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Michigan schools' financial crisis growing
Detroit News
By: David Shepardson and Jennifer Chambers
November 19, 2013

A growing number of Michigan school districts face higher borrowing costs after downgrades this year by Moody’s Investors Service, which cited financial pressure stemming from falling enrollment and charter school growth in a report issued Tuesday.

The bond rating agency said since January it downgraded 53 school districts in Michigan, nearly as many as in the previous two years combined.

Justin Marlowe, a professor at the University of Wisconsin-Milwaukee who has written about local government finance, said increased charter school competition and tight state budgets are squeezing the districts.

The “proliferation of charter schools and ongoing state budget problems have put more pressure on local school districts,” Marlowe said, adding there “don’t seem to be any immediate solutions unless we rethink how we finance school districts.”

According to the Moody’s report, 425 of the state’s 549 public school districts lost students between 2004 and 2012, with total enrollment slipping 13.2 percent.

But as overall enrollment was falling, charter schools were growing: They had 120,000 students in Michigan at the end of the last school year and the number of schools rose by 8 percent for this school year, to 298.

In a separate report last month, Moody’s said charter schools were hurting public school finances in urban districts nationwide — and singled out Michigan as home to a large number facing that pressure. The report said Detroit, Clintondale, Mount Clemens and Ypsilanti schools “all have experienced significant fiscal strain related to charter enrollment growth.”

Marlowe said school districts across the country have been hit by credit downgrades.

“These reports haven’t been unique to Michigan,” he said. “This is definitely a national trend and Michigan is maybe a little more pronounced and have been hit a little bit harder.”

For districts that have to borrow money, a credit downgrade increases their costs to borrow, which can leave them with less money for teacher salaries, utility bills and other operating costs.

Moody’s, which uses a 21-point scale in its ratings, has issued 54 downgrades in Michigan this year. Of those downgrades, 40 percent were of two or more notches — representing more significant downgrades.

The Pontiac school district was downgraded twice in the year. And the troubled Oakland County district, which has an estimated $45 million deficit, saw its bond rating cut two spots in June, from B2 to Caa1, and again in August, to Caa2, the fourth-lowest ranking.

By comparison, Moody’s issued 33 downgrades of Michigan districts in 2012, and 26 in 2011.

Of the districts that were downgraded this year, 22 were in Metro Detroit. The report’s authors said financial stress, once confined mostly to southeast Michigan districts, is spreading to other parts of the state.

“Public school districts in Metro Detroit and southeast Michigan have seen particularly large declines in enrollment given the region’s economic and demographic challenges, although many school districts in other parts of the state have experienced enrollment declines as well,” Moody’s analyst Matthew Butler said. “With these negative factors, the geographic location of downgraded issuers in 2013 has expanded relative to prior years to include a larger number of districts outside of southeast Michigan, a trend we expect to continue.”

George Heitsch, superintendent of the Avondale School District in Auburn Hills, said his district was downgraded two notches in February from A2, the sixth-highest rating, to Baa1 because its deficit was larger than projected for the 2012-13 school year. The district has 3,783 students.

The district, however, is on pace to erase its remaining $1 million deficit by the end of this fiscal year, June 30, 2014. The district expects a surplus, Heitsch said, but he couldn’t give an amount.

“They (Moody’s) thought we were heading in the wrong direction, but we are heading out of debt,” Heitsch said.

Detroit Public Schools, which is battling a deficit nearing $80 million, according to district officials, saw its rating drop in June by one notch, from B1 to B2, the seventh-lowest ranking. In August, DPS borrowed $92 million in short-term revenue notes due to cash flow shortages. Officials said the borrowing will cost more than $4 million in issuance and debt service expenses.

Tuesday’s report cited charter schools’ high market share in some of Michigan’s biggest cities with putting increasing pressure on the public districts’ bottom line.

In Detroit, Moody’s said 41 percent of students were in charter schools in 2011-12. In Flint, 33 percent of city students were in charter schools, and 23 percent in Grand Rapids.

The state’s Schools of Choice program also has drained students and money from certain districts, worsening their budget problems, the report said.

Pontiac, for instance, has seen 21 percent of its students move to other public districts. In Lansing, 17 percent of students attend school in another district.

“These declines have led to revenue losses, which the districts have limited flexibility to offset,” the report said.

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