Some Michigan schools get debt reprieve from state

The state of Michigan is paying down the debts of six local school districts – two of which have closed or merged with neighboring districts – including some outstanding some bond balances.

The move was part of a state budget supplemental bill signed by Gov. Gretchen Whitmer on Dec. 18. The $114 million from the state’s School Aid Fund will become available Feb. 13.

The aid goes to school districts that ran into fiscal distress that led to state fiscal intervention.

Receiving debt relief are Muskegon Heights School District, which will get $31.3 million for outstanding school bond loan fund balances and an emergency loan balance; Pontiac City School District, which will get $18.4 million for an emergency loan balance; Benton Harbor Area Public Schools, which will get $10 million for an emergency loan balance; and Ypsilanti Community Schools, which will get $5.5 million for long-term limited tax debt.

Also benefiting are the communities formerly served by Inkster Schools, dissolved in 2013, and Willow Run Community Schools, which merged with Ypsilanti Public Schools in 2013.

Inkster will get $12.1 million for outstanding school bond loan fund balances or school loan revolving fund balances. Willow Run will get $19.4 million for school bond loan fund balances or a school loan revolving fund balance, in addition to the funds made available to the current, merged Ypsilanti district.

According to the Citizens Research Council of Michigan, a nonprofit public policy research group, the outstanding loan balances for Benton Harbor, Muskegon Heights, Pontiac and Ypsilanti stood at $10.3 million, $21.4 million, $18.2 million and $5.5 million, respectively, as of June 30.

Michigan Treasury Department spokesman Ron Leix said that in most cases, the loans were intended to fund operational shortfalls and address emergency cash flow shortages. Specifically, the debt included emergency loans; limited tax general obligation or unlimited tax general obligation debt; School Bond Qualification and Loan Program loans and initiatives to improve student achievement or to implement strategic plans.

Ypsilanti Community Schools Superintendent Dr. Alena Zachery-Ross said she and her team are waiting to hear precisely how the funds will be allocated. But they anticipate that by freeing up money used for debt service, “we can use those dollars in our general funds and pay our dedicated and talented staff, and we will be able to make updates to our facilities and provide additional support and enhancements to our programs,” she said.

“Although the new [consolidated] district has operated in the black for the past ten years, the debt from the two previous districts has been a challenge for both the district and the payers,” Zachery-Ross added. “This relief will allow a new start for the entire community… We have proven what ‘Stronger Together’ looks like in action. We are grateful to everyone who has made this possible.”  

State education officials acknowledged that Michigan has ground to make up when it comes to education financing.

“In general, Michigan has underfunded its schools, particularly those that educated children with the greatest needs — those in poverty, those with disabilities, and English learners, over many years,” said Martin Ackley, director of the Office of Public and Governmental Affairs at the Michigan Department of Education. “And so it was hardest for those districts with challenging mixes of students to stay within budget. The debt then affected for most districts what they had to spend in classrooms on kids’ instruction.”

In a blog post, the CRC said the outstanding loans to the districts were taken out to cover operating deficits built up from “chronic budget overspending and mismanagement.” It noted that Michigan has paid off debts before – for Buena Vista School District in 2016 and for Inkster in 2021 – and that these piecemeal interventions come in the absence of any statewide policy.

“The lack of a cohesive state policy for dealing with school legacy debts represents a moral hazard, signaling to other districts that they will not be fully responsible for solving their future financial problems and taking care of their legacy debts, should they arise,” the CRC said.

Grants to the existing districts will free up operating funds they would have otherwise needed to pay back the state loans, the CRC said. The state grants for the two dissolved districts will help property taxpayers there; they will no longer be levied to pay the debt absorbed by the state.

State Budget Office Director of Communications Lauren Leeds said the goal of this decision was to lower property taxes and funnel more money to classrooms.

“Governor Whitmer has made education funding a priority, signing historic budgets that ensure every public school student gets a free breakfast and lunch, take the first step toward free pre-K for all Michigan 4-year-olds, increase the weighted funding formula to provide additional resources to meet the specialized educational needs of students, and more,” she said.

The decision by the state legislature and Gov. Whitmer also comes a week after the release of a new report from the Education Law Center, a nonprofit education reform group based in New Jersey, which in its national overview of education spending gave Michigan a ‘C’ grade for public school funding levels and a ‘D’ grade for equitable funding distribution.

The report calls on state policymakers — as opposed to Congress or local school districts — to treat resource gaps with the same sense of urgency they applied to the COVID-19 pandemic.

ELC Research Director Danielle Farrie said Michigan received a ‘D’ because it does not target funding to high-poverty districts. She added that ELC did not consider capital funding or debt service in its report because those forms of funding tend to be short-term and “obscure broader funding patterns.” 

“The existing financing structure in Michigan is inadequate,” she said. “Michigan is one of only 13 states that does not appropriate state aid to school districts to finance construction costs. The reliance on property taxes to support these projects inevitably leads to inequities and disproportionate tax burdens that disadvantage property-poor school districts.”

That means that Michigan’s low-income districts have to choose between capital expenditures and spending on priorities like teacher retention, she said.

In the U.S., the burden of responsibility for addressing school financing inequalities rests at the state level, said Adam Tyner, national research director at the Fordham Institute, a nonprofit education policy think tank funded in part by the National Alliance for Public Charter Schools.

Tyner noted that even if school funding in Michigan is “near parity” now, “that means it is not making up for historical inequalities, which may be driving current inequities, such as debt.

“If the state is helping pay for debts accumulated by districts that were receiving much less funding over many decades, the policy may be helping to compensate for those historical inequalities,” he said.

Based on his own research, Tyner recommended that the school districts receiving debt relief focus their spending on “academic ROI,” or return on investment, which generally includes recruiting and retaining high-quality teachers as opposed to, say, simply shrinking class sizes.

“Because it is clear that some resources… are more expensive in schools where many students are facing challenges, programs that reward accomplished teachers for working in the highest-needs environments, for example Texas’s Teacher Incentive Allotment, can be especially effective,” he said.

An initial review of the districts benefiting from the new state grants on the Municipal Securities Rulemaking Board’s EMMA website found none with underlying debt ratings, though Pontiac sold general obligation debt rated Aa1 by Moody’s Investors Service solely based on it being wrapped by the state’s credit enhancement program for school district bonds, which is rated in line with Michigan’s state government.