Detroit not the only school district seeing red

Twenty-four districts operated in a deficit in 2007-2008

Twenty-four public school districts in Michigan operated at a deficit in 2007-2008 and more than half of those anticipate they will still be in the red at this time next year.

That tally doesn’t include Detroit Public Schools, which only recently announced it likely will run short of money in 2008 and 2009. While Detroit’s numbers dwarf the rest, other districts also have projected deficits ranging from thousands to millions of dollars in closing out the current fiscal year, with no fund balance available to fill the gap.

In dollar amounts, figures vary from $3.2 million in Macomb County’s Clintondale Community Schools, equal to about 10 percent of revenue, to $39,000 in Vanderbilt Area Schools in Otsego County, less than 2 percent of total revenue.

In comparison, Detroit anticipates a shortfall of $45 million when it closes the books this year, and a draft budget projected a deficit of up to $408 million in 2009, according to area media reports. The district’s projected 2009 budget is $1.37 billion, potentially putting the deficit at nearly 30 percent of district revenue.

By law, Michigan school districts must adopt a balanced budget. Districts that spend beyond their ability to pay must submit a deficit elimination plan to the Michigan Department of Education that outlines how they will resolve the shortfall within the next two years. A handful of districts, however, have been in a deficit position for anywhere from two to 10 years over the last decade, according to information from the Michigan Department of Education.

“For some districts, it might take a few years to get out of deficit. Some get in and out quickly,” said Elaine Madigan, director of the department’s Office of School Finance and School Law.

ENROLLMENT, STAFFING ISSUES

Most school districts point to declining enrollment as a key reason for their revenue shortfall. Since public school districts receive a large share of state funding on a per-pupil basis, they receive less money when they enroll fewer students. The decline may result from families moving away, students choosing to attend a different school, or a declining birthrate in general.

In Michigan overall, the number of kindergarten through 12th grade students, including those in alternative education, has dropped from about 1.7 million in 2003 to 1.67 million as of fall 2006, according to headcounts calculated by the state’s Center for Educational Performance and Information. That doesn’t include students in ungraded programs, such as some special education settings, or in prekindergarten.

On the spending side, districts say that rising costs for wages, health insurance, retirement and energy have pushed up their expenses.

A few deficit districts also admit to insufficient oversight of spending as a reason for their shortfall, as well as overstaffing.

“We were administrator-heavy and secretary-heavy,” Superintendent Paul Rogers of Madison (Heights) Public Schools told Michigan Education Report in a telephone interview. “They (former administrators) hadn’t trimmed based on declining size.”

Madison has been in a deficit for at least 10 years, but this year pared the debt from about $2.8 million to $1.6 million, against a $15 million budget, mainly through reductions in staff, overtime and transportation.

In Detroit, teachers already have rallied against talk of laying off as many as 1,400 staff members in coming years. District enrollment has decreased from about 150,000 students in 2003 to approximately 106,000 currently, but board of education members have said that staff cuts have not kept pace.

In addition to downsizing, districts that have deficits say they plan to sell unused land or buildings, hire private companies to operate support services and hope to negotiate savings on wages or benefits during employee contract talks. At least one district now requires stricter oversight of purchases.

COST CONTROL

“… (C)ontracts will not be settled until all employee groups agree to provide some form of relief on the cost of health care,” the Beecher Community School District deficit elimination plan stated. In deficit for eight of the past 10 years, Beecher’s latest plan called for reducing a $700,000 shortfall to $268,000 in 2007-2008 and making up the rest in 2008-2009.

The district’s plan also includes tighter control of purchase orders and budget overrides and lists reductions of nearly 30 full-time equivalent positions among teachers, support service and administrative staff over the past two years. For example, the district eliminated three business office positions in 2006 as it outsourced its technology and business operations to the Genesee Intermediate School District.

Beecher and Clintondale administrators did not respond to requests for interviews.

While the state has the authority to accept or reject each district’s deficit elimination plan, it can’t mandate specific action, according to state officials.

“We don’t have the authority to tell them what to do,” Madigan said, though the department does consult with districts about ways to reduce expenditures. If a district fails to file a plan or fails to follow through on its plan, the state can withhold state aid, something Madigan said has happened for brief periods in some districts.

“That little hammer seems to work quite well as an incentive,” she said.

Extra scrutiny from the state is one consequence of running a deficit. Another is the cost of borrowing money to cover the gap. While a number of districts take out short-term loans as a way of tiding them over between state aid payments, districts in deficit must borrow extra.

