In a nutshell

• A 2013 state law authorized state officials to dissolve local school districts for financial reasons.
• Two districts, Buena Vista and Inkster, were dissolved in 2013 – creating the need for a state-financed bailout of the districts’ debts. The state cleared Buena Vista’s outstanding debts in 2016, leaving just Inkster’s debts outstanding.
• In December, the state provided a $8.2 million payment toward Inkster’s legacy debts, bringing it closer to the final chapter in the school dissolution policy.

We’ll give you a pass if you missed this item buried in the behemoth $1.3 billion state spending bill approved on the last day of the Michigan Legislature’s lame duck session: $8.2 million towards repaying the legacy debts of the Inkster School District. The appropriation moves the state closer to ending its role in dissolving two local school districts under a 2013 state law – a policy decision borne out of political expediency more than anything else.

Avoiding Emergency Management

In late Spring 2013, as the school year was wrapping up, state officials hastily enacted a law to allow the Superintendent of Public Instruction and Treasurer to dissolve local school districts not deemed “financially viable.” The ink on the new law was barely dry when Superintendent Mike Flanagan and Treasurer Andy Dillon conferred and determined that two districts, Buena Vista in Saginaw County and Inkster in Wayne County, would be dissolved before the start of the 2013-14 school year. Both districts had long histories of incurring annual budget deficits; they had accumulated operating debts of $3 million and $13 million, respectively.

Until 2013, the state’s primary mechanism for dealing with local government fiscal emergencies was Public Act 436 of 2012, the emergency manager law. At the time, four school districts were operating under this law (Detroit, Muskegon Heights, Highland Park, and Pontiac). State officials did not have the appetite to bring two more districts under this degree of state control, and sought another policy response.

The new dissolution law, Public Act 96 of 2013, allowed state officials to bypass the deliberative processes outlined in the emergency manager law and deal with troubled school districts much more expeditiously, by immediately closing all of a district’s schools, assigning its students to other nearby districts, and leaving the “old” district in place not to educate students, but solely to levy authorized taxes to repay debts.

Speeding up the State Bailout

Unlike the emergency manager law, district dissolution provides a direct, although fairly complicated, mechanism to supply districts with additional resources for dealing with their financial problems. It does so by allowing districts to use their local school operating taxes to repay debts instead of using these funds to educate students. Because students in the dissolved district attend other schools, local funding is no longer needed to provide educational services. To make sure per-pupil funding is maintained, the redirected local tax dollars are replaced, dollar-for-dollar, with additional state School Aid Fund resources provided to the districts that enroll students from the dissolved one.

Using the School Aid Fund this way means the state effectively finances the dissolved district’s debts. Meanwhile, the local operating tax is redirected to debt repayment until all debts are repaid, which can take years.

In the case of the Inkster School District, the local property tax generates about $1 million per year. Given the district’s total indebtedness of $13 million in 2013, it was estimated at the time that it would take until at least 2043 to liquidate it all (including interest on state emergency loans issued to the district).  Repayment was sped up when the Michigan Legislature approved a $8.2 million appropriation in December 2018, rather than wait for the local tax dollars to roll in over the coming years. The state was forced to take a similar step in 2016 to resolve the remaining $700,000 of Buena Vista School District’s debt after local taxpayers voted to not reauthorize the school property tax used for debt repayment.

Lessons Learned

The state’s decision to clear these debts in Inkster brings to a close this particular exercise. While the dissolution law remains on the books, the state has not used it since. Two other districts dealing with financial emergencies around the same time, Pontiac and Benton Harbor, went through the emergency management law. The dissolution law’s basic mechanics would later be used to fashion the state’s “old co./new co.” model employed with the Detroit Public Schools financial bailout in 2016.

Was dissolution a success? Hard to say.

From a financial perspective, existing options to address the districts’ problems were limited when the new policy was adopted. The emergency manager law did not allow for additional local taxes or provide state funding for financial crises. The dissolution law, on the other hand, provides a state-funded mechanism to pay off debts. This relieves local taxpayers of that obligation, but shifts the burden to taxpayers throughout the state.

While the state’s original plan to use the local school operating tax to repay debts worked for a time, the plan had to be abandoned in both Buena Vista and Inkster. In the end, the state had to ante up to settle the debts. However, local taxpayers remain on the hook for retiring bonded debt, even after their school district stopped teaching students and the state emptied its schools.

From a student’s perspective, school closure does not guarantee that a student will land in a school with a significantly better track record, financially or academically, than their former district. In fact, many Inkster students found themselves assigned to a school in another deficit district. Also, students’ emotional and social ties with their school community were severed by the state’s dissolution policy.

Dissolving any community institution is a serious matter that should not be taken lightly. In 2013, state officials raced into a decision to close two majority-minority school districts for financial reasons. They did so without seeking either approval or input from the local communities affected. While the policy was partially successful from a financial perspective, it came at a great expense to students and their families in Buena Vista and Inkster. It is unclear if the state will employ its school dissolution powers again, but it should learn from the experiences in these two districts before it does.