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This is to certify that the
dissertation entitled

REACTION TO BUDGETARY STRESS IN MICHIGAN
PUBLIC SCHOOLS

presented by
Maria A. Bolen

has been accepted towards fulﬁllment
of the requirements for the

PhD. degree in Educational Administration

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REACTION To BUDGETARY STRESS
IN MICHIGAN PUBLIC SCHOOLS

By

Maria A. Bolen

A DISSERTATION

Submitted to
Michigan State University
In partial fulﬁllment of the requirements
For the degree of
DOCTOR OF PHILOSOPHY

Educational Administration

2009

ABSTRACT

REACTION TO BUDGETARY STRESS
IN MICHIGAN PUBLIC SCHOOLS

By

Maria A. Bolen

This study focuses on how school districts in Michigan are reacting to budgetary
stress brought on by the downturn in the economic climate. It addresses the key factors
school districts can implement to increase revenues or decrease expenditures and
identiﬁes which of these factors districts choose and the reasons why. This study also
analyzes the effectiveness of the various measures implemented in restoring or
maintaining the ﬁnancial health of the district. The research seeks to generate useful
lessons about strategies for improving district ﬁnancial conditions.

The research also pays particularly close attention to districts that are either in
deﬁcit or are close to a deﬁcit status. A number of these districts have been successful in
making budgetary adjustments that have permitted them to strengthen their ﬁnancial
condition and avoid falling into a deﬁcit. Accordingly, a comparison will be made of the
ﬁnances of Deﬁcit Districts, Near-Deﬁcit Districts, and all other districts in the state.

To determine more about the ﬁnancial status of school districts in the State of
Michigan, two main questions are posed. First, how have levels of ﬁscal stress —
measured by district fund equity —— changed over the past ﬁve years for all districts in the
State of Michigan? Second, what factors have contributed to strong or weak ﬁscal

positions of Michigan’s school districts?

The empirical work will be based on an analysis of the ﬁnances of all the districts
in the State of Michigan, plus a detailed study of the budgets and decision-making in a
sample of six districts. The six districts are located in a highly populated suburban area
located in a major metropolitan center (Detroit), with a great degree of racial, ethnic and
socio-economic diversity.

Findings Show that in the research setting studied, there is not a “one-Size-ﬁts-all”
pattern of revenue enhancement or expenditure reductions present in the behavior of
school districts. School districts had to consider a variety of internal and external
inﬂuences before decisions to implement certain measures were made. Thus, what
measures can be implemented to improve the ﬁnancial health in one district, may not be
feasible to be implemented in another district. Furthermore, certain revenue

enhancement and expenditure reduction measures appear to have a negative affect on

ﬁscal health.

ACKNOWLEDGEMENTS

The author of this study wishes to express sincere appreciation to the members of
her Guidance Committee, Dr. David Arsen, Dr. Phillip A. Cusick, Dr. BetsAnn Smith,
and Dr. Steven Weiland for the assistance given during this study, but also for the
knowledge that was gained during the program.

Special thanks and appreciation are extended to Daniel Hanrahan and Glenda
Rader of the Michigan Department of Education and to Barry Tiedemen of the Center for
Educational Performance and information for their assistance acquiring the data
necessary to analyze for this study. Furthermore, I would also like to thank Dr. Marla
Scafe for the quantitative data analysis of this study.

Finally, I would like to thank all of my school ﬁnance colleagues in Oakland
County for sharing their knowledge, assistance and support throughout the process.
Special thanks to Mr. Bruce Beamer of Clarkston Public Schools, Mr. John Schwartz of
Royal Oak Public Schools, Ms. Romaneir Polly of Avondale Public Schools, Mr. Larry
Gallagher of Berkley School District and Mr. Scott Johnson of Madison Public Schools

for opening their doors and taking the time to share their district’s story.

1v

TABLE OF CONTENTS

LIST OF TABLES .................................................................................. vii
I. INTRODUCTION OF THE RESEARCH TOPIC .......................... 1
The Key Questions to Be Answered ........................................... 3
Qualitative and Quantitative Study to Measure Fiscal Stress. . . . . . . . . ..4
Signiﬁcance of the Study ......................................................... 4

11. REVIEW OF LITERATURE ................................................... 5
School Funding in Michigan .................................................... 5
Evidence on School Funding .................................................... 7
Evidence on School Research Allocation ..................................... 14

The Efﬁciency Debate ........................................................... 15

Cost of Special Needs Students ................................................ 16
Factors Predicting Fiscal Stress ................................................ 19
Measures Implemented by Fiscally Responsible School Districts ......... 20
Conclusion ........................................................................ 20

III. RESEARCH DESIGN AND METHODOLOGY ........................... 24
Purpose of the Study ............................................................. 24
Theoretical Discussion .......................................................... 27
Research Design .................................................................. 30
Methods Used to Answer the Research Question ............................ 30

Data Collection Methods ....................................................... 35
Conclusion ......................................................................... 36

IV. ANALYSIS OF FINANCIAL DATA ........................................ 37
Results of Fund Equity Comparisons .......................................... 38
Summary of Fund Equity Comparisons ....................................... 40
Results of Multiple Regression Analysis ...................................... 42
Summary of Multiple Regression Analysis ................................... 46

V. ANALYSIS OF SURVEYS AND INTERVIEWS 49
Survey Results .................................................................... 49
Average Fund Equity Comparisons ............................................ 62
Interview Results ................................................................. 76

VI. ANALYSIS OF FINDINGS .................................................. 104
EXHIBIT 1. FINANCE MANAGER SURVEY ................................... 110
EXHIBIT 2. INTERVIEW QUESTIONAIRRE ................................. 112
LITERATURE CITED ................................................................. 114

LIST OF TABLES

Table 1. History of Fund Equity Levels In the State of Michigan ............................ 37
Table 2. Inﬂuences of District Characteristics on District Fund Balances

Dependent Variable: Fund Balance to Total Revenue .............................. 44
Table 3. Inﬂuences of District Characteristics on District Fund Balances

Dependent Variable: Fund Balance to Cost of Expenditures ