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July 11, 2019

What's Next for the Financial Crisis in Benton Harbor Schools

In a nutshell

  • Benton Harbor schools and State of Michigan are at an impasse over the current financial crisis
  • State options range from doing nothing (not likely) to emergency management
  • The district’s unique situation may call for different, new state approach to address the academic and fiscal failures plaguing the district’s students

When Benton Harbor students began their summer break in early June, the future of the district’s two high schools was in limbo. The uncertainty originated from Governor Whitmer’s unexpected proposal in late May to close the schools in the fall of 2020 and convert to a K-8-only district as a way to address the persistent financial and academic crises plaguing the small southwest Michigan district. 

While most students are on summer vacation, school officials and community leaders continue to work toward an acceptable plan to ensure them a more promising future.

Since late May, two state-initiated plans, plus a counterproposal offered by the district, have been considered. The most recent plan, reportedly jointly developed by the state and the locally-elected school board, was rejected by the board at a July 2 special meeting. These events follow a June 14 decision by the district to turn down the state’s initial plan and offer its own proposal (which the state did not accept).

Benton Harbor’s problems, as formidable as they are, are not unique in the state. At least four other districts could be waiting in the wings for an agonizing financial workout with state officials. Even more affluent districts like Pinckney are wrestling with the financial struggles that accompany falling enrollment, although not to the degree Benton Harbor is. So the final resolution in southwest Michigan should be closely watched by administrators and financial managers across the state. 

Path Forward. What are the Options?

Given the current impasse, what are the state’s options to deal with Benton Harbor’s  ballooning financial challenges? We see three possible avenues: 1) do nothing; 2) re-engage the emergency manager law; or 3) initiate district dissolution. Each is designed to primarily focus on the financial side of the equation, as opposed to the core academic problems. None of them are pretty. 

First, the state could do nothing to help aid the district’s operating deficit (estimated at $4.6 million) or its long-term debts (about $12.1 million). The district would be left to both pay for current operations as well as liquidate the short- and long-term liabilities with the current funding it receives and under current timetables. The state would not step in with any financial assistance, either as debt restructuring or additional fiscal resources.

On the operations side, Michigan school funding is highly dependent on student enrollment and Benton Harbor has been steadily losing students for years. Between 2009 and 2019, enrollment fell more than 50 percent from 3,585 to 1,852 students. While some of this is related to demographics (shrinking school-age population statewide), far more is tied to students leaving the district for another public schooling option (nearly 65 percent of Benton Harbor residents attend school in another district in the 2019 school year). There is no sign this trend will reverse course. In fact, unresolved uncertainty surrounding the district’s future is only likely to exacerbate the trend for the upcoming school year, adding further fiscal pressure.

At the same time that operating revenue declines because of enrollment, the budget must finance the emergency loans ($11 million of total long-term debt) it received over the years. Loans were used to pay vendors and pay down the accumulated budget deficit. A number of these back-loaded loans (interest-only payments to date) require principal payments in 2020. Debt service payments will jump from $116 to $324 per pupil, drawing critical resources away from other priorities and further squeezing the 2020 operating budget.

Doing nothing is likely to lead to serious cash flow challenges and the likelihood of unpaid vendors and payless paydays in the coming year. In the past, the prospect of unpaid staff and vendors prompted the state to step in with an emergency loan; however, the state’s authority to issue new loans to schools under the Emergency Municipal Loan Act expired in 2018. Thus, there is no state financial backstop.  

Teachers are not likely to show up for work if they are not paid. Student learning will be the biggest casualty if the state decides to do nothing for Benton Harbor. If state and local decision makers are truly concerned about Benton Harbor children and their futures, the option of doing nothing should not be pursued. 

A second option would be to re-engage the state’s emergency manager law (Public Act 436 of 2012). The irony of the state pursuing this approach would be the fact that Benton Harbor was released from state oversight under the emergency manager law by the Department of Treasury in November 2018. Presumably, it was the position of the State Treasurer at the time that a financial emergency no longer existed. It is unclear how to reconcile such a finding with the current financial situation facing the district.  

To proceed down this path, the State Superintendent of Public Instruction would have to initiate a preliminary review and ultimately the Governor would have to determine that a financial emergency exists in Benton Harbor. Upon such a finding, the law allows the local school board to choose the specific state intervention – consent agreement, emergency manager, neutral evaluation, or Chapter 9 bankruptcy. The district was under a consent agreement with the State of Michigan from September 2014 to November 2018. 

Clearly, the financial emergency was not solved under the previous consent agreement and it’s unclear whether an appointed emergency manager would have any more success. 

