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January 10, 2020

Flint Schools to Borrow $30 Million, Levy New Tax to Settle Deficit

  • Flint schools‘ financial challenges continue to mount
  • The district will ask voters in March to approve a 25-year $30 million bond to pay off legacy debts and provide funds for this year’s budget
  • A new tax is being requested to finance the borrowing that has statewide implications

The question of how Flint Community Schools intends to approach its financial crisis is now clear: By going to the taxpayers’ well.

The district has a new plan to eliminate its operating deficit and legacy debts over the next 25 years, by levying a new tax. This tool has not been available to other fiscally-challenged districts (and there have been many) since 1994. Voters must approve the plan, but if they do so in the March election, its already-stressed budget will be relieved of significant financial obligations. 

But, does this new tax backtrack on a key promise of Proposal A to limit school operating taxes?

Flint’s plan

At the beginning of the school year, Flint Community Schools faced at least a $5 million operating deficit and $25 million in long-term operating debts. At the time, the district had a multi-year payment plan to address its long-term operating debts, but nothing to address its deficit. The plan to handle the long-term obligations relied entirely on tapping the district’s general operating budget until the debt is retired in 2037; this is the same pot of money used to fund classroom instruction and other current services. Servicing the debt amounts to nearly $550 per student this year.

As recently as mid-December, it was not clear how the district was going to address its dire financial predicament and still be able to meet its obligations to educate 3,700 students. Further, as the problem came to public attention, it was unknown if the State of Michigan would provide some form of financial assistance as it has done for others or take a more active role in the district’s affairs by employing the emergency manager law, Michigan’s tool for dealing with schools in financial distress. 

By the end of the month the district decided on a plan; ask Flint voters in March to borrow $30 million to liquidate the long-term liabilities and provide operating capital to address the current deficit. To pay for the plan, voters will be asked to approve a new tax of 2.82 mills for 25 years to cover the annual debt service on the bonds (voter approval is required for any new tax pursuant to the Headlee Amendment to the Michigan Constitution). If approved, Flint will be the first district since 1994 to levy a separate tax to finance its operating deficit, a funding tool available to schools prior to the adoption of the Proposal A finance reform. Other districts have issued long-term debt to finance their accumulated operating deficits, but they did not have access to new tax revenues to meet debt service obligations. Instead, they had to finance their debt from current and future operating revenues.

Proposal A implications

How, one might ask, can Flint do this?

Those with a deep understanding of Michigan’s school finance system might wonder if Flint’s deficit elimination plan backtracks on a key tenet of Proposal A to reduce school operating taxes.  Some would argue it most definitely does. 

Prior to 1994, districts had a great deal more control over the amount of revenue they could raise. Proposal A of 1994 was designed to cut local property taxes by severely limiting the ability of districts to levy taxes for school operations. It cut schools’ authority to go to voters to ask for more money to address operating expenses, including accumulated deficits. School funding decisions were largely removed from the local ballot box and transferred to Lansing decision makers.

Curtailing local taxing authority was key in shifting funding responsibility from local property taxes to state-levied taxes. Further, limitations on locally levied school taxes halted the escalating per-pupil funding differences across districts, another motivation behind Proposal A.

A lesser-known Proposal A reform prohibited districts from issuing notes or bonds to finance an operating deficit. With this authority gone, districts also lost the power to levy a separate property tax to finance such borrowing. While districts are still able to issue debt for capital improvements and levy taxes to repay bonds under after Proposal A, they lost their ability to borrow for operating purposes. Eliminating this authority was another way to limit local school taxes; seven districts were levying a debt-reduction millage when the authority to issue new deficit bonds was suspended in 1994.

Flint’s plan, if approved, would return some school taxing control to local voters. Authority that was lost with Proposal A in 1994.

Detroit Public Schools reforms

Flint largely has Detroit Public Schools to thank for paving the way for its new deficit elimination plan. 

The deficit borrowing and taxing restrictions adopted under Proposal A were eliminated with the 2016 Detroit Public Schools restructuring reforms. As a result, districts again have the authority, with the state’s permission, to issue debt to meet operating or projected operating deficits. Under the 2016 law changes, the bonds are called “school financing stability bonds.” The new authority was used by Detroit Public Schools to structure a long-term repayment plan for its legacy debts, while its responsibility for educating students was transferred to the new, debt-free Detroit Public Schools Community District.

Detroit issued stability bonds in 2016 totaling $226 million. The bond proceeds, along with a $150 million state loan, were used to liquidate the district’s legacy debts. Unlike what is being proposed in Flint, repayment of the DPS bonds comes from an existing tax levied on Detroit business property owners (18-mill non-homestead). Flint is seeking a new tax that will be paid by all property owners (residential and business), while it continues to levy the 18-mill business tax to finance its per-pupil foundation grant. 

(It should be noted that Flint voters are being asked to reduce the authorization to levy a sinking fund millage from 4 mills currently to 1.18 mills, and adopt the new deficit funding millage of 2.82 mills. Thus, taxpayers will not see an increase in their overall tax bill.)

Although the legislative changes adopted in 2016 were intended to deal with Detroit Public Schools, they are not limited to Detroit. Flint just happens to be the first district, after Detroit, to propose the new deficit borrowing and a plan to levy a new tax for debt repayment. Before it can proceed and issue $30 million in bonds and levy the new tax, Flint will have to get the go-ahead from the Michigan Department of Treasury and local voters. With Benton Harbor schools also facing serious financial challenges, Flint might not be the last to employ this deficit funding tactic.

