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November 21, 2019

From Benton Harbor to Flint; State Officials Confront Another Failing Urban School District with no Clear Policy

In a Nutshell

  • Flint schools face a $5 million structural operating deficit and mounting long-term liabilities
  • Declining enrollment combined with postponing difficult fiscal decisions are primary causes of the district’s problems
  • The state will likely to have to step in with assistance, but currently lacks a clear policy position for dealing with struggling districts

Yet another urban, majority-minority public school district is facing difficult financial decisions, and the state government has not settled on a policy for dealing with it. After addressing Detroit a few years ago, and Benton Harbor this past summer, education policymakers now turn to Flint. These three districts will not be the last to struggle with the consequences of declining enrollment and fiscal mismanagement. How the state responds matters, not only for Flint, but for those that follow. 

After liquidating its previous operating deficit in 2016, Flint Community Schools (FCS) is back in financial trouble; overspending last year’s $67 million budget by $4.9 million and starting the 2019-20 school year with another budget shortfall. A growing operating deficit, combined with mounting long-term obligations, spells financial trouble for a district still grappling to overcome the health, social, and economic challenges arising from the Flint water crisis. 

Addressing the district’s fiscal challenges will likely require some form of state assistance, as was the case just three years ago (more on that below). What form that assistance will take is unknown, but further hemorrhaging of student enrollment and a looming cash crunch will require the state’s attention sooner rather than later for the district to remain solvent. For its part, the district is considering closing a number of schools as part of its deficit elimination plan.

Ongoing operating deficits

So how did they get here? For eight of the last nine years, FCS has failed to match spending with available revenue, leading to a general fund operating deficit. The only exception was Fiscal Year (FY)2015 when FCS barely managed to balance its budget. Another operating deficit is projected for FY2020. Over this period, annual deficits have ranged from less than $100,000 to over $15 million, with an average deficit of $6 million (bars in chart below). The district is dealing with a structural deficit of at least $5 million based on last year’s spending.

Source:  Flint Community Schools Annual Financial Reports

Structural problems can be found on both sides – revenue and spending – of the district’s general fund ledger. Enrollment is the basis for school funding in Michigan and it has been declining in Flint for decades. Job loss has led to population decline in the city, and the water crisis dealt another crippling blow. Combine this with competition for students (just 28 percent of the 14,500 flint residents attend FCS schools), including a new charter school in the city that will enroll hundreds of former Flint students and capture the per-pupil funding they bring, and the enrollment decline is startling; falling from 16,825 students at the beginning of the 2010 school year to 4,245 students for the 2018 school year (74 percent). The fall 2019 student count was recently reported as 3,725 students, 13 percent less than last fall, amounting to a revenue loss of $4.4 million. 

Commensurate with this decline, general fund revenue fell from $207 million in FY2011 to $67 million in FY2019. Managing school finances in the face of sizeable annual enrollment declines is challenging. Given the magnitude of the financial losses, Flint’s elected and appointed school officials have been unable to cut expenses fast enough, contributing to the structural deficit.

Annual operating deficits can be addressed with the use of reserves or other transfers, if available. If unavailable, however, deficits accumulate, meaning vendors and others go unpaid. The district skipped paying what it owed to the state, including its contribution obligations to the state-run teacher retirement system and unemployment insurance premiums. It racked up nearly $15 million in outstanding bills by the end of FY2014, before agreeing to a repayment plan requiring monthly installments from its current operating revenues.

Flint had an accumulated deficit of $22 million (line in chart above) at the end of FY2014. District officials slowly chipped away at it over the following few years, eliminating the deficit at the end of FY2016 and posting a slight positive general fund balance and maintaining it through FY2018. But this was only accomplished by moving a sizeable amount of the district’s operating obligations off its balance sheet and converting them to long-term debt. 

It must be noted that the deficits occurred despite the fact that FCS receives more funding per-pupil than its neighboring districts. In FY2018, the district received $15,000 per student (all sources) compared to an average of $10,225 per student across other Genesee County districts. Much of this additional funding pays for additional services (instructional and non-instructional) to meet the educational needs of students deemed at-risk of academic failure and those with disabilities. 

