At a press conference last week, State Superintendent Dr. Michael Rice warned that public schools faced the possibility of harmful budget cuts in the face of depleted state revenues arising from the coronavirus pandemic’s impact on the state economy. Without a massive infusion of federal dollars to backfill state revenue coffers Dr. Rice opined that “Congress is the only entity that has the capability of substantially sparing our children from very profound cuts.” Dr. Rice, along with state budget watchers, are projecting at least a $650 per-student cut in state aid to districts to bring the state School Aid Fund into balance, a cut that would be 40 percent larger than the one schools took in the wake of the Great Recession.

Despite this bleak outlook, the fiscal picture facing Detroit Public Schools Community District, the state’s largest school district, does not appear so dire. In fact, the district is preparing to adopt a revised budget for the current year (that ends June 30) that incorporates a $700 per-student reduction in state funds while maintaining staff compensation and vendor payments and without dipping into its $140 million reserves. 

For the 2020-21 school fiscal year beginning July 1, the district is proposing a budget that ups the state funding cut by $114 per pupil (for a total of $814 compared to initial FY2020 budget) without reducing school programs (including art, music and gym) or laying off staff. Again, without dipping into its reserves. No doubt, these proposed state funding will be felt in the district’s spending plan, but nothing close to what Dr. Rice has suggested.

How can this happen in Detroit, a district plagued by decades of fiscal upheaval and just four years removed from a state-financed bailout? The short answer – the influx of federal stimulus funds that districts have received to help them manage through the pandemic. In addition to non-classroom spending reductions, the district plans to spread the federal funding over two years until which time state revenues are projected to return to pre-pandemic levels. 

Bleak State Revenue Picture

Because Michigan funds its public schools largely with state sales and income taxes, local district budgets are directly tied to the underlying economic activity fueling state tax receipts. The pandemic has caused a major slowdown in economic activity and state revenue collections. This came into clear focus at the May 15 revenue estimating conference. Revenue projections for the School Aid Fund were reduced by $1.2 billion for FY2020 and $1.1 billion for FY2021 compared to January 2020 estimates. With this reduction, the Senate Fiscal Agency now projects that the School Aid Budget is in deficit by $1.1 billion for FY2020 and $1.0 billion for FY2021 based on current appropriation levels.

State law requires Lansing officials to cut spending, increase revenues or some combination of the two to bring the School Aid Budget back into balance. The default method to achieve balance is an equal per-pupil cut to the amount of state discretionary dollars shared with local districts. The Research Council has cautioned against this blunt approach because of the disparate impact it would have on the most vulnerable and challenged learners, but, unfortunately, there have been no alternatives offered by either the Governor or the Michigan Legislature since the deficit was identified nearly a month ago (see endnote). The current estimate is that the deficit would require each district (including charter schools) to take a $652 per-student reduction for FY2020, a cut that would have to be realized in school budgets with less than one month remaining in their fiscal years.

Districts Must Act Absent State Direction

Schools across the state are scrambling to adjust their spending plans in the face of a June 30 year-end. State law mandates they adopt, maintain, and operate a balanced budget. One week into June, there is little time to effect major spending adjustments. Leaving their reserves as the only fiscal safety valve.

Further complicating matters, the state has not shared with the 900 traditional, charter, and intermediate districts its plans for balancing the state School Aid Budget. Again, neither the State Budget Director or the Michigan Legislature have weighed in with specific actions to address the $1.1 billion shortfall.

For some state officials, including Superintendent Rice, their hope is that Congress will step in with additional federal aid or loosen restrictions on aid previously provided to schools through the federal CARES Act. They have made public pleas that only the federal government will be able save districts from deep cuts – including teacher layoffs, increased class sizes, and program eliminations. Right now, it appears state officials hope that the federal help materializes before issuing guidance about state revenue/budget reductions. While additional funds may be forthcoming, hope is not a strategy. 

For many local school officials on the front lines, time is of the essence for the state to act. In the absence of state decisions, local officials are using the May state revenue updates to make adjustments to their FY2020 spending plans, as well as prepare FY2021 budgets. Most, including Detroit Public Schools Community District (DPSCD), are assuming a flat, per-pupil cut in state funding. If the state decides to go in another direction, officials will come back to make budget adjustments later. 

