[00:00:00] Isabel Lohman: Hello and welcome to Facts Matter, a podcast by Citizens Research Council of Michigan. I’m Isabel Loman, and I’m the education reporter at Bridge Michigan. We’re a non profit, non partisan newsroom covering the state. I cover everything from pre K to higher ed, and sometimes that even means covering contentious school board meetings where leaders are facing tough decisions.

Today, I’m guest hosting the Facts Matter podcast with Craig Thiel, Research Director at the Citizens Research Council. Hi, Craig.

[00:00:28] Craig Thiel: Good morning.

[00:00:29] Isabel Lohman: How are you?

[00:00:30] Craig Thiel: I’m doing great.

[00:00:33] Isabel Lohman: Great. So you’ve been doing a lot of math recently about school finances. Big picture. We know federal pandemic relief funds are ending.

We know some districts are facing a declining enrollment. Big picture. What can we expect from school district budgets next year?

[00:00:50] Craig Thiel: Right. So you hit on two of the biggest trends in school finance right now. The federal government stepped in with large amounts of resources sent those directly to districts to help navigate the pandemic and its aftermath.

The largest Pot of money that came to districts back in April of 2021 had a spending deadline of September 2024, which is right around the corner. And at the same time that districts have seen. Massive sums of federal resources, as well as some serious increases in their state funding, they’ve been experiencing declining enrollment.

In other words, the number of students enrolled in our public schools across the state has been continuously declining. These effects have been variable. Some districts have have had greater losses of students year over year than others, but the general trend has been declining enrollment. And that’s important because money is allocated to school districts based on the number of students who are, who are enrolled.

So the ending of this federal Resources and the declining enrollment really brings together two financial challenges for school districts that are going to force some tough decisions about resizing their budgets. School districts have to have balanced budgets. They have to be in place by June 30th every year.

So we’re in the moment right now when school districts are looking forward to the end of this. Federal funding accounting for the loss of students over this period of the last three years and are really going to have to pull together their budgets to make sure that their spending doesn’t exceed the amount of revenues that they have at their disposal.

So tough decisions on the horizon.

[00:02:54] Isabel Lohman: You mentioned tough decisions. I live in Ann Arbor. When I’m driving around, I sometimes see a lawn sign that says support Ann Arbor teachers. That district’s going through a lot right now. They’re trying to make about 25 million in cuts for next year. Are they unique in that way?

[00:03:12] Craig Thiel: I think in terms of scale, they might be unique. But we recently did an analysis to look at what has happened with the federal resources that we talked about here. And it’s not surprising. A lot of districts use those resources to grow their staffing ranks. The problem is those individuals have been hired probably with the thinking that They’re going to be full time long term employees of the district and the budget realities are that the money won’t be available.

So now districts are faced with having these hard decisions about staffing levels in Ann Arbor. Our our analysis showed that over the last four years since the right before the pandemic, school districts in the state are, I’m sorry, Ann Arbor had grown. It’s teaching ranks by about 6%. At the same time, the number of students enrolled in the district declined by 6%.

Generally speaking staffing levels, Follow student enrollments long term trends are if there’s fewer students in a school district, they need fewer staff to provide the various services that K through 12 schools provide. So, there’s really been this kind of mismatch in these two major trends and the fiscal realities are that when the federal resources go away a lot of these positions will have to be eliminated.

[00:04:41] Isabel Lohman: So we talk about the potential for positions having to be eliminated. At the same time, when I talk to district leaders across the board, whether we’re having a finance story or school mental health story, they say that these extra people have been helpful to students in a time that no other student has experienced with these pandemic, all the things that came with pandemic, you know, your disrupted routines, your heightened mental health concerns, more contact tracing, all of these sorts of things.

Is there any sort of solution for districts To make these cuts without having to make personnel cuts.

[00:05:12] Craig Thiel: Yeah, K through 12 districts are largely in the business of employing people. So most of their budgets are tied up with people costs and that’s salaries. And a big piece is also the benefits that school employees receive from their employers.

So on balance about 50 percent of budgets are spent on actual staff salaries and another 20 to 30 percent are spent on their benefits. So when you add those 2 pieces together, about 4 of every 5 that a school district spends is actually on people. And as you mentioned, those people are spread across.

A variety of programs everything from what we think of as traditional you know, classroom instruction to aides that are helping a classroom teacher to nurses, physical therapists, reading specialists, counselors you know, school districts employ a number of different professionals in different industries to deliver the services.

And Over the pandemic, yes, a lot of hiring in what might be considered non traditional positions in districts happened because of the wide ranging impacts of the pandemic on students both learning and then their physical and mental health and schools have stepped up. The end of the Federal dollars doesn’t mean that those programs have to end.

