In a Nutshell:

• Nearly six years removed from a major financial restructuring and despite the profound disruptions caused by the worldwide public health emergency, Detroit Public Schools Community District continues its financial recovery unabated.
• The district met all of the required financial benchmarks prescribed in state law – e.g., balanced budget, timely debt payments – to allow a state review body to renew a waiver to exempt the district from direct, day-to-day financial and operational oversight.
• Updated financial forecasts show that the district’s legacy debts will be retired in 2026, approximately 10 years after the Detroit public school system went through a state-financed restructuring.

Nearly six years removed from a major financial restructuring and despite the profound disruptions caused by the worldwide public health emergency, Detroit Public Schools Community District continues its financial recovery unabated.

During the two decades leading up to the state-financed restructuring of Detroit’s public school system in 2016, plummeting student enrollment combined with financial mismanagement and outright corruption led to fiscal distress and direct state intervention in the day-to-day governance, management, and operation of the district. Since the restructuring, the financial picture has improved steadily with growing budget reserves and improving cash flows.

These improvements, somewhat ironically, have been super-charged over the last couple years due to the COVID-19 pandemic and the availability of federal relief funds. However, the massive fiscal stimulus the district received to navigate the pandemic will run out in a couple of years, requiring major budget modifications to bring spending in line with available resources. Failure of district officials to make these necessary budget adjustments in the coming years risks a return to the bad fiscal habits of the past.

Budget Surpluses and Growing Reserves

Key indicators of Detroit Public Schools Community District’s (DPSCD) improving financial health in its annual financial report (year ended June 30, 2022) show a history of balanced budgets, growing year-end reserves, and a healthy cash position. These improvements have not gone unnoticed. The district met all of the required financial benchmarks prescribed in state law to allow the Detroit Financial Review Commission in December to renew a waiver to exempt DPSCD from direct, day-to-day financial and operational oversight. The Commision is the state oversight body tasked with monitoring the district’s solvency after its restructuring nearly six years ago. This is the third waiver renewal granted to the district.

Balanced budgets are the foundation for financial success for any organization. This is especially true for DPSCD because operating in the black is a key condition of its restructuring agreement with the State of Michigan. DPSCD has operated with balanced budgets since Fiscal Year (FY) 2017. According to the district’s recent financial report, it finished FY2022 with a General Fund budget surplus of nearly $200 million with revenues totalling $1.2 billion and total expenditures of $1.0 billion. 

Furthermore, the district is forecasting balanced budgets for the coming years with annual revenues projected to exceed annual expenses each of the next five years (chart below).

DPSCD Five-Year Budget Projections

Source:  Chart copied from October 2022 financial update presentation, Detroit Public Schools Community District

These annual budget surpluses will help grow the district’s year-end fund balances. According to the district’s most recent financial forecast, year-end reserves are expected to increase from $102 million at the end of FY2021 to $674 million by the end of FY2024. The amount of reserves is projected to go from 11 percent to 75 percent of operating reserves, well in excess of what might be considered a healthy rainy day fund. It should be noted, however, that the remarkable growth in reserves is due to the district’s plan to reserve approximately $700 million of COVID relief dollars it receives between FY2021 and FY2023 for its Facility Master Plan – a multi-year, $2.1 billion capital investment program. The spend down of the accumulated reserves for planned facility improvements and upgrades occurs through FY2029.

Detroit is not alone in its efforts to use the one-time COVID funding to temporarily grow its budget reserves. All K-12 school districts face a spending deadline of September 2024 to exhaust the federal dollars. To meet these deadlines, many Michigan schools are effectively stockpiling their federal funds in their fund balances by replacing current spending from their general fund resources with large portions of the federal relief dollars.Unlike the federal dollars, the general fund dollars don’t have an expiration date. We previously showed how districts have used the federal aid to grow their combined budget reserves from $2.4 billion pre-pandemic to $3.3 billion at the end of FY2021.

Fiscal Cliff Ahead

It is important to note that the budget growth is fueled in large part by the availability of federal COVID-19 relief funding. The district is expected to receive over $1.2 billion and must spend these one-time resources before September 2024. It has programmed nearly $500 million in its operating budgets for FY2022 through FY2024 to ensure safe, healthy learning environments and to address the profound learning losses experienced by students since the onset of the pandemic. As noted above, the other $700 million will go to support its capital improvement program over the coming years.

By using a large portion of the one-time federal resources to support staffing and other ongoing expenses, the district’s annual operating spending ramps up to $1.1 billion by FY2023. However, with the expiration of the federal funds in 2024, total spending will fall back to $905 million in FY2024 and then to $854 million in FY2025. The depletion of these funds, combined with several anticipated cost increases (e.g., energy, transportation, supplies), creates a spending cliff that will necessitate future budget cuts. The district’s budget reserves, however, will serve as a hedge to the ratched-downed spending required.

Currently, DPSCD anticipates that it will have to shed 100 positions, including teachers, mental health professionals, and nurses from its ranks to avoid an operating deficit and manage the impending fiscal cliff. According to a recent report shared with the Financial Review Commission, school leaders have begun notifying the affected personnel that their positions will be eliminated. It should be noted that Detroit students were some of the last in the state to return to in-person learning and COVID-19 disruptions had an outsized impact on them.  The impending staffing reductions may come at the expense of the district’s ongoing efforts to address students’ pandemic-related academic recovery – reducing or eliminating tutoring, enrichment, and after-school programs.

Debt Retirement Continues

The 2016 restructuring split the public school system into two separate districts; a “new” district (DPSCD) was created to educate students while the “old” Detroit Public Schools remained intact for the sole purpose of retiring a variety of legacy debts.  At the time of the split, we estimated that Detroit Public Schools had amassed over $3.5 billion in total long-term debt and other obligations, including over $1.8 billion in accumulated operating deficits resulting from years of budget overspending. The massive operating deficit required the district to allocate $3,000 per student (more than one-third of its per-pupil state foundation grant at the time) from its General Fund budget each year to meet the principal and interest payments. Financial resources that were intended to pay for the education of current Detroit students.

While all of the district’s school buildings and other capital assets financed with previous bond proceeds were transferred to the “new” DPSCD to allow it to continue educating students, the “old” Detroit Public Schools district remains responsible for making annual debt service payments. Under the restructuring plan, Detroit Public Schools collects all voter-approved millages dedicated to the repayment of its bonded debt. As of June 30, 2022, the district’s outstanding bonded debt totaled $1.4 billion and was scheduled to be fully retired by 2041.

Additionally, the “old” district collects the 18-mill school operating tax and uses the proceeds to retire the legacy operating deficit that was amassed prior to restructuring. As of June 30, 2022, the district had $186 million of the accumulated deficit to pay off, down from $377 million following its restructuring in 2016. This millage currently generates approximately $72 million per year. Based on this tax yield, all legacy debts (not bonded debt) will be retired in 2026, approximately 10 years after the Detroit public school system went through a state-financed restructuring.

The fiscal health of the Detroit public school system is important beyond just meeting all the requirements of the state-imposed restructuring. While doing so ensures that Detroiters remain in control of their local public schools, maintaining balanced budgets and improving the overall financial position of the school district prevents district officials from falling prey to old financial habits. The same bad habits that had a direct negative impact on the level and quality of education services provided to nearly 50,000 students in the years leading up to the 2016 restructuring. In the six years since Michigan policymakers brokered the restructuring, financial stress has not been an obstacle for DPSCD to address the learning needs of all students and improve upon its anemic academic record.