Absorbing the (likely) State Budget Cuts

DPSCD is assuming a $700 per-student cut in state dollars for FY2020. These reductions have been built into budget amendments shared with the Detroit Financial Review Commission (FRC) this week and scheduled to be adopted by the DPSCD Board next week. Based on current enrollment, this amounts to a $35 million reduction in state aid relative to the original FY2020 budget. Despite this sizable reduction, the district’s General Fund revenue will increase by 4 percent (See table).

Detroit Public Schools Community District Revenues, Expenditures and Year-End Balances

Source: DPSCD

According to documents shared with the FRC, the cut will be absorbed without impacting payments to employees or contracted vendors that supply services/goods through the end of the school year. Instead, budgeted spending was reduced for work that did not occur because of the pandemic and funding earmarked for filling vacancies. The district will make a planned $25 million deposit to its Capital Projects Fund to cover much-needed facility improvements. Perhaps most significantly, the state aid cut does not require the district to use any of its $140 million fund balance.  See table.

Turning to FY2021, DPSCD recognizes an additional $114 per-student decline for FY2021, for a total of $814 per student compared to the original FY2020 budget. This represents a 10 percent reduction to its $8,142 foundation allowance and totals $41 million. Again, information shared with the FRC reveals that the district will be able to absorb these cuts without cutting school-based programs and staff, reducing salaries, and while maintaining classroom sizes. The budget is balanced without dipping into the district’s reserve.

In the absence of staffing and academic cuts, the anticipated per-pupil cut in state funds is largely offset by the federal CARES Act money coming to the district. The state will receive $390 million in federal pandemic relief to allocate to districts. Detroit’s piece is the largest of any district (approximately 24 percent of the total), primarily because of its high concentration of poverty and low-income students; the criteria used to allocate funding among districts. The district’s $85 million allocation of these discretionary funds is being spread across the next two budget years in roughly equal amounts to support eligible programs, respond to the pandemic and maintain operations across the current and next budget year. These resources are expected to mitigate the state funding cuts until which time School Aid Fund revenue is projected to reach pre-pandemic levels at the end of FY2022.

Detroit an Outlier?

The pandemic has disrupted life for everybody, school finances are no exception. The drastic state revenue reductions will have to be shouldered, at some point, by local schools. That is just the way Michigan’s school finance system works. With limited ability to raise revenue on their own, districts will either reduce classroom spending, dip into reserves, or some combination of the two. 

The federal funding already provided to Detroit will save it from having to take either of these two routes. We don’t know if Detroit’s situation is unique. Judging by words of the State Superintendent, it just might be. Alternatively, maybe Detroit, once the poster child for a poorly managed school district, might offer other districts a path forward for dealing with the financial upheaval caused by the pandemic.

Endnote:
Section 296 of the State School Aid Act requires a series of notifications when a deficit in the School Aid Fund is identified that begin the process of bringing the budget into balance. First, the State Treasurer must notify the State Budget Director of a shortfall; this occurred by letter on May 15 (date of May revenue conference). Then, the Budget Director notifies the Michigan Legislature not less than 30 days before implementing equal per-pupil cuts to state funding (a process called proration). This 30-day window is intended to provide the legislature with the opportunity to come up with alternatives to the proration process.

Presumably, the legislative notification is supposed to occur immediately after the Budget Director receives word from the Treasurer that a deficit exists; however, the Budget Director has not informed the legislature in the three-plus weeks since the May revenue conference and identification of the School Aid Fund shortfall. A direct reading of the law reveals that an immediate legislative notification of proration is not required. Rather, the law requires a 30-day notification before proposing cuts, not after when the deficit is identified. Thus, the Budget Director, at his discretion, is able to delay indefinitely the start of the proration process and therefore the state’s default School Aid Fund balancing mechanism .

Policymakers may want to re-visit this aspect of the law given the fact that local school districts, aware of the School Aid Fund shortfall, are being forced to make budget adjustments absent specific state guidance because of the delay in starting the proration process.