Detroit Schools Face Default

Published February 1, 2005

In order to comply with state and federal laws, Detroit Public Schools issued a comprehensive financial report for the fiscal year ended June 30, 2004. The report included an audit of the district’s financial statements by an independent accounting firm, Plante & Moran, PLLC. The audit reveals that the school district–Michigan’s largest–will run out of money before the end of the current school year, perhaps as early as April.

The district, which currently enrolls nearly 141,000 students, will end fiscal year 2005 with a $198 million deficit, according to the audit. The shortfall amounts to approximately 13 percent of the district’s $1.5 billion annual operating budget.

The audit, published on November 11, 2004, provided a comprehensive review of the district’s finances. It attributed the deficit to a number of factors, including a continuing loss of students to charter schools; students choosing to enroll in neighboring districts through Michigan’s public school choice laws; mid-fiscal year reductions in state aid during the 2003-2004 school year; previously negotiated salary increases with the district’s teachers’ union; and rising health care and pension costs.

Reforms Scuttled

The district published the audit on the heels of Detroit residents’ November 2 vote on “Proposal E,” through which they chose to end governance of the district by a state-created “reform board.” The reform board was established in 1999 by the Michigan legislature and former Gov. John Engler in response to the locally elected school board’s financial mismanagement, which included such abuses as board members being chauffeured to board meetings at taxpayer expense.

Under the 1999 reform legislation, the school district’s 11-member elected board was replaced by a seven-member board composed of the Michigan Superintendent of Public Instruction and six appointees of the mayor of Detroit. The reform board was given the power to hire and fire a district “chief executive officer,” who in turn was granted sweeping powers to manage the district without board approval.

In July 2000, the reform board chose Kenneth Burnley as district CEO, but his contract is set to expire at the end of the school year, and the board recently suggested it does not intend to renew the agreement. Burnley’s departure will likely occur six months before the district’s governance reverts to a locally elected board in January 2006. Some observers argue the uncertainty caused by this six-month gap will compound the present financial crisis.

Burnley says that without more money, the school district–the city’s largest employer–may have to close 40 of its 255 schools and eliminate as many as 5,400 jobs, laying off nearly one-fourth of the district’s approximately 22,200 employees.

Layoffs and school closures in the district are nothing new. In June 2004, the district let go of 2,100 employees, closed five schools, and depleted most of its financial reserves.

The district has only two years to eliminate its deficit, according to Michigan law, and its plan to become solvent must be submitted to, and approved by, the state legislature.

Borrowing Proposed

To avoid closing schools and eliminating jobs, Burnley has proposed borrowing $200 million from the state through a bond issue that would bypass voter approval. He is asking the state to give the district 15 years to repay the loan.

Such a bond issue would require approval from the Republican-controlled state legislature. State Senate Majority Leader Ken Sikkema (R-Wyoming) would likely oppose such a plan, according to his spokesman. In December, Sikkema introduced a resolution asking Gov. Jennifer Granholm, a Democrat, to appoint a team of experts to review the situation. In response, Granholm has called on the community of Detroit to solve the problem and proposed the district borrow the money from banks, rather than the state. It is not clear whether banks would consider the district creditworthy.

Ultimately, the legislature may seek to have a state-appointed financial manager run the district, creating what Granholm has referred to as “a state takeover of the state takeover.”

The district’s enrollment has been declining steadily since the 1998-1999 school year, when it recorded 173,848 students. The current enrollment of approximately 141,000 represents a loss of more than 30,000 students, a nearly 19 percent decrease over a seven-year period.

The district’s children’s reading scores have shown a slight improvement under Burnley’s leadership, but Detroit schoolchildren still lag behind the rest of the state academically. Graduation rates have remained virtually unchanged during the reform board’s governance, hovering at barely 50 percent.

Burnley has said he will announce in February–the same month in which the school board must indicate whether Burnley’s contract will be renewed–which schools will be closed.

Although the Detroit school district is experiencing the state’s worst financial problems, it may not be alone for long. Other urban school superintendents in the state recently warned the Michigan Board of Education that their districts may face insolvency within 18 to 48 months of Detroit.

Brian L. Carpenter ([email protected]) is director of the leadership development initiative for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Michigan.