initiatives to get a grip on the problem.
Michigan's schools superintendent last week reported that six more local school districts had deficits at the end of June than last year, boosting the total number to nearly 60. At least two districts are in "dire fiscal stress," requiring state emergency loans to make it through the year, Superintendent Mike Flanagan told legislators in a joint education committee meeting.
In May, two Michigan districts defaulted on debt service payments.
Top education officials and Gov. Rick Snyder are working on a new early-warning system that analysts say is key to stemming the problem. The governor assembled a working group that made a series of recommendations, some of which may prompt new legislation. This summer the governor signed into law a pair of bills that broadens the state's authority to intervene in troubled districts and dissolve small ones.
The problem is tied to declines in state aid, falling enrollment, caps on cash-flow borrowing, and the districts' unwillingness to make deep cuts, according to analysts and state education officials. For many districts, the crises came on suddenly after years of putting off cuts coupled with enrollment declines — which are projected to continue at least through 2020.
"The other shoe is still yet to drop," Jeff Williams, CEO and chief of the education practice area for Public Sector Consultants, a Lansing-based research and management firm. The Southeast Michigan region in and around Detroit, which holds half of Michigan's population, is expected to lose 13% of its K-12 population by 2020, Williams said.
"Even if the economy is going well and the school districts are stabilized, it won't matter how good you are financially, you're in for some tough times," said Williams.
In last week's testimony, Flanagan said the Michigan Department of Education may begin to work with the state attorney general to launch investigation into some districts with deficits. The state budget office is also developing a new five-year financial trend information outlook. Education officials Monday held a seminar for local officials to recognize early signs of fiscal distress.
There are 56 school districts in the state with deficits, Flanagan said. Fourteen districts saw deficits grow by the end of fiscal 2013, while 22 saw their deficits shrink. The Ypsilanti School District, which recently merged with a neighboring school district in an effort to address its fiscal difficulties, reported a deficit of $11.2 million.
The state has four school districts under emergency management. Detroit Public Schools has operated by an emergency manager since early 2009 and carries a $82 million deficit, by far the largest of any district. The state appointed emergency managers to take over Muskegon Heights School District and Highland Park School District in 2012. The state is working on a consent agreement for joint operation of Pontiac City Public Schools after a bond default. The state is also reviewing East Detroit Public Schools for possible financial stress.
Michigan has 549 regular school districts, another 260 charter districts, and 56 county-based districts. In the 1980s, the number of districts with deficits climbed as high as 80, while in the 1990s, it was less than 10.
Moody's Investors Service, in a new report on state oversight programs, said it considers Michigan to have moderate oversight of school districts. In the Midwest, only Ohio is considered to have strong oversight, Moody's said.
"The state has a mixed history of success and failures in its oversight of school districts, including some instances of defaults on debt service payments," said Moody's, which earlier this year issued a series of reports warning of the fiscal stress facing Michigan school districts. "While the state has stepped in to assist ailing school districts, most notably with the appointment of an EM for Detroit Public Schools, in 2009, other districts have not received state assistance until after serious cash flow issues develop."
Most dramatically, two school districts defaulted on debt payments: Buena Vista School District and the Pontiac City Public Schools. Since then, the state has dissolved Buena Vista and entered into a consent agreement with the Pontiac district.
"These instances of default highlight the severe stress that school districts are facing across the state and the limited implementation of [Public Act 436, the law that governs distressed local governments] authority over distressed school districts," Moody's said.
The need for an early-warning system is illustrated by the speed with which some districts fall into distress, Williams said. Of the 25 districts rated by municipal data source Munitrex as being in the most distress in August, more than half were rated in the "no worries" category as recently as 2008 and 2009, Williams said.
"Twelve of the 25 districts were sailing along as recently as 2010 and 2011," he said. Many local officials are unwilling to make tough decisions despite falling state aid and enrollment, because it often means teacher layoffs, Williams said. Putting off cuts for a few years has led to the recent rash of crises, he said.
"Instead of a crow coming home to roost, it's a whole flock, and it landed last night," Williams said.
Snyder earlier this year created a working group to draft recommendations for an early warning system that lawmakers can use as a guide for writing new legislation. The group made a number of recommendations to the governor in a report released in late August.
"Nobody thinks that it befits students, families, faculty, administrators and policy makers to find financial crises popping up too late to stave off financial catastrophe," said the working group's report, written by Snyder's education policy advisor Craig Ruff. "We need to push the envelope. We may need 50 or more triggers. We need to identify problems 90 or more days earlier than we do now."
The group recommends that treasury and the education department appoint a single person to receive all reports of fiscal distress, and assemble a "SWAT team" to investigate reports of distress. The state should also assign green, yellow and red lights to all districts, with red lights designating districts that have audited fund balances greater than 0% but less than 5% as a percentage of total general fund expenditures.
A current state law stipulates 19 conditions that could trigger a preliminary review by the Michigan Department of Education. But the department lacks the capacity to handle the additional workload, and needs more money and staff to handle the problem, the report said.
The group also recommends limiting borrowing.
"MDE and Treasury see habitually districts unable to meet current obligations because they have to pay principal and interest on the previous year's state aid note," the report said. "Emergency loans complicate the payback process."
