CHICAGO - With Detroit's bankruptcy in the rear-view mirror, state and city leaders are turning their attention to the long-troubled Detroit Public Schools, which are viewed as a roadblock to the city's long-term recovery.
DPS has been under state control since 2009, with four different emergency managers since then, the latest one appointed just two weeks ago.
Michigan Gov. Rick Snyder told local and state officials that he wants to introduce legislation to overhaul the system by early spring. A new coalition of Detroit leaders has taken on the issue, and is expected to submit reform recommendations to the governor by March. Among the proposals is one that would have Detroit Mayor Mike Duggan take over the district.
Analysts and economists say a turnaround from the school system's long slide is key to the Motor City's own restructuring in the wake of largest municipal bankruptcy in the U.S.
Without a stable school system, Detroit's chances of building a strong property tax base remain slim.
"I don't think Detroit can recover absent dealing with the school system," said Frank Shafroth, director of the Center for State and Local Leadership at George Mason University. "The governor's own reputation is at risk. Absent turning it around, I don't see any way for Detroit not to go back into bankruptcy."
Michigan State University economist Eric Scorsone, who focuses on local government finances, said the district currently acts as a drag on the city's recovery.
"Right now the schools have to become less of a negative before they can even become a positive," said Scorsone. "The schools are helping keep people out of Detroit or even forcing them to leave."
Detroit is one of an increasing number of Michigan school districts facing fiscal stress amid declining enrollment and state aid. But Detroit's problems are particularly acute.
The district's enrollment dropped 62% between 1998 and fiscal 2012, according to Moody's Investors Service, which maintains a junk rating and negative outlook on the district.
Unlike cities, school districts have few options for growing revenues, said Scorsone, one of four authors of a new report on how to address Michigan school districts' fiscal stress.
"With cities it's a more complicated picture: declining population doesn't always mean fiscal stress," Scorsone said. "Whereas with a school district it's pretty straightforward: if you lose students you lose money."
Despite nearly six years of state control, the district faces a $170 million deficit in fiscal 2015. That's down from $327 million in 2010, but that improvement is largely due to the issuance of deficit bonds in 2011, according to Moody's.
Snyder on Jan. 13 named the district's fourth emergency manager, Flint EM Darnell Earley. Earley replaced Jack Martin, who was nearing the end of the 18-month term dictated by the state's emergency management law.
In interviews ahead of Earley's appointment, Snyder acknowledged to local reporters that the emergency management model was not working as well for DPS as it had elsewhere. But he said he wants to keep the schools under state control as "community leaders start discussions about a long-term reinvention to build a stable, financially secure system."
On top of falling enrollment, DPS carries roughly $2.1 billion of debt. Of that, $1.6 billion is unlimited-tax general obligation bonds secured by the state's School Bond Qualification and Loan Program. Another $325 million is long-term state aid revenue bonds, secured by an intercept feature on state aid; and $108 million is loans from the Michigan School Loan Revolving Fund, according to Moody's.
In 2013, fixed costs, including debt service and retirement costs, made up 35% of operating revenue and were expected to grow at least 3% or more in fiscal 2015, Moody's said.
"DPS is such a great example of one emergency manager after the other and yet the deficit got bigger," Scorsone said. "The EM model is predicated on cutting expenses and restructuring to reduce costs. But that can be a death spiral: if you cut more teachers and classrooms get bigger, more people want to leave. You're in a very tough situation and it can be very, very hard to fix."
Moody's, the only ratings agency to maintain an underlying rating on the district, maintains an issuer rating of B3, six notches into junk territory. It also has a negative outlook on the district, warning in an April 2014 downgrade report that it expects "the operational stress, balance sheet weakness, elevated leverage, and economic challenges will continue to exert growing pressure on the district's underlying credit quality."
A chunk of the district's LTGO bonds backed by a third lien on state aid with a 4% coupon yielded 4.04% in trading last week, according to the Municipal Securities Rulemaking Board's EMMA website. One-year notes backed by state aid with an August 2015 maturity and a 2.85% interest rate traded with a 1.83% yield in recent trading, according to EMMA.
There are 57 districts and public school academies that ended fiscal 2014 either in deficit or with a projected deficit, according to the MSU report, "Knowledgeable Navigation to Avoid the Iceberg: Considerations in Proactively Addressing School District Fiscal Stress in Michigan."
With a record number of school districts reporting deficits in recent years, the report recommends that the state enact a so-called fiscal health indicator that provides the districts and the public with transparent measures of fiscal health. Scorsone said the report's team will formally present the recommendations to legislators as they tackle school reform in the current legislative session.
School districts, including Detroit, could get some good news if voters pass a new road funding ballot measure in May. The proposal would raise the state sales tax to 7% from 6%. The bulk of the new money would go to roads, but schools would be in line for $300 million annually.
In his State of the State address, Snyder said he wants to see legislation that would address, among other things, the fragmented nature of Detroit's school system, which is dominated by charters - roughly 50% of the city's students attend charters - and a relatively new state-controlled authority for academically failing schools. There are now 15 DPS schools that have been shifted to the Educational Achievement Authority, a move that, along with charters, have driven much of the district's enrollment decline.
The governor called the city's schools an "uncoordinated education environment" that is "not creating success for our students."
He said he wants to introduce legislation that "can bring more structure and more thoughtfulness to deal with these challenged situations." As part of the effort, Snyder has met with the newly created Coalition for the Future of Detroit Schoolchildren and asked them to send him recommendations by March.
A stable school district is key to any healthy city, said Shafroth.
He said Duggan should look to Chicago, where Mayor Rahm Emanuel has made a big push to overhaul schools in an effort to attract more middle-class families with young children.
"For the vast majority of cities, the property tax base is what defines your fiscal solvency, and that base is defined by, 'Are we a place where young families will come?'" said Shafroth. "Schools are so essential for a city's future, and success in Detroit is very critical to Mayor Duggan and to the governor."