Fewer School Districts Borrowing to Cover Expenses, But Pension Debt Rising

A recent state report indicates that by the end of June, as many as 18 school districts are projected to emerge out of red ink, leaving just 22 districts in a deficit situation. Although some media reports have cast this as a story of underfunded schools, they do so by ignoring the fact that just three years ago 55 districts had a deficit, a state record.

Michigan school districts are required by state law to balance their budget each year and not spend more than they take in. Nevertheless, every year some do have expenses exceed revenues, which is labeled as being in deficit. Some districts quickly work themselves out of the jam, while for others the overspend-and-borrow cycle can extend longer. This practice can dig a hole for a district, like an individual who carries a significant credit card balance month after month.

What explains the financial turnaround? Part of it is that districts are getting more money.

Consider two districts projected to be out of deficit by the end of this month.

Alpena Public Schools and Warren Consolidated Schools both were in deficit as of June 2014 and June 2015 and both are projected to be in the black by June 30.

Enrollment in Alpena fell by 64 students between 2013 and 2016, from 3,958 to 3,894. Yet despite having fewer students — meaning thousands of dollars less in state aid for each student no longer in attendance — the overall amount of state aid to Alpena rose by $2 million, from $22.8 million in 2013 to $25.7 million to 2016.

It was a similar story in Warren, where enrollment fell by 622 students over three years while state funding increased by $2.7 million.

But at the same time revenues are increasing, school budgets are under stress from growing pension expenses.

Warren Consolidated Schools, for example, saw its required contributions to the Michigan Public School Employees Retirement System rise from $22.0 million in 2014 to $28.7 million in 2015. That’s a $6.7 million increase in just one year.

At the end of the 2014-15 school year, there were 41 districts in deficit. One charter school in deficit closed at the end of 2014-15, leaving 40 schools in deficit in the recently completed school year. Of those 40, 18 are projecting to show that they eliminated their deficit when the final audited figures are released in November.

“If the districts’ projections were to hold true, there will be 22 deficit districts at the end of 2015-16 (41 minus 1 closed academy minus 18 projecting to eliminate their deficits),” said William DiSessa, a spokesman for the Michigan Department of Education, in an email. “But history tells us that a few districts end up in deficit after their audit is completed in November. So we won’t know how many districts are in deficit at June 30, 2016, until the audits are completed in the fall.”

A big indicator that school districts are doing a better job in handling their finances is that no school districts that are currently in the black are projected to go into deficit by the end of June.

That’s a far cry from when, just three years ago, then-State Superintendent Mike Flanagan predicted there could be 100 districts in deficit within a few years.