By Paul Traub
On Thursday, April 21, 2016, the members of the Detroit Association of Business Economists (DABE) were presented with an excellent overview of the current financial state of the Detroit Public School (DPS) system. The presentation entitled “Detroit Public Schools—Financial Crisis” by Craig Thiel provided an in-depth analysis of how DPS arrived at its current situation, with operating liabilities of $1.9 billion and total debts in excess of $3.5 billion. According to Thiel, a senior research associate with the Citizens Research Council of Michigan (CRC), it took decades of declining student enrollments and five state-appointed emergency managers since 2009, each unable to solve DPS’s financial problems, for the City’s school system to fall into a state of financial crisis. In addition to ballooning deficits, mounting legacy costs, recurring cash shortage problems, and deteriorating facilities, DPS has experienced declining enrollment since the early 1970s, reaching an annual rate of 10.5% between FY2003 and FY2014.
Declining enrollment has become one of the most significant problems for DPS because of the per-student funding model used by the state. As schools lose students, they also lose funding. The problem with this model is that as enrollment declines, revenues fall almost immediately while expenses fall very slowly. This is because public education is personnel-intensive, with about 60% of a district’s general fund budget going to pay instructors. For example, if a school loses 10% of its students across multiple grade levels in a single year, it would lose the per-student funding associated with those students almost immediately. However, the school still needs to provide classroom instruction for all of the remaining students, which might require the same number of teachers as before. In addition, the fixed cost of maintaining the facility would not likely change. This results in an operating deficit for the school.
In addition to the operating shortfalls, the schools need to continue to fund accrued legacy costs for pensions and health care. Adding to the problem, DPS has been funding its declining enrollment and legacy cost deficits through borrowing for years. As enrollment declines, there is less per-student funding available to cover the required debt and legacy payments. According to estimates, in FY2016 only 40% of the per-pupil allocation will be available for classroom instruction. The rest will go to paying legacy costs and to service debt. Less money for the classroom has resulted in a decline in academic performance, prompting those parents who have the means to do so to seek alternatives for their children’s education, further exacerbating the decline in DPS enrollment. Today, only about 40% of all Detroit K-12 students attend Detroit Public Schools. The state of Michigan legalized chartered schools in 1993. By 1995, the first chartered schools opened in Michigan. However, because of Michigan’s per-student funding model, if a student leaves a traditional public school to go to a charter school, the funding follows the student, while DPS retains all the legacy cost. This results in increasing the debt payments per student, resulting in even less money for public school classroom instruction.
A recent proposal approved by the state senate would permit Detroit to adopt a model used by other distressed school districts in the state. Under the proposed model, the DPS would be separated into two parts. One part would be responsible for the debt, and the other would be responsible for educating the students. The plan calls for the creation of a Community School District with an elected board. The district would operate under a Financial Review Commission to review the actions of the elected board and a Detroit Education Commission, which would be responsible for overseeing academic performance. The Michigan House of Representatives is still working on the plan. However, Thiel stated that time to act was yesterday and until the structural challenges currently faced by DPS are fixed, enrollment will continue to decline and the problems of the DPS will only get worse.
To see a copy of Thiel’s presentation click on “Detroit Public Schools–Financial Crisis.”