White Paper on DPS Fiscal Crisis

WHITE PAPER

Returning DPS to fiscal health requires the curtailing of recent runaway spending by the Emergency Manager

I. Executive Summary                  

The following fiscal analysis is based on a comparison of DPS FY 2008 expense allocations (as reported in the district’s 2008 CAFR) to projected allocations in the DPS FY 2015 budget.  We note that certain spending categories today receive a higher proportion of total general fund expenditures than they did in fiscal year 2008, when the elected board governed district finances.  While some areas now receive a much lower proportion of total general fund expenditures (spending on classroom instruction, for example, has declined from 55.2% of total expenses in 2008 to 46.8% today), other areas have not been subjected to the same austerity.  Spending as a proportion of general fund expenditures has increased in General Administration, Instructional Staff Support, Pupil Services, Debt Service, and other areas.  DPS should consider addressing its current fiscal crisis by bringing increased spending in those areas in line with the proportion of total spending each area received in 2008.  DPS should not undertake even steeper cuts and greater austerity in spending on classroom instruction, as classroom spending (1) has already been subjected to drastic cuts since 2009, (2) impacts children more than any other category, and (3) most closely serves the core mission of the school district to educate children.

II. Background

In 2009 the State of Michigan imposed an emergency financial manager on Detroit Public Schools to address the district’s financial challenges. Today, after more than five years of emergency management, the district continues to face a severe fiscal crisis.  A lack of rigorous planning has recently brought this crisis to a head. Contrary to commonly accepted budgeting practices, the DPS EM submitted a proposed budget for public review in June 2014 built on the assumption that voters would approve a countywide millage.  When that millage was defeated, the public learned that the district now had a significant budget shortfall with which to contend.

In response to this budget shortfall, the Emergency Manager has publicly suggested that teachers might face “payless paydays” and/or a 10% cut in salary beginning October 1. Teachers, students, and their families have expressed concern that the impact on children’s education would be severe if the EM were to follow through with his current plans.

III. Argument and Methodology 

Teacher salaries fall within the spending category Classroom Instruction and reflect the one area in which the EM has not hesitated to cut costs to cover previous budget shortfalls.  For example, even before the recent countywide millage was defeated at the polls the EM proposed a fiscal year 2015 budget that saved approximately $6.8 million by raising class size targets from 38 to 43 in grades 6 through 12.

The analysis in this White Paper reveals that cost-savings, to the degree that they are fiscally necessary, could be derived from other areas of the budget, with far less harm to the educational circumstances of the district’s children.  In comparing spending allocations between fiscal year 2008 and fiscal year 2015, further cuts in classroom instruction to cover fiscal missteps appears both unnecessary and indefensible from a fiscal standpoint.  Instead, we identify other spending areas that have received a higher proportion of general fund expenses under emergency management than they did in 2008.

Importantly, this analysis does not suggest the need for drastic cuts in these other spending areas that would parallel the drastic cuts already made by the emergency manager in the area of classroom instruction. Rather, our methodology pinpoints the amount of savings that could be realized simply by reducing the proportion of spending in each of the target categories to the levels that prevailed under board governance in 2008.  We suggest that the savings realized from such cuts would not only address the current fiscal crisis, but would also free up sufficient funds to reverse the emergency manager’s planned increases in class size. 

IV. Data

According to the FY 2015 budget, there are some spending categories in which DPS now spends much less, as a proportion of total expenditures, than it did under the Detroit Board of Education in FY 2008.  As we noted, the FY 2015 budget allocates just 46.8% of total expenditures to Instruction, whereas the district allocated 55.2% to that category in FY 2008.  By comparison, if DPS allocated the same proportion of total expenditure to classroom instruction today as it did in 2008 (55.2%), this would deliver an additional $57 million for classroom instruction.  In other words, since 2009, DPS has not just cut classroom instruction in proportion to the district’s decreasing general fund budget—it has saved an additional $57 million by cutting a much greater share from classroom instruction than proportional decreases would yield.  Other areas of the budget have not been subjected to such austerity.

While DPS austerity under the emergency manager has resulted in significant cuts to this one vital category, the proportion of total expenditures in other categories is higher today than it was in FY 2008.  The chart below demonstrates the savings that would be realized simply by returning the budget categories of Pupil Services, Instructional Staff Support, General Administration, and a variety of other support services, as well as Debt Service to the proportion of total general fund expenses they received in FY 2008. 

V. Analysis and Recommendations

Areas of general fund spending that today exceed the proportion that was allocated to them in FY 2008 are highlighted in pink in the table.  Areas highlighted in yellow, at the right side of the table, indicate the savings that would be derived simply by returning the proportion spent on that category to FY 2008 levels.  Finally, green highlighting at the bottom indicates total cost savings that would be realized if all seven identified areas were simply returned to the proportion of general fund expense they received in FY 2008, before they were increased by the emergency manager—more than $87 million in total.

Even if the amount of general fund spending that is directed to debt service were left at its current levels, the indicated return to 2008 proportions would save the district over $46 million.  This would easily cover the $6.8 million needed to restore class size to earlier targets, as well as the shortfall between the $111 million in loans that the EM requested and the $82 million that the elected Detroit Board approved.

Final note: While a reduction in proportion allocated to debt service to 2008 levels does not appear necessary to meet current fiscal goals, the source of the increase—from 1.7% of general fund spending to $7.8%-- should be discussed. EM Roy Roberts was widely credited with reducing the legacy deficit by over $200 million.  Mentioned less frequently was the fact that most of the reduction was accomplished through new borrowing rather than cost cutting or increases in enrollment.  While that borrowing may have been accomplished with favorable terms for the district, the larger portion that is now spent on debt service is directly related to two factors: (1) increased borrowing and (2) decreasing enrollment, including 11,000 freely given to the Education Achievement Authority.