• After nearly two decades of being under state oversight, control of Detroit Public Schools Community District finances could soon return to the local board and superintendent
• Three years of deficit-free budgets will allow the district to request a waiver from state oversight
• Financial challenges remain, including major capital investment needs, that could threaten progress made since 2016 state reforms

For nearly all of the last two decades, the main public school district serving Detroit children has been under some form of direct state oversight. That may end very soon. 

If you know anything about how Michigan funds its public schools, you probably know how this happened: depopulation of the city and increased competition from charter and suburban schools led to plummeting enrollment and similar funding cuts, touching off a spiral of decline that is hard to recover from, as we’ve explained in our recent blogs on Benton Harbor and Flint. Detroit’s problems came first, and are probably the most dramatic, at least numerically – enrollment fell 72 percent from 2000 to 2015, from 169,363 to 47,959 students. 

Since 2000, chronic and sizeable financial challenges were used to justify direct state involvement (at times, takeover) in the day-to-day governance and operations of Detroit Public Schools and its successor, Detroit Public Schools Community District. The state-appointed Financial Review Commission, established to monitor the City of Detroit’s finances after its 2014 bankruptcy, was granted authority to do the same for DPSCD finances following the 2016 bailout of DPS. 

With key financial benchmarks met by the district, the commission could soon waive its oversight role and return financial control to the local board and its superintendent.

Long history of state intervention

State involvement in the DPS  began in 1999 when the locally elected school board was replaced with a seven-member reform board created by state law. Six members were appointed by the Mayor of Detroit (former school board members were ineligible), with the seventh position reserved for the State Superintendent of Public Instruction. The new board appointed a CEO to run the day-to-day operations of the district. Because the CEO appointment required a unanimous vote, the state superintendent had de facto veto power regarding CEO selection and therefore control of the district. 

The state law creating the school reform board also established a separate five-member accountability board to review the progress of the CEO and the reform board and to make recommendations to the governor. This body was comprised of all state-level actors (e.g., the state superintendent, state treasurer, state budget director), thus giving the state even more oversight authority.

The reform board governed the district for only the minimum five years required under state law. However, it was unable to solve the district’s financial problems, the reason for the state intervention in the first place. In fact, during its tenure the board and its CEO amassed an operating deficit.

When asked in November 2004, Detroit voters overwhelmly chose to return to a locally governed district instead of retaining the reform board/CEO model. Board members were elected in November 2005, and local control was returned to the district in January 2006, effectively ending state control. 

However, this was short-lived. Finances continued to deteriorate as students fled the district and funding decreased further. As the fiscal situation became more dire, the state again stepped in to take control, this time in a much more direct way. 

In 2009, Governor Granholm appointed the first in a series of three emergency managers that would manage the district for the next seven years. Although the elected board remained in place, it was basically powerless under the state emergency manager law – these managers assumed nearly all governance and operational powers that would have been held by the school board and superintendent. 

They had complete control over district finances (except to raise taxes). Those managers were able to balance the annual budget, but had virtually no success tackling the underlying structural deficit. This was achieved only by deep spending cuts  (including staffing and teacher salaries), long-term debt to cover annual budget deficits, and delaying required payments; none of these tactics addressed the larger fiscal challenges. Putting off the required fiscal reckoning only made problems worse.

By 2016, the district was staring at $3.5 billion in long-term capital and operating debt. In yet another state attempt to confront the crisis, the legislature crafted a package of governance, financial, and academic reforms, including a $617 million state bailout modeled after the City of Detroit’s historic bankruptcy. One key organizational reform separated the district into two distinct entities; the “old” DPS was retained to collect local property taxes and liquidate legacy debts, and a “new” debt-free district was created to provide public schooling in the city. Governance of the newly-created Detroit Public Schools Community District was returned to an elected school board at the beginning of 2017, with the power to select and appoint a superintendent to run the district. 