On the spending side, added costs associated with special education obligations contribute to a structural strain on the general fund. The district enrolls a disproportionate share of the county’s students with special needs. Over 90 percent of FCS students are economically disadvantaged while about 21 percent of students qualify for special education services; this compares with 60 percent and 14 percent, respectively, across all other districts in the county. The Flint water crisis, which left an unknown number of children with a range of learning problems due to lead poisoning, has only increased the demand for special ed. 

Providing required services to students with disabilities stresses the general fund budget because dedicated funding (federal, state, and local combined) is not sufficient to cover the full cost. As a result, FCS has to designate dollars from its general fund budget, pulling resources out of general education classrooms. For districts with large concentrations of students with disabilities (like Flint), proportionately more general fund resources are required to meet the state’s special education mandate.

Converting operating deficits to long-term debt

The improvement seen in the general fund operating balance sheet occurred only on paper. It was not the result of real, lasting operational changes to bring in more revenue or cut expenses. Instead, improvements resulted from converting the accumulated deficit to a number of long-term liabilities, requiring annual repayments over a number of years.

The delinquent teacher retirement and unemployment bills owed to the State of Michigan were converted to long-term debts beginning in 2015. In 2017, the district issued $19.3 million in long-term bonds, using the proceeds to liquidate its accumulated deficit and provide working capital for the year. The debt service (principal and interest) on these bonds will be $1.8 million this year, payable from its per-pupil state aid. The annual debt payment is equal to $475 per-pupil, money that would otherwise go to pay for current expenses. As enrollment continues to shrink, the per-pupil expense will rise.The bonds are scheduled to be repaid in 2029. 

Other Michigan districts have converted their accumulated operating deficits into long-term debt as a way to improve their operating balance sheet. This tactic, however, merely changes the nature of the liability from short-term to long-term. It may help with cash flow in the coming year (spread out payments over a number of years), but if not accompanied by operational changes – staffing reductions, increased facility utilization, other efficiencies – then future students will largely bear the brunt of past financial decisions. This was a tactic regularly used by the former Detroit Public Schools, before the state stepped in and enacted a suite of more permanent financial and governance reforms in 2016.   

Possible state responses

The district is struggling academically and has been for some time. Its 12 schools are some of the worst performing in the state. To address the academic challenges, the district is working closely with a number of community partners, including the Department of Education, through a partnership agreement. This plan lays out clear, targeted academic improvements to be achieved after 18 and 36 months, but is silent as to the financial problems. The efficacy of this effort, along with any other educational initiative undertaken, will be tied to the health of the district’s finances.

Is anything being done at the state level? Not really. As things stand today, there is no plan to address the financial challenges of the district. A deficit elimination plan has been submitted to state officials and is under review. The state has not signaled what financial assistance, if any, it is willing to provide. In the past, Treasury has provided emergency loans to help districts bridge short-term financing gaps; however, the statutory authorization for such loans expired in September 2018. Further, a short-term loan would not address the fundamental problems of declining enrollment and escalating special education expenses. These require a long-term solution.

Earlier this summer, the Whitmer administration proposed closing two Benton Harbor high schools as a solution to address the district’s escalating debts and failing academics. Following considerable community pushback to the plan, the state retreated from its original approach and has since engaged stakeholders to form an advisory committee to come up with a debt-reduction plan and academic strategies to address the district’s challenges. 

As we discussed in our earlier analysis of Benton Harbor’s problems, the state’s options are limited and none of them are pretty – do nothing, dissolve the district, or employ the state’s emergency manager law. Flint does not meet all the triggers for forced dissolution, so that is off the table. Doing nothing risks serious disruptions to student learning, while emergency management represents a heavy-handed approach that was abandoned in Benton Harbor’s case. And because the situation there remains unresolved, it does not offer a template for Flint. 

While there is much uncertainty with Flint’s situation, one thing is apparent – Michigan lacks a clear and consistent policy for dealing with near-fiscally insolvent school districts.

 

NOTE: This post was updated on Monday, November 25 with the preliminary official fall 2019 student count (3,725 students) and the associated budgetary effects of the year-over-year student decline.

