STUMP » Articles » Borrowing for Operational Costs is a Bad Idea: Detroit and Chicago Schools » 5 January 2016, 06:31

Looks like this week’s theme is government indebtedness beyond the main pension indebtedness I usually focus on.

First, let’s look at one entity I haven’t looked at at all before: Detroit public schools.

DETROIT PUBLIC SCHOOLS

The Detroit Public Schools have massive debt payments that dwarf their current operational expenses:

Lansing — The debt payments of Detroit Public Schools — already the highest of any school district in Michigan — are set to balloon in February to an amount nearly equal to the school district’s payroll and benefits as the city school system teeters on the edge of insolvency.

Detroit Public Schools has to begin making monthly $26 million payments starting in less than a month to chip away at the $121 million borrowed this school year for cash flow purposes and $139.8 million for operating debts incurred in prior years. The city school system’s total debt payments are 74 percent higher from last school year.

The debt costs continue to mount while Gov. Rick Snyder and the Legislature remain at odds over how to rescue Michigan’s largest school district. A bankruptcy of the district could leave state taxpayers on the hook for at least $1.5 billion in DPS debt.
….
“We’re running out of money in April,” said Marios Demetriou, deputy superintendent of finance and operations at DPS. “We need help to fix the school district once and for all. Our kids deserve a good education and when you don’t have cash there are things that are lacking.”

Financial analysts say the skyrocketing debt payments owed to the state expose an unprecedented amount of money being diverted from classroom instruction to pay off past debts, even as the city school system eliminates 100 central office jobs this month.

Here’s the graph from the story:

Holy crap.

What makes it worse is how much of this is covering operational expenses.

Let’s look farther down the article:

The operating loans are owed to a state revolving loan fund, which analysts say is the district’s only available lender.

“For DPS, unfortunately, the only entity they can borrow money from right now is the state of Michigan,” Thiel said. “If they were to go to Comerica Bank and try to get a line of credit, they’d probably laugh them out the door.”

THERE’S A REASON FOR THAT.

At issue among state lawmakers is how to pay for the Detroit school system’s $515 million in past debts and unpaid vendor and pension bills and about $200 million Snyder has requested for assistance in creating a new debt-free Detroit school district.

Legislators on both sides of the aisle have expressed support for aiding the Detroit district, but no legislation has been introduced after eight months of talks.

Detroit district officials and financial analysts said lawmakers have as little as two-and-a-half months to address the problem — since the 46,325-student district has lost 100,000 pupils in the past decade and may need to borrow more money this spring to keep its 103 school buildings open through June.

POPULATIONS IN DECLINE

But that little tidbit, the huge drop of the student population over the past decade, puts me in mind of the huge drop in the overall population in Detroit…. and Puerto Rico over the same time period, as well as the stagnant population growth of Chicago:

Chicago has been shrinking in population for some time. I checked the most recent estimates, and saw an estimate the Chicago population was (barely) growing again…. but to a level still below the population in 2000, forget about their peak year of 3.6 million. The current estimate sets Chicago at about a million fewer people than their peak.

That’s a huge drop, in both an absolute and relative sense.

Here’s Puerto Rico:

In what some experts characterize as the largest out-migration since the 1950s, emigration to the U.S. mainland has accelerated in recent years, with 144,000 fleeing from mid-2010 to 2013, according to a Pew Research Center study using U.S. Census Bureau data. The island’s population now stands at 3.6 million, down from it’s population peak of 4 million residents in 2009.

And finally, Detroit:

Sorry if that one doesn’t resolve. I’m trying out Google’s Public Data viewer.

Something odd is going on with the Detroit data, indicating some “squishiness” in the data between the decennial censuses.

Still, just using the 2000 – 2010 change, we see Detroit has lost a huge portion of its population.

CHICAGO PUBLIC SCHOOLS

I have covered the Chicago Public Schools fiscal problems before, and to make things simple I will merely copy the Public Pensions Database graph on contributions:

Before we dive into their current $$ trouble, let’s look at their enrollment figures:

CPS Enrollment Falls by 6,000 Students, Adjusts School Budgets

By Tanveer Ali and Joe Ward | September 25, 2015 5:00pm | Updated on September 25, 2015 7:38pm

CHICAGO — Enrollment in Chicago Public Schools dropped by more than 6,000 students this year compared with last, according to figures released by the district Friday.

