In a nutshell:
- After years of fiscal distress and state intervention, Detroit Public Schools Community District’s financial status has improved considerably following the state-directed re-structuring in 2016.
- The district’s recent annual financial report reveals five years of balanced budgets, steady growth in its reserves, and continued on-time debt repayment.
- Additionally, it will receive over $800 million in one-time federal relief funds, much of which will be used to finance facility improvements in the coming years and meet increased operational costs arising from the pandemic.
For nearly two decades, plummeting student enrollment combined with financial mismanagement led to fiscal distress and nearly continuous direct state intervention in the daily governance, management, and operation of Detroit Public Schools. However, following a major restructuring of the debt-plagued district and a state-financed $600-million bailout in 2016, the financial picture of the city’s public schools has improved steadily. A progression we have monitored and analyzed since the new Detroit Public Schools Community District (DPSCD) began operations.
Key indicators of DPSCD’s improving financial health can be found in its most recent financial report, notably balanced budgets, growing year-end reserves, and a healthy cash position. Importantly, the improvements to date have occurred largely without the assistance of the latest wave of federal COVID relief funding; the district is set to receive $800 million. These funds will be a critical piece of DPSCD’s upcoming fiscal strategy and employed to address long-standing facility needs and operational expenses associated with the pandemic.
These improvements have not gone unnoticed. The district met a number of required financial benchmarks to allow the Detroit Financial Review Commission in December to renew a waiver to exempt DPSCD from direct, day-to-day financial and operational oversight. This is the state oversight body tasked with monitoring the district’s solvency after its re-structuring and it is the second year in a row that the waiver has been granted.
Balanced Budgets and Steady Reserves
Without a doubt, a major cause of Detroit Public School’s past financial problems was large annual budget deficits. As the district lost students (and funding) at a breakneck pace, it was unable to reduce its spending commensurately. Year after year, the district was unable to maintain balance between ongoing revenues and expenditures. This resulted in massive unpaid vendor bills and an accumulated operating deficit.
Years of overspending and operating deficits were only papered over when state officials allowed, and in some cases directed, the district to issue long-term debt to liquidate short-term operating debts. All this did was move the operating deficit to a long-term liability, forcing future students and taxpayers to pick up the costs of financing the past overspending.
This has not been a problem for the new Detroit Public Schools Community District. As the chart below summarizes, since its inception in the 2017 school year (July 1, 2016), the district has not overspent its available revenues over the last five years. Student enrollment grew from approximately 45,700 students in 2017 to nearly 51,000 students in 2020, before dropping slightly in 2021 (49,000 students) due to the impact of the pandemic. Regaining pre-pandemic enrollment levels will be key to on-going fiscal stability.
DPSCD Revenue and Expenditures, Fiscal Years 2017 to 2021
Source: Detroit Public Schools Community District, Annual Financial Report
Building off of its recent history of balanced operating budgets, DPSCD has been able to amass $216 million in year-end reserves according to its most recent financial audit. As of June 30, 2021, the district had approximately $100 million in unassigned General Fund reserves (this includes nearly $38 million in a “Rainy Day” account). The General Fund is used for day-to-day operations of the district.
Additionally, DPSCD recorded $113 million in reserves in its capital projects account; money that will be used to address the physical condition needs of over 100 schools housed in 12 million square feet of building space.
The chart below highlights the stark improvements in the year-end fund balance relative to its condition in the years before the state bailout. The $250 million accumulated budget deficit reported in 2016 was retained by the “old” district (DPS) and is currently being repaid from a portion of the $617 million provided by the State of Michigan. The chart also shows (blue line in chart) that the district has maintained sufficient reserves to cover approximately 10 percent of its annual operating expenditures, a relatively healthy amount by governmental financial management standards.
DPSCD General Fund Reserves, Fiscal Years 2017 to 2021
Source: Detroit Public Schools Community District, Annual Financial Report
DPSCD Uses Operating Reserves to Address Facility Needs and Limit Debt Burden
A facilities assessment conducted in 2018 identified over $500 million in immediate capital needs with the potential of these costs growing to $1.5 billion by 2023 if unaddressed. To date, DPSCD has not engaged in any long-term capital financing to address its unmet facility needs. The district has access to the capital markets and state qualification just like any other school district in the state. But, instead of borrowing and going into debt, it has used some of its operating funds and reserves to finance investments in its physical stock.
Through transfers from its General Fund reserves, including $80 million for 2021, the district has stockpiled $113 million for capital needs according to the 2021 audit. Much of these dollars will be used in 2022 to cover various planned improvements according to plans shared with the Financial Review Commission in December. The district also plans to leverage these funds with a substantial portion of federal COVID relief dollars towards improving facilities.
A separate entity from DPSCD, Detroit Public Schools continues to exist for the sole purpose of levying school taxes to pay off various long-term obligations. This includes multiple full faith and credit general obligation bonds issued for capital improvements ($1.5 billion outstanding as of June 30, 2021), as well as notes payable to refinance short-term cash flow notes into long-term payables ($220 million outstanding as of June 30, 2021). Other long-term obligations include legacy retirement obligations ($55 million outstanding as of June 30, 2021) and amounts due to the School Loan Revolving Fund ($96 million outstanding as of June 30, 2021). In total, the district’s long-term obligations are $1.8 billion.
Annual debt service payments for these obligations are financed from various local tax levies, as well as state borrowing from the School Loan Revolving Fund. Obligations are scheduled to be repaid at different future dates. Notably, the district revealed in December that it will be able to retire its operating debt in 2026, one year earlier than scheduled under the 2016 state bailout legislation. Annual debt service payments for the operating debt is financed by the local school operating property tax; when this debt is repaid the tax proceeds will go back into school operations.
COVID Uncertainty Still Remains
The main public school district in the City of Detroit, DPSCD, is on a stable and improving financial foundation. The district’s recent financial report provides evidence of the progress made since the 2016 state legislation was enacted to provide DPSCD with a “clean slate”. It has balanced all of its budgets over the past five years and continued to build up its reserves. This is in marked contrast from almost a decade of chronic budget deficits and staggering debt accumulation.
Meanwhile, the “old” Detroit Public Schools that was left intact to repay various legacy debts has met all its financial obligations. In fact, DPS is scheduled to retire some debts earlier than expected.
These financial improvements, while welcomed, are set against a backdrop of continued COVID uncertainty. Uncertainty surrounds the path the virus will take and how that path will impact DPSCD’s ability and success in delivering K-12 services to nearly 50,000 students. Adjusting to the academic challenges that the pandemic presents the district, at least the financial expenses that come with them, will be financed in large measure by the $800 million in one-time federal relief dollars the district has been allocated. In setting up these pandemic and post-pandemic spending plans, DPSCD should not lose sight of the stable financial footing it has built for itself over the past five years.
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