Photo Credit:
Sarah Razak / Creative Commons

From Benton Harbor to Flint; State Officials Confront Another Failing Urban School District with no Clear Policy

In a Nutshell

  • Flint schools face a $5 million structural operating deficit and mounting long-term liabilities
  • Declining enrollment combined with postponing difficult fiscal decisions are primary causes of the district’s problems
  • The state will likely to have to step in with assistance, but currently lacks a clear policy position for dealing with struggling districts

Yet another urban, majority-minority public school district is facing difficult financial decisions, and the state government has not settled on a policy for dealing with it. After addressing Detroit a few years ago, and Benton Harbor this past summer, education policymakers now turn to Flint. These three districts will not be the last to struggle with the consequences of declining enrollment and fiscal mismanagement. How the state responds matters, not only for Flint, but for those that follow. 

After liquidating its previous operating deficit in 2016, Flint Community Schools (FCS) is back in financial trouble; overspending last year’s $67 million budget by $4.9 million and starting the 2019-20 school year with another budget shortfall. A growing operating deficit, combined with mounting long-term obligations, spells financial trouble for a district still grappling to overcome the health, social, and economic challenges arising from the Flint water crisis. 

Addressing the district’s fiscal challenges will likely require some form of state assistance, as was the case just three years ago (more on that below). What form that assistance will take is unknown, but further hemorrhaging of student enrollment and a looming cash crunch will require the state’s attention sooner rather than later for the district to remain solvent. For its part, the district is considering closing a number of schools as part of its deficit elimination plan.

Ongoing operating deficits

So how did they get here? For eight of the last nine years, FCS has failed to match spending with available revenue, leading to a general fund operating deficit. The only exception was Fiscal Year (FY)2015 when FCS barely managed to balance its budget. Another operating deficit is projected for FY2020. Over this period, annual deficits have ranged from less than $100,000 to over $15 million, with an average deficit of $6 million (bars in chart below). The district is dealing with a structural deficit of at least $5 million based on last year’s spending.

Source:  Flint Community Schools Annual Financial Reports

Structural problems can be found on both sides – revenue and spending – of the district’s general fund ledger. Enrollment is the basis for school funding in Michigan and it has been declining in Flint for decades. Job loss has led to population decline in the city, and the water crisis dealt another crippling blow. Combine this with competition for students (just 28 percent of the 14,500 flint residents attend FCS schools), including a new charter school in the city that will enroll hundreds of former Flint students and capture the per-pupil funding they bring, and the enrollment decline is startling; falling from 16,825 students at the beginning of the 2010 school year to 4,245 students for the 2018 school year (74 percent). The fall 2019 student count was recently reported as 3,725 students, 13 percent less than last fall, amounting to a revenue loss of $4.4 million. 

Commensurate with this decline, general fund revenue fell from $207 million in FY2011 to $67 million in FY2019. Managing school finances in the face of sizeable annual enrollment declines is challenging. Given the magnitude of the financial losses, Flint’s elected and appointed school officials have been unable to cut expenses fast enough, contributing to the structural deficit.

Annual operating deficits can be addressed with the use of reserves or other transfers, if available. If unavailable, however, deficits accumulate, meaning vendors and others go unpaid. The district skipped paying what it owed to the state, including its contribution obligations to the state-run teacher retirement system and unemployment insurance premiums. It racked up nearly $15 million in outstanding bills by the end of FY2014, before agreeing to a repayment plan requiring monthly installments from its current operating revenues.

Flint had an accumulated deficit of $22 million (line in chart above) at the end of FY2014. District officials slowly chipped away at it over the following few years, eliminating the deficit at the end of FY2016 and posting a slight positive general fund balance and maintaining it through FY2018. But this was only accomplished by moving a sizeable amount of the district’s operating obligations off its balance sheet and converting them to long-term debt. 

It must be noted that the deficits occurred despite the fact that FCS receives more funding per-pupil than its neighboring districts. In FY2018, the district received $15,000 per student (all sources) compared to an average of $10,225 per student across other Genesee County districts. Much of this additional funding pays for additional services (instructional and non-instructional) to meet the educational needs of students deemed at-risk of academic failure and those with disabilities. 