The number of students enrolled across all CPS schools dropped to 367,499, from 373,087 last year. That number is based on attendance numbers from the 10th day of the 2015-2016 school year.

Unlike the past two years when budgets were based on projected enrollment rather than actual enrollment, CPS is adjusting individual school budgets this year based on the 10th-day enrollment.

Some of that 6000 drop may be a result of overly “optimistic” projected enrollment numbers in prior years.

There is a lot going on with Chicago right now, what with Rahm Emanuel being taken to task for the coverup in the killing of Laquan Macdonald, as well as an airing of long-simmering grievances re: Rahm, but the superbig problem looming is the Chicago Public Schools finances.

I will excerpt Mark Glennon’s post on the matter:

Suppose bankruptcy for Chicago Public Schools could somehow entirely cancel all its unfunded pension liability, all its bonded debt, and let the school district switch over to a new retirement plan for future work funded at levels common in the private sector. Surely that would more than solve the district’s budget problems and free up plenty of cash for education, right? After all, its commonly reported that the only hole to be plugged in CPS’s new budget is $480 million, which CPS hopes to get to get from the state. Just the contribution to its defined benefit plan is $675 million this year, which smart readers probably know is many times what the private sector would pay. And erasing annual service on bonded debt would be huge, right?

Nope, even 100% haircuts on those obligations would barely balance the budget in a sustainable way.

Go to the post for a rundown on the numbers. It’s ugly.

Here’s Glennon’s bottom line:

Writing a few hundred pages about what Chapter 9 might look like would be pretty easy for CPS, like most municipalities, but the bottom line would be that we don’t know. Municipal bankruptcy is fraught with unknowns, as experts constantly warn. The real issue is not whether bankruptcy is an attractive option, it’s whether it’s inevitable: If even total cancellation of pension and bond debt would barely balance its budget, how can it be balanced outside of bankruptcy?

I think I know their answer, which is the same for Puerto Rico and Detroit:

MAKE SOMEONE ELSE PAY

The problem that Puerto Rico, Chicago, and Detroit all have is that they’ve borrowed money for operational costs in the past… assuming they could afford to charge other people, that is, future taxpayers, to pay for the past operational costs.

But those future taxpayers did not appear. There are fewer of just the base population (CRAP!) and then you find out so much of the base population is poor and don’t actually pay taxes (DOUBLE CRAP!), so they do the big deer eyes at other other people — taxpayers elsewhere.

In the case of Detroit and Chicago, they’re trying to get their states to bail them out. Puerto Rico is going one better, and trying to get something from the federal government.

Now, Michigan has been bailing out Detroit, because the deal is that while Detroit has been losing population, Michigan as a whole has been increasing.

Illinois had been shoveling money at Chicago, but you may have heard that there’s a Republican as governor now, and he and the Democratic legislature are at loggerheads re: the state budget.

Puerto Rico? They’re barely on the national radar, and an explicit federal bailout of fiscal profligates is going nowhere. This sort of thing does not bring any sort of confidence that bailout money would not simply go into a black hole of corruption:

Puerto Rico Lost Track Of $10 Million In Federal Grant Money

Seven years after a Puerto Rico government got $10 million in federal money to build a cemetery and bus station, neither one has been built, and local authorities claim to have no documentation about the projects.

…..
In 2007, the Department of Housing and Urban Development gave the Municipality of Toa Alta, Puerto Rico $2 million to create a mausoleum. The money was required to be spent by 2010. This year, construction had not started, because of “problems accessing the project site,” which was on land that had long been owned by the local government itself.

Another $6 million-plus was for construction of a four-story building containing parking and a bus terminal, also distributed in 2007 and to be spent by 2010, and with no changes permitted. By 2015, the abandoned frame of a five-story building sat on the site, with Puerto Rico demanding more federal money to complete the expanded project.

The federal money was supposed to be a loan, but HUD secured no collateral before disbursing the funds, leaving the department with little leverage to prevent an entity from walking away with the money, according to a report this month from the department’s inspector general.

Yeah, that idea is not getting off the ground.

So yes, I’m sticking with my predictions of no federal bailouts this year (states bailing out their major cities, sure… there are reasons for that.)

Compilation of Chicago posts.