FUND BALANCE VERSUS CUTS

That cost increases if districts put off making unpopular financial decisions.

“It may be that a board (of education) wouldn’t pull the trigger one year, but the next year they have to,” said Dave Martell, associate executive director of the Michigan School Business Officials. Turnover among school board members or school administrators is one reason that hard choices are sometimes put off, he and state department officials said.

“The reality of the economy is that many districts have made cuts year after year after year,” Martell said, balancing their budgets through a combination of reduced spending and use of reserve funds. In Utica Community Schools, for example, the board of education used $7 million from fund equity and reduced spending by $8 million to balance its budget a year ago. News reports from across Michigan indicate that many districts have followed a similar strategy in adopting budgets for 2008-2009.

The MSBO, a nonprofit corporation, recommends that school districts maintain a fund balance equal to 15 to 20 percent of their budget as a hedge against unexpected expenses or revenue loss, and also as a way to avoid borrowing money and paying interest. Martell said school business managers are looking for ways to operate more efficiently, including working with other local districts or intermediate districts.

“Their job is to not run a deficit,” he said.

In Madison Heights, Rogers said his district saved $165,000 by essentially closing its transportation department and contracting with nearby Clawson Public Schools for busing. A small district geographically, Madison does not provide transportation for general education students, but had a staff of five full-time bus drivers for special education transportation, field trips and athletic trips, Rogers said.

“It would have been cheaper to lease every parent (of a special education student) a car,” Rogers said.

Rogers was hired by the district in January of 2007. Formerly a school administrator in Anchor Bay, he is also an attorney and has worked in his family’s lumber and newspaper businesses.

‘LEAN THINKING’

The Pawley Learning Institute at Oakland University has taken an interest in public school finance in the last year, developing a program called “Lean Thinking for Schools” that rests on applying management and production principles learned in the private sector, primarily the automotive industry, to non-profit and service organizations.

“Lean thinking” calls for continually evaluating the processes that make up a school district —– instruction, administration, food service and others — to determine what adds value to the organization and what does not. The goal is to improve or expand the processes that add value and eliminate the rest.

“With lean thinking, you want to create value. If what we engage in is not adding value, it’s waste,” said Dr. Shannon Flumerfelt, an assistant professor in the School of Education and Human Services at Oakland who works with the institute. She used the example of an area school district that added full-day kindergarten.

“They created something of value,” she said, and were rewarded by higher enrollment. Madison’s new transportation program, described above, would be an example of providing value in a more efficient way.

“What most administrators do is say, ‘What can we cut from the budget?’” Flumerfelt said. “You just kind of pick things off.”

In contrast, lean thinking encourages organizations to look for efficiencies and improvement in processes themselves, while protecting the value those processes offer, she said. That means the ‘lean thinking’ district of the future might not look like districts today, she said. For example, schools already are challenging ideas about how much value a mandated number of school days or school hours adds to instruction.

The Pawley Institute offers coursework in lean principles and also offered a seminar for school administrators in southeast Michigan in March.

HEALTH INSURANCE COSTS

Employee health insurance programs might look different in the future in some school districts, as a new state law requiring them to seek competitive bids begins to play out across Michigan.

The Madison district is currently seeking such bids, Rogers said.

Asked if he anticipates the process will bring down health insurance costs, as supporters of the legislation predicted, Rogers said, “Either the bids will or the employees will contribute.” The district has capped the amount it will pay per employee for health insurance, giving employees a choice between the Michigan Educational Special Services Association’s SuperCare plan or a preferred provider option through Health Alliance Plan of Michigan. The cost of the MESSA plan generally exceeds the cap, so employees pay the difference, Rogers said. MESSA is a third-party insurance administrator affiliated with the Michigan Education Association.

Looking ahead, Rogers said he wants to turn around declining enrollment, possibly by developing an educational program aimed at the community’s international population. Nearly 20 percent of Madison students speak English as a second language, he pointed out.

“I’m trying to build a district that fits the 21st century,” he said. “You have to look at your target populations and meet your community’s needs.”

More than half of the districts currently operating under deficit elimination plans are located in Wayne, Macomb, Washtenaw or Oakland counties. The 24 deficit districts represent 3 percent of all of Michigan’s 781 conventional public school districts and public charter schools. The number of deficit districts has remained relatively stable over the past five years.

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In addition to downsizing, districts that have deficits say they plan to sell unused land or buildings, hire private companies to operate support services and hope to negotiate savings on wages or benefits during employee contract talks. At least one district now requires stricter oversight of purchases.

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