The decisions about those programs could be that we’re going to keep those programs because that’s what parents and kids need in this moment and that they’ll have to you know, make adjustments elsewhere. And what that looks like is going to vary district to district. But The fiscal realities are there’s going to be fewer dollars available.

It’s going to be incumbent on districts to prioritize those dollars going forward.

[00:07:07] Isabel Lohman: It sounds like, when a family is making a budget, obviously it’s a much smaller scale here, right? But you’ve got your pros and your cons. You’ve got the things you have to have on the table and some things that you might have to pull off if you just can’t make it work, what do we know about district savings accounts?

We’re hearing a lot about fund balances right now. What do we know? Are they in a healthy spot?

[00:07:26] Craig Thiel: Well, if there’s one silver lining here with the end of the federal money that districts are going to have available to kind of program into their operating budgets and this declining enrollment trend is that districts have been shoring up their savings accounts during this Period since the pandemic hit our research suggests that the flexibility and the wide discretion that districts had in programming these federal dollars allowed them to substitute spending that would have Occurred from their general fund resources to shift over to these federal resources and then put some of those general fund dollars, those discretionary dollars into their rainy day accounts and, and savings accounts across the state.

Number of districts that have grown their reserves as a percent of their revenue is substantial. Before the pandemic, if I could just share some statistics we have, before the pandemic, just under 50 percent of school districts in the state had At least 15 percent of their revenues in reserve. So, in other words, about and 15 percent is generally considered kind of a best practice from financial management standpoint. It would be about 2 months worth of their operating expenditures in reserve. The most recent data for 2023 about 75 percent of districts now have at least 15% of their revenue in reserve.

So, the fact that they have these savings accounts and amount of money in reserve can help kind of navigate the transition from having a lot of this federal money to not having a lot of this federal money in kind of a short period of time. So we would expect districts are gonna lean in to their fund balances to get to the right sized budget that they need to have on a going forward basis.

[00:09:40] Isabel Lohman: You mentioned right sizing and the fact that enrollment plays a part in this too. You recently did a podcast episode with Laurie Higgins at Chalkbeat Detroit and you talked a little bit about the potential for school closures. School closures, generally speaking, tend to not be popular in communities.

Are we anticipating that we’re going to see more school closures in the next year or even district consolidation in the next year or two?

[00:10:04] Craig Thiel: Right. So, and this is going to be a very localized occurrence. I mean, we can’t. say that every district’s going to manage through this at the same time in the same way.

But The reality is districts can only operate under enrolled school buildings for so long before it becomes infeasible. Schools have to provide certain levels of services. They have to keep the lights on. And as the number of students enrolled in those buildings declines, the cost per student increases.

Increases substantially. And eventually you get to the point where, a fifth grade class in one building with 20 kids is contrasted with a fifth day. in another building at 20 kids, and it might be most economical to close one of those buildings, consolidate those classes to relieve of the high fixed costs that the under enrolled district or under enrolled schools are bearing.

So school closures have occurred as we’ve seen this declining enrollment. I think our numbers show that over the last 15 years or so school district traditional school districts have lost about 16 percent of their enrollment and they’ve closed about 12 percent of their operating buildings over this period of time.

So as this enrollment trend continues, we’d expect Some districts to be looking at, closing buildings, consolidating services into underutilized facilities

[00:11:39] Isabel Lohman: for sure. And I know the state has also put money aside for districts to consider consolidation last. I checked on that data. It did not seem like districts were particularly interested in those funds when you’re thinking about the future of Michigan schools.

One thing that I was thinking about, I was looking at some of the data that Ann Arbor is sharing with its community, and one thing that they showed is different simulations for how the district could go about making these cuts, and in it, they say, we have some assumptions here, right? They talk about what they assume their enrollment is going to be.

They talk about what they assume their state revenue is going to be. What can we expect from the state in the next couple of years? What seems realistic to see in the state budget?

[00:12:18] Craig Thiel: Right, so the state budget’s going to kind of settle back into what we consider a normal at least the K through 12 budget, kind of a normal growth scenario.

The last few years, there have been substantial revenue growth year over year. That growth has Resulted in substantial state budget surpluses. And then the budget has been Lansing officials have been appropriating those surpluses as one time resources to districts to build up programs. Going forward, the state really is going to be looking at what I would say is inflationary revenue growth.

And so the state budget is probably going to be looking at funding those core items that districts rely on. So the foundation allowance funding for economically disadvantaged students, special ed students, and many of the other programs that have seen funding increases or new funding allocated over the last 3 years.