Besides tending to finances, the emergency manager must develop an education plan for the district. Such a plan could include one or more school closures or even converting all schools to charters, as was done in Muskegon Heights and Highland Park. The law’s bankruptcy option has not been pursued for a school district; in Michigan, it’s only been used for the city of Detroit’s largest-ever municipal bankruptcy. We considered the bankruptcy option for the Detroit Public Schools in 2016 and determined it accomplished little as it would have largely shifted the district’s debts to the state and other school districts in Michigan.

Finally, the state might consider completely dissolving Benton Harbor schools, an approach it took in 2013 for two debt-laden districts (Buena Vista and Inkster). Under dissolution, resident students would be assigned to other nearby districts. The district, would remain in place only as a legal entity, to repay all existing debts using the local school operating property tax. 

We sketched out the key triggers involved in the state’s dissolution law and Benton Harbor’s current financial position relative to them in an earlier blog. Our analysis suggests that the district satisfies all the conditions necessary for the state superintendent of public instruction and state treasurer to move forward with closing all Benton Harbor schools as soon as this fall. Given the timeline associated with the dissolution process, including the impact it would have on families and their ability to find alternatives before school starts, this option is likely off the table for the 2020 school year.  But, the state could pursue this approach the following year.

A New Approach

The State of Michigan, ultimately responsible for public K-12 education, must be equipped with the policy tools to deal with those circumstances when local school districts fail financially. To this end, the state government has developed specific policies to deal with financial failures (e.g., emergency management, school dissolution). These involve direct intervention in local school affairs, including the provision of state-appointed officials, the requirement to adopt certain “reform” models, and the loss of some control to manage and govern local schools.

None of the policy options laid out here are pretty. While each has been used previously with some success in other settings across the state, it is unclear they will work given the severity of the situation in Benton Harbor. A new approach is likely in the works for Benton Harbor, which may serve as a template for others in the near future. 

Research Director

About The Author

Craig Thiel

Research Director

Craig is the Research Council’s Research Director and primary researcher of education and school finance issues. Prior to becoming Research Director, Craig served as the Director of State Affairs and as a Senior Research Associate. During his graduate school studies, he worked for the Council as a Lent Upson-Loren Miller Fellow from 1993 to 1995. Before joining the Council in 2006, Craig worked for ten years as a fiscal analyst at both the Senate Fiscal Agency and the House Fiscal Agency. Before his time with the Michigan Legislature, Craig served as a Governor’s Management Intern in the Department of State, Office of Policy and Planning from 1995 to 1997. Craig began his working career with the United States Environmental Protection Agency in Chicago in 1991.

What's Next for the Financial Crisis in Benton Harbor Schools

In a nutshell

  • Benton Harbor schools and State of Michigan are at an impasse over the current financial crisis
  • State options range from doing nothing (not likely) to emergency management
  • The district’s unique situation may call for different, new state approach to address the academic and fiscal failures plaguing the district’s students

When Benton Harbor students began their summer break in early June, the future of the district’s two high schools was in limbo. The uncertainty originated from Governor Whitmer’s unexpected proposal in late May to close the schools in the fall of 2020 and convert to a K-8-only district as a way to address the persistent financial and academic crises plaguing the small southwest Michigan district. 

While most students are on summer vacation, school officials and community leaders continue to work toward an acceptable plan to ensure them a more promising future.

Since late May, two state-initiated plans, plus a counterproposal offered by the district, have been considered. The most recent plan, reportedly jointly developed by the state and the locally-elected school board, was rejected by the board at a July 2 special meeting. These events follow a June 14 decision by the district to turn down the state’s initial plan and offer its own proposal (which the state did not accept).

Benton Harbor’s problems, as formidable as they are, are not unique in the state. At least four other districts could be waiting in the wings for an agonizing financial workout with state officials. Even more affluent districts like Pinckney are wrestling with the financial struggles that accompany falling enrollment, although not to the degree Benton Harbor is. So the final resolution in southwest Michigan should be closely watched by administrators and financial managers across the state. 

Path Forward. What are the Options?

Given the current impasse, what are the state’s options to deal with Benton Harbor’s  ballooning financial challenges? We see three possible avenues: 1) do nothing; 2) re-engage the emergency manager law; or 3) initiate district dissolution. Each is designed to primarily focus on the financial side of the equation, as opposed to the core academic problems. None of them are pretty. 

First, the state could do nothing to help aid the district’s operating deficit (estimated at $4.6 million) or its long-term debts (about $12.1 million). The district would be left to both pay for current operations as well as liquidate the short- and long-term liabilities with the current funding it receives and under current timetables. The state would not step in with any financial assistance, either as debt restructuring or additional fiscal resources.