On the spending side, added costs associated with special education obligations contribute to a structural strain on the general fund. The district enrolls a disproportionate share of the county’s students with special needs. Over 90 percent of FCS students are economically disadvantaged while about 21 percent of students qualify for special education services; this compares with 60 percent and 14 percent, respectively, across all other districts in the county. The Flint water crisis, which left an unknown number of children with a range of learning problems due to lead poisoning, has only increased the demand for special ed. 

Providing required services to students with disabilities stresses the general fund budget because dedicated funding (federal, state, and local combined) is not sufficient to cover the full cost. As a result, FCS has to designate dollars from its general fund budget, pulling resources out of general education classrooms. For districts with large concentrations of students with disabilities (like Flint), proportionately more general fund resources are required to meet the state’s special education mandate.

Converting operating deficits to long-term debt

The improvement seen in the general fund operating balance sheet occurred only on paper. It was not the result of real, lasting operational changes to bring in more revenue or cut expenses. Instead, improvements resulted from converting the accumulated deficit to a number of long-term liabilities, requiring annual repayments over a number of years.

The delinquent teacher retirement and unemployment bills owed to the State of Michigan were converted to long-term debts beginning in 2015. In 2017, the district issued $19.3 million in long-term bonds, using the proceeds to liquidate its accumulated deficit and provide working capital for the year. The debt service (principal and interest) on these bonds will be $1.8 million this year, payable from its per-pupil state aid. The annual debt payment is equal to $475 per-pupil, money that would otherwise go to pay for current expenses. As enrollment continues to shrink, the per-pupil expense will rise.The bonds are scheduled to be repaid in 2029. 

Other Michigan districts have converted their accumulated operating deficits into long-term debt as a way to improve their operating balance sheet. This tactic, however, merely changes the nature of the liability from short-term to long-term. It may help with cash flow in the coming year (spread out payments over a number of years), but if not accompanied by operational changes – staffing reductions, increased facility utilization, other efficiencies – then future students will largely bear the brunt of past financial decisions. This was a tactic regularly used by the former Detroit Public Schools, before the state stepped in and enacted a suite of more permanent financial and governance reforms in 2016.   

Possible state responses

The district is struggling academically and has been for some time. Its 12 schools are some of the worst performing in the state. To address the academic challenges, the district is working closely with a number of community partners, including the Department of Education, through a partnership agreement. This plan lays out clear, targeted academic improvements to be achieved after 18 and 36 months, but is silent as to the financial problems. The efficacy of this effort, along with any other educational initiative undertaken, will be tied to the health of the district’s finances.

Is anything being done at the state level? Not really. As things stand today, there is no plan to address the financial challenges of the district. A deficit elimination plan has been submitted to state officials and is under review. The state has not signaled what financial assistance, if any, it is willing to provide. In the past, Treasury has provided emergency loans to help districts bridge short-term financing gaps; however, the statutory authorization for such loans expired in September 2018. Further, a short-term loan would not address the fundamental problems of declining enrollment and escalating special education expenses. These require a long-term solution.

Earlier this summer, the Whitmer administration proposed closing two Benton Harbor high schools as a solution to address the district’s escalating debts and failing academics. Following considerable community pushback to the plan, the state retreated from its original approach and has since engaged stakeholders to form an advisory committee to come up with a debt-reduction plan and academic strategies to address the district’s challenges. 

As we discussed in our earlier analysis of Benton Harbor’s problems, the state’s options are limited and none of them are pretty – do nothing, dissolve the district, or employ the state’s emergency manager law. Flint does not meet all the triggers for forced dissolution, so that is off the table. Doing nothing risks serious disruptions to student learning, while emergency management represents a heavy-handed approach that was abandoned in Benton Harbor’s case. And because the situation there remains unresolved, it does not offer a template for Flint. 

While there is much uncertainty with Flint’s situation, one thing is apparent – Michigan lacks a clear and consistent policy for dealing with near-fiscally insolvent school districts.

 

NOTE: This post was updated on Monday, November 25 with the preliminary official fall 2019 student count (3,725 students) and the associated budgetary effects of the year-over-year student decline.

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