We won’t see much of that anymore. As far as the state’s role going forward outside of funding, the state has a role in monitoring the fiscal health of school districts. So, as districts unwind these federal resources and cope with the declining enrollment trends, if their budgets start to show Challenges and school districts are adopting or getting into deficit situations.

The state has a series of programs to step in to alert district officials that these are problems that need to be addressed. With the final backstop being some form of state intervention. But you know, the, the policy is for districts to to do their best to manage their finances. State oversight will step in when challenges develop forcing officials to make some of the tough decisions that they might have been read it reticent to to make before the state stepped in.

[00:14:25] Isabel Lohman: You mentioned the state stepping in before we get their parents and community members can also step in. If you’ve got a parent or community member who wants to make sure their local district budget is in a good spot, or maybe they see what’s happening in Ann Arbor. And they’re like, I never want that to happen to my district.

What do you recommend that everyday folks do to look at their budgets? Is there something that they should be looking out for? Is there something they should be asking their principals or superintendents? What can everyday folks do to understand school budgets better?

[00:14:52] Craig Thiel: Well, schools are required to show us their math so they have to have their budget math posted on their websites and it’s right there on their, the landing page.

So parents and, and families can go and pull down their district’s current budget. As well as budgets for past years, the financial reports, which are kind of the accounting of those budgets. And then School boards have to have a public hearing where they present the budget and adopt the budget.

As I mentioned earlier, that’s happening right now in the springtime. So, getting engaged in your local school board meetings. If they have a separate finance committee or budget committee that’s working up a proposal for the full board those should be public meetings as well and parents should attend those warning flags for districts high level are, you know, what’s happening to your enrollment and your staffing?

Are they going in opposite directions? Are they going in in similar directions? If they’re going in opposite directions, that might signal some challenges on the horizon. If districts are relying on their You know, rainy day funds to kind of support their ongoing operations. That’s a concern as well.

Those rainy day funds can be used to kind of transition to a new budget norm, but they, they’re not designed to be there to support ongoing programming in a district because when those one time resources run out then, we’re faced with these decisions we were talking about cutting staff and whatnot.

Looking at what’s happening outside of staffing and in buildings we talked about under enrolled buildings and we have a lot of small school districts in the state of Michigan that operate a single elementary school, a single middle school and a single high school, in those instances, it’s really hard to think about school building closures.

But service sharing is another option that’s available to districts working with neighboring districts for maybe some of the behind the classroom work, whether it’s business services, transportation services, food services. Those are signals that school districts are taking the financial challenges they face seriously if they’re going in that route.

There’s a lot available to districts to, to manage through these challenges. They often come with trade offs, as you’ve mentioned but they should be responding to the priorities of their constituency, the students and the families in their community to see what is of the highest priority and should get the first dollar funded in a budget versus what’s, you Further down the list of priorities

[00:17:43] Isabel Lohman: for sure.

It sounds like there’s, there’s, of course, a bunch of trade offs. Districts aren’t new to a budget that they have to figure out. They have to do this every single year, sometimes with my friends when I’m trying to explain a complicated story to them. I say, okay, give me 30 seconds, 60 seconds or 90 seconds.

So, if I had to sum this up in 30 seconds, correct me if I’m wrong. We’ve got school districts making their budgets. Some school districts have enrollment losses. We also have declining birth rates. Every school district is dealing with the fact that the federal pandemic funds are ending. But at the same time, some of those districts may be short up their rainy day balances better than others.

And those districts might be in a better position to not have to make as many cuts from year to year as we get there. Is that right?

[00:18:26] Craig Thiel: That’s right. The only comment I would add is the federal resources, while they’re dried up, some districts have program those for for ongoing costs, and those are the districts are really going to have a challenge with their budget when the spending deadline hits for those districts that allocated their resources to more one time programming whether that’s services to students or facility upgrades or equipment and curricula purchases, the unwinding of the federal dollars won’t be as painful because they program those dollars for one time purposes.

Uses so, there’s not going to be a not every district is going to have the same experience here. It’s really going to tie back to how did they program those resources over the last 3 years? Have they been thinking about this? Every district was aware that The funding came with the deadline of September 2024.

So that shouldn’t be a surprise to anyone

[00:19:27] Isabel Lohman: for sure. Well, Craig, I know you and I will continue to be looking for surprises, whether that’s a budget that’s super sound or a budget that has some questions or community members are asking questions, but it sounds like we’re coming into a really interesting time to see what happens in Michigan schools.

Well, thank you for doing this conversation with me. I appreciate it. Again, I am Isabel Lohman. I’m with Bridge Michigan, and I’ve been speaking with Craig Thiel with the Citizens Research Council of Michigan. You can find them online at crcmich. org and on Twitter at crcmich. This is Facts Matter, a podcast presentation of the Citizens Research Council.