UPDATED:  May 7, 2014 (see below)

It appears that a state-appointed emergency manager and private management of an academically and financially struggling school district has not been the answer in the Muskegon Heights community.  The chronically ailing school system will need additional financial resources in the form of an emergency state loan to remain open for the rest of the 2013-14 school year and repay its management company for services already rendered.  This new episode for the Muskegon Heights education community raises issues about the structure of Michigan’s school finance system, the operational and academic difficulties involved with managing declining student enrollment, and the policy options available to the state to deal with failing school districts.

In 2012, the Muskegon Heights School District emergency manager simultaneously converted the entire district into a charter school district (Muskegon Heights Public School Academy System).  The emergency manager selected Mosaica Education, Inc., a for-profit education service provider, to operate all four schools of the former Muskegon Heights Public School District.  The original public school district in Muskegon Heights remains in existence solely for the purpose of collecting a dedicated local school operating millage, which is used to eliminate the outstanding deficit and legacy costs of the former district instead of financing the local share of the district’s per-pupil foundation allowance.  Under this arrangement, the revenue from the local tax is replaced, dollar-for-dollar, with funds from the School Aid Fund such that state dollars finance 100 percent of the district’s foundation allowance.

On April 28 of this year, the Muskegon Heights School District received a $1.4 million emergency loan from the State of Michigan to avoid the possible mid-year closure of the Muskegon Heights Public School Academy System and to avoid a projected year-end operating deficit.  At the same time that the loan was approved, the emergency manager terminated the 5-year operating agreement with Mosaica Education, Inc., two years early.  As a result, students of the charter district will experience their second educational transition (i.e., new personnel, new curriculum, etc.) in the last two years.

The new loan represents the third emergency loan made to the financially and academically struggling school district in less than two years.  The first two were made to settle the district’s $12 million accumulated deficit and allow the new charter school district to start with a “clean slate.”  The recent loan is the first emergency loan effectively made to help balance the books of a charter school.  All previous loans were made to traditional public school districts.  Emergency loans to Muskegon Heights now claims over 25 percent of the maximum amount of loans ($50 million) allowed under state law.

Financial problems are not new for the charter school district.  The district ended its first year in operation (2012-13 school year) with a $500,000 deficit in its capital projects fund.  This year, despite receiving two advances totaling more than $400,000 earlier in April, it became clear in late April that the Muskegon Heights Public School Academy System would be unable to correct its finances to avoid ending the 2013-14 year with a general fund deficit.  The prospect of closing early or not being able to pay employees necessitated the new $1.4 million emergency operating loan.

One look at the district’s approved budgets for 2013-14 provides a clear indication of a major cause of the continued financial bleeding.  Even before being charterized, the district was plagued by constant annual student enrollment declines (i.e., enrollment declined by 273 students, or 15 percent, between 2007-08 and 2011-12) as students and families sought different educational options.  Michigan’s school finance system ensures that money follows the student; as Muskegon Heights students left for other schools they took their funding with them.  For years, the district was unable to keep up with the annual revenue reductions and shed costs fast enough.  As a result, the district was constantly operating in the red and had an accumulated general fund deficit of $12 million as of June 30, 2012, before being turned over to the emergency manager.

The declining enrollment trend continued under the emergency manager’s watch, but his original budget did not reflect this reality (and the amended budget does not either).  The district had 1,130 students in the 2012-13 school year.  This year, enrollment fell to 902 students, 20 percent lower.  More important to the current situation is the fact that the original spending plan for the current year was based on increase of 198 students for a total enrollment of 1,328 students.  Missing the enrollment estimate by this much (426 students) directly translated into a discrepancy in state revenue equal to nearly $3 million (based on $7,168 per pupil), requiring a budget adjustment in December of 2013 for the current year, six months into the fiscal year.  Effecting the appropriation reductions of this magnitude necessary to balance the budget, in a condensed time period, was deemed nearly impossible.

The Local Financial Stability and Choice Act (Public Act 436) requires that an emergency manager conduct “all aspects of the operations of the local government within the resources available. . .” The new emergency loan signals that the Muskegon Heights emergency manager is unable to manage the district within the resources available to him.  In light of the broader discussion of school finance statewide, this situation raises very important public policy questions.  If an emergency manager is unable to manage the affairs of the school district in accordance with the mandates of state law and within the resources available, should we expect the same of all other school districts?  Should all school districts be afforded the additional resources available to the Muskegon Heights emergency manager to help them with their finances?

As with the previous $11 million in loans made to the district, the cost of bailing out the charter school district this year will be spread across all other districts in the state.  The loan will be repaid over the next 30 years by diverting the local 18-mill property tax that is intended to finance the district’s per-pupil foundation grant.  Because these funds will be used to repay the loan, the state School Aid Fund will be responsible for covering the full amount of the foundation grant obligations.  As a result, there will be $1.4 million fewer state resources to share with other districts, including those that are financially struggling.

The academic and financial problems in the Muskegon Heights school district are not new.  Many had tried to address these problems and did not succeed.  Now, the emergency manager and his hand-picked educational service provider, while able to slightly improve the learning culture and academic performance in the district over the last two years, have been unable to fix the district’s finances.  It appears that the emergency manager was unable to address a key driver of the financial problem; declining student enrollment.  It is likely that until the manager can stabilize the loss of students, deficits will continue and additional emergency loans required.  Unfortunately, the Muskegon Heights school district is not alone; many more districts are finding it increasingly difficult to effectively manage through the fiscal effects of persistent declining enrollment.

May 7, 2014 UPDATE

At the time of posting (April 30), CRC did not have the documentation related to the $1.4 million emergency loan made on April 24.  According to the information provided by the State of Michigan and received on May 7, the $1.4 million loan will accrue interest over a 30-year period at the rate of 3.45%.  Based on the term and interest rate, the total cost of repaying the loan (principal and interest) will be $2.5 million.  Therefore, the State School Aid Fund will be shorted a total of $2.5 million (not $1.4 million cited in the original post) as the 18-mill local school operating tax is used to repay the loan and not finance the per-pupil foundation allowance.

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