Detroit's public school system gains more autonomy as it plots capital needs

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Michigan released Detroit’s public school system from active fiscal oversight, a reward for fiscal gains that followed the state’s 2016 bailout that brightens its future case for joining the ranks of municipal borrowers.

The Detroit Financial Review Commission in a vote this week granted a waiver to Detroit Public Schools and Detroit Public Schools Community District, releasing both from active oversight that had given the commission final say on budgets, collective bargaining agreements and contracts. The waivers run through the end of 2021.

DPSCD is the entity that operates the city’s public schools. The state legislation that included a $600 million bailout established the new entity while leaving DPS intact to continue collecting tax revenue that goes to pay off the district’s debts.

“Our largest school district has shown leadership in having three consecutive balanced budgets with minimal oversight of day-to-day operations,” said state Treasurer Rachael Eubanks, who serves as commission chair.

The district, which serves 47,000 students, is still struggling to improve academic performance and stabilize enrollment but it reported improvements on those fronts along with fiscal targets. State and national test performance results are up and chronic absenteeism and suspensions are down. While the district’s enrollment has tumbled to 47,000 from more than 80,000 a decade ago, it’s risen 6,000 since 2017.

The district’s status is considered crucial to the city’s post-Chapter 9 progress.

The state established the FRC in 2014 to oversee the city and in 2016 its powers were expanded to include the district and its predecessor under the state legislation, although DPS has first came under state emergency management oversight 11 years ago. In addition to Eubanks, the members include the state budget director and city and district leaders.

The commission released the city from direct oversight in 2018, four years after its exit from Chapter 9, in recognition of its balanced budgets and other fiscal strides.

To win the waivers’ approval, the districts had to meet a set of targets including adoption of deficit-free budgets for three consecutive years, show they could sell and guarantee debt, and abide by generally accepted accounting practices.

“We met several financial requirements while enhancing student programming, increasing teacher pay, and shifting away from contracted services for greater full-time employment,” DPSCD Superintendent Nikolai Vitti said.

On the capital targets and market access, DPS noted that this year it completed a $41 million refunding of 2010 debt and a $257 million refunding of 2012 bonds that were directly placed, and refunding of $265 million state revolving fund loan balance. DPS said in its report to the commission it received more than a dozen responses from banks and the refundings “demonstrated the ability of the district to access the financial market at lower interest rates yielding savings for taxpayers.”

DPSCD noted it has not sold any municipal securities or debt obligations and has available unrestricted general fund resources necessary to address working capital and facility needs. The fiscal 2020 budget allocated $25.3 million of $139 million of DPSCD’s fiscal 2019 fund balance for capital improvements. Work was delayed due to the COVID-19 pandemic. A total of $56 million has been allocated for capital since 2018.

DPSCD is undertaking a strategic capital improvement planning process that should be completed in June and would provide the basis for any future voted or non-voted capital financing over the next decade. A 2018 report laid out $500 million of needs and DPSCD is considering a capital bond millage question for voters on next year’s ballot.

"The district still plans on engaging community and stakeholders on a capital bond campaign," it told the commission. "Given the current COVID-19 pandemic and signs of a recession, the district and will reassess timelines after we launch the FY 21 school year.” DPSCD believes recent voter renewal of an operating millage renewal with an 85% favorable vote bodes well for the district should it seek a vote.

Asked by the commission about its prospects for market access, DPSCD said: “We believe the investor's reception would be favorable. In 2018, the city of Detroit issued stand-alone bonds gaining significant interest from investors.” New debt would carry an unlimited tax general obligation tax pledge and the district intends to work with the state on enhancement. Detroit recently sold its second stand-alone bonds.

On the financial targets, DPS reported balanced operations and said its existing levies are producing enough revenue to cover the fall debt service payment. The district can take out state loans to cover shortfalls.

DPSCD reported an unrestricted general fund balance of $139 million for fiscal 2019, down slightly from $141 million in 2018, and up from $79 million in fiscal 2017. Through August, DPSCD revenues are running 10% ahead of budget or $9.1 million and expenses are $2.4 million more than anticipated.

The District assumed a 10% reduction in per-pupil funding in fiscal 2021 and fiscal 2022 due to the COVID-19 pandemic but the state adopted a budget for fiscal 2021 that mostly holds aid steady so the district projects an additional $30 million over budget.

Like in the case of the city, the commission will not have a say in day-to-day operations but it will continue to keep its eye on the districts through routine meetings and the districts are still required to submit financial reports, its budgets, and annual financial plans.

Struggling under the weight of its bonded debt and operating deficits, the Michigan Legislature’s $617 million bailout of the district’s operating ledger split the district into two organizations. The split allowed DPSCD to begin with a clean balance sheet.

Moody’s Investors Service raised the district’s issuer rating in August 2019 by two notches to Ba3 from B2 and assigned a stable outlook. At the time, DPS debt included $1.5 billion of general obligation unlimited tax bonds, $286 million of GO limited tax bonds and state operating loans, $106 million of deferred pension payments owed to the state's Office of Retirement Services, and $153.9 million of current loans from the state's revolving fund.

The 2020 refundings carried a AA rating from S&P Global Ratings based on participation in the state’s enhancement program.

In fiscal 2018, DPS' two tax levies — an 18 mill operating levy and 13 mill debt service levy — brought in $164.5 million. Total debt service and expenses were $188.8 million. To cover the gap, the district can borrow funds through the state's SLRF. Debts are slated to be retired in 2049 but could be delayed in tax values declines or early if they rise.

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