On the operations side, Michigan school funding is highly dependent on student enrollment and Benton Harbor has been steadily losing students for years. Between 2009 and 2019, enrollment fell more than 50 percent from 3,585 to 1,852 students. While some of this is related to demographics (shrinking school-age population statewide), far more is tied to students leaving the district for another public schooling option (nearly 65 percent of Benton Harbor residents attend school in another district in the 2019 school year). There is no sign this trend will reverse course. In fact, unresolved uncertainty surrounding the district’s future is only likely to exacerbate the trend for the upcoming school year, adding further fiscal pressure.

At the same time that operating revenue declines because of enrollment, the budget must finance the emergency loans ($11 million of total long-term debt) it received over the years. Loans were used to pay vendors and pay down the accumulated budget deficit. A number of these back-loaded loans (interest-only payments to date) require principal payments in 2020. Debt service payments will jump from $116 to $324 per pupil, drawing critical resources away from other priorities and further squeezing the 2020 operating budget.

Doing nothing is likely to lead to serious cash flow challenges and the likelihood of unpaid vendors and payless paydays in the coming year. In the past, the prospect of unpaid staff and vendors prompted the state to step in with an emergency loan; however, the state’s authority to issue new loans to schools under the Emergency Municipal Loan Act expired in 2018. Thus, there is no state financial backstop.  

Teachers are not likely to show up for work if they are not paid. Student learning will be the biggest casualty if the state decides to do nothing for Benton Harbor. If state and local decision makers are truly concerned about Benton Harbor children and their futures, the option of doing nothing should not be pursued. 

A second option would be to re-engage the state’s emergency manager law (Public Act 436 of 2012). The irony of the state pursuing this approach would be the fact that Benton Harbor was released from state oversight under the emergency manager law by the Department of Treasury in November 2018. Presumably, it was the position of the State Treasurer at the time that a financial emergency no longer existed. It is unclear how to reconcile such a finding with the current financial situation facing the district.  

To proceed down this path, the State Superintendent of Public Instruction would have to initiate a preliminary review and ultimately the Governor would have to determine that a financial emergency exists in Benton Harbor. Upon such a finding, the law allows the local school board to choose the specific state intervention – consent agreement, emergency manager, neutral evaluation, or Chapter 9 bankruptcy. The district was under a consent agreement with the State of Michigan from September 2014 to November 2018. 

Clearly, the financial emergency was not solved under the previous consent agreement and it’s unclear whether an appointed emergency manager would have any more success. 

Besides tending to finances, the emergency manager must develop an education plan for the district. Such a plan could include one or more school closures or even converting all schools to charters, as was done in Muskegon Heights and Highland Park. The law’s bankruptcy option has not been pursued for a school district; in Michigan, it’s only been used for the city of Detroit’s largest-ever municipal bankruptcy. We considered the bankruptcy option for the Detroit Public Schools in 2016 and determined it accomplished little as it would have largely shifted the district’s debts to the state and other school districts in Michigan.

Finally, the state might consider completely dissolving Benton Harbor schools, an approach it took in 2013 for two debt-laden districts (Buena Vista and Inkster). Under dissolution, resident students would be assigned to other nearby districts. The district, would remain in place only as a legal entity, to repay all existing debts using the local school operating property tax. 

We sketched out the key triggers involved in the state’s dissolution law and Benton Harbor’s current financial position relative to them in an earlier blog. Our analysis suggests that the district satisfies all the conditions necessary for the state superintendent of public instruction and state treasurer to move forward with closing all Benton Harbor schools as soon as this fall. Given the timeline associated with the dissolution process, including the impact it would have on families and their ability to find alternatives before school starts, this option is likely off the table for the 2020 school year.  But, the state could pursue this approach the following year.

A New Approach

The State of Michigan, ultimately responsible for public K-12 education, must be equipped with the policy tools to deal with those circumstances when local school districts fail financially. To this end, the state government has developed specific policies to deal with financial failures (e.g., emergency management, school dissolution). These involve direct intervention in local school affairs, including the provision of state-appointed officials, the requirement to adopt certain “reform” models, and the loss of some control to manage and govern local schools.

None of the policy options laid out here are pretty. While each has been used previously with some success in other settings across the state, it is unclear they will work given the severity of the situation in Benton Harbor. A new approach is likely in the works for Benton Harbor, which may serve as a template for others in the near future. 

Research Director

About The Author

Craig Thiel

Research Director

Craig is the Research Council’s Research Director and primary researcher of education and school finance issues. Prior to becoming Research Director, Craig served as the Director of State Affairs and as a Senior Research Associate. During his graduate school studies, he worked for the Council as a Lent Upson-Loren Miller Fellow from 1993 to 1995. Before joining the Council in 2006, Craig worked for ten years as a fiscal analyst at both the Senate Fiscal Agency and the House Fiscal Agency. Before his time with the Michigan Legislature, Craig served as a Governor’s Management Intern in the Department of State, Office of Policy and Planning from 1995 to 1997. Craig began his working career with the United States Environmental Protection Agency in Chicago in 1991.

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