Out from under direct state oversight

While local control was returned to the elected board and superintendent three years ago, the state retained direct oversight of DPSCD’s financial affairs and influence over district operations, via the Financial Review Commission. State oversight includes having to get approval for all contracts, collective bargaining agreements, revenue estimates and budgets, and appointment of the chief financial officer. The district has had to provide monthly reports to the commission about its operations, cash flow and other financial activities. Furthermore, each year the FRC must certify that DPSCD is in compliance with various state laws. This oversight effectively provides the state with veto power over all key decisions made by the district’s board and superintendent to ensure that it does not backslide and incur deficits.

The “old” DPS is also under  FRC oversight. Because the district primarily exists to collect local property tax and liquidate legacy debts, the commission ensures that all required debt payments are met and current.

DPSCD’s 2018-19 financial report shows that it balanced its budget,  its third consecutive year without incurring a deficit. As a result, the district has nearly doubled its year-end fund balance from $79 million in 2016-17 to $140 million this past year. These improvements allow the district to petition the state to reduce its oversight of DPSCD. State law allows direct oversight to be waived for one year if certain financial and operational conditions are met, including three consecutive years of deficit-free budgets. The request for an oversight waiver could occur as early as next week at the FRC’s monthly meeting.

The FRC’s other responsibility, the City of Detroit, was granted a waiver from oversight in April 2018, three years after exiting bankruptcy.  The commission approved another waiver in 2019 for the city’s 2019-20 fiscal year. Approval of a waiver does not end the FRC’s authority over the city or DPSCD, but it relieves them from direct, day-to-day state oversight. During a waiver period, the commision remains dormant and can re-engage if either falls back into deficit, misses a debt payment, fails to get FRC approval to issue debt, or fails to meet other conditions laid out in state law. The commision is dissolved only after it has granted the city and the school district a waiver for 10 consecutive years.

From our perspective, it is good that oversight by the FRC will not end completely. Many challenges remain for both entities; neither the city nor the school district have needed to navigate a recession, for one. Past recessions have caused reductions in the amounts of state funding shared with local governments, changes to the city’s property tax base, and other budget pressures. Both enjoy quality management at the present time, but there is no guarantee of that continuing into the future. Also, the school district’s ballooning capital needs should remain on the state’s radar.

Challenges remain

By nearly all accounts, DPSCD finances have improved measurably since 2016.  Budget surpluses, growing enrollment, and balanced budgets are just a few high-level indicators that the major contributors to past fiscal challenges are healthy. 

While the operating budget appears to be in good shape for the foreseeable future, the district faces massive capital improvements that have the potential to threaten its recovery. A facilities assessment conducted in 2018 pegged the district’s immediate capital needs at over $500 million with the potential of these costs growing to $1.5 billion by 2023 if unaddressed. The 2016 state bailout provided $25 million to assist with transition costs and some of this money went to addressing capital needs. Further, DPSCD allocated $30 million of its 2018-19 operating funding to meet urgent needs in school buildings across the district. 

As demand to address capital improvements escalates, the operating budget will become more stressed. Dipping into its unrestricted fund balance ($87 million at June 30, 2019) or its rainy day fund ($36 million) are options for the short term, but drawing down these funds leaves the district vulnerable to budget shocks arising from enrollment losses or a spike in unexpected expenses. Further, with the prospect of a recession occurring at some point in the economic cycle (this is the longest economic recovery on record), these resources are likely to be needed to maintain programs and service levels should state and/or local funding decline.

The 2016 state bailout legislation did not directly address DPSCD’s capital needs. In Michigan, school facility funding is completely funded at the local level through voter-approved property taxes. Currently, Detroit residents and businesses are already being taxed at the state maximum (13 mills) for the capital debt. The capital debt ($1.5 billion outstanding), which is backed by the State of Michigan, will not be fully paid until 2052. Because of DPS’s current debt obligations, DPSCD is unable to issue additional state-backed debt, but could pursue non-qualified debt if voters approve. However, financing such debt would place further strain on Detroiters’ household budgets as they already face the nation’s third highest property tax burden.

While it is unclear at this time where the money will come from to address DPSCD’s capital needs, one thing is clear – it cannot wait until 2027 to make large investments in its buildings and other capital stock.  While direct state oversight of district operations may no longer be prudent, the state will likely have to play some role, directly or indirectly, developing a long-term capital investment strategy and identifying the needed funding.