Flint Schools to Borrow $30 Million, Levy New Tax to Settle Deficit

  • Flint schools‘ financial challenges continue to mount
  • The district will ask voters in March to approve a 25-year $30 million bond to pay off legacy debts and provide funds for this year’s budget
  • A new tax is being requested to finance the borrowing that has statewide implications

The question of how Flint Community Schools intends to approach its financial crisis is now clear: By going to the taxpayers’ well.

The district has a new plan to eliminate its operating deficit and legacy debts over the next 25 years, by levying a new tax. This tool has not been available to other fiscally-challenged districts (and there have been many) since 1994. Voters must approve the plan, but if they do so in the March election, its already-stressed budget will be relieved of significant financial obligations. 

But, does this new tax backtrack on a key promise of Proposal A to limit school operating taxes?

Flint’s plan

At the beginning of the school year, Flint Community Schools faced at least a $5 million operating deficit and $25 million in long-term operating debts. At the time, the district had a multi-year payment plan to address its long-term operating debts, but nothing to address its deficit. The plan to handle the long-term obligations relied entirely on tapping the district’s general operating budget until the debt is retired in 2037; this is the same pot of money used to fund classroom instruction and other current services. Servicing the debt amounts to nearly $550 per student this year.

As recently as mid-December, it was not clear how the district was going to address its dire financial predicament and still be able to meet its obligations to educate 3,700 students. Further, as the problem came to public attention, it was unknown if the State of Michigan would provide some form of financial assistance as it has done for others or take a more active role in the district’s affairs by employing the emergency manager law, Michigan’s tool for dealing with schools in financial distress. 

By the end of the month the district decided on a plan; ask Flint voters in March to borrow $30 million to liquidate the long-term liabilities and provide operating capital to address the current deficit. To pay for the plan, voters will be asked to approve a new tax of 2.82 mills for 25 years to cover the annual debt service on the bonds (voter approval is required for any new tax pursuant to the Headlee Amendment to the Michigan Constitution). If approved, Flint will be the first district since 1994 to levy a separate tax to finance its operating deficit, a funding tool available to schools prior to the adoption of the Proposal A finance reform. Other districts have issued long-term debt to finance their accumulated operating deficits, but they did not have access to new tax revenues to meet debt service obligations. Instead, they had to finance their debt from current and future operating revenues.

Proposal A implications

How, one might ask, can Flint do this?

Those with a deep understanding of Michigan’s school finance system might wonder if Flint’s deficit elimination plan backtracks on a key tenet of Proposal A to reduce school operating taxes.  Some would argue it most definitely does. 

Prior to 1994, districts had a great deal more control over the amount of revenue they could raise. Proposal A of 1994 was designed to cut local property taxes by severely limiting the ability of districts to levy taxes for school operations. It cut schools’ authority to go to voters to ask for more money to address operating expenses, including accumulated deficits. School funding decisions were largely removed from the local ballot box and transferred to Lansing decision makers.

Curtailing local taxing authority was key in shifting funding responsibility from local property taxes to state-levied taxes. Further, limitations on locally levied school taxes halted the escalating per-pupil funding differences across districts, another motivation behind Proposal A.

A lesser-known Proposal A reform prohibited districts from issuing notes or bonds to finance an operating deficit. With this authority gone, districts also lost the power to levy a separate property tax to finance such borrowing. While districts are still able to issue debt for capital improvements and levy taxes to repay bonds under after Proposal A, they lost their ability to borrow for operating purposes. Eliminating this authority was another way to limit local school taxes; seven districts were levying a debt-reduction millage when the authority to issue new deficit bonds was suspended in 1994.

Flint’s plan, if approved, would return some school taxing control to local voters. Authority that was lost with Proposal A in 1994.

Detroit Public Schools reforms

Flint largely has Detroit Public Schools to thank for paving the way for its new deficit elimination plan. 

The deficit borrowing and taxing restrictions adopted under Proposal A were eliminated with the 2016 Detroit Public Schools restructuring reforms. As a result, districts again have the authority, with the state’s permission, to issue debt to meet operating or projected operating deficits. Under the 2016 law changes, the bonds are called “school financing stability bonds.” The new authority was used by Detroit Public Schools to structure a long-term repayment plan for its legacy debts, while its responsibility for educating students was transferred to the new, debt-free Detroit Public Schools Community District.

Detroit issued stability bonds in 2016 totaling $226 million. The bond proceeds, along with a $150 million state loan, were used to liquidate the district’s legacy debts. Unlike what is being proposed in Flint, repayment of the DPS bonds comes from an existing tax levied on Detroit business property owners (18-mill non-homestead). Flint is seeking a new tax that will be paid by all property owners (residential and business), while it continues to levy the 18-mill business tax to finance its per-pupil foundation grant. 

(It should be noted that Flint voters are being asked to reduce the authorization to levy a sinking fund millage from 4 mills currently to 1.18 mills, and adopt the new deficit funding millage of 2.82 mills. Thus, taxpayers will not see an increase in their overall tax bill.)

Although the legislative changes adopted in 2016 were intended to deal with Detroit Public Schools, they are not limited to Detroit. Flint just happens to be the first district, after Detroit, to propose the new deficit borrowing and a plan to levy a new tax for debt repayment. Before it can proceed and issue $30 million in bonds and levy the new tax, Flint will have to get the go-ahead from the Michigan Department of Treasury and local voters. With Benton Harbor schools also facing serious financial challenges, Flint might not be the last to employ this deficit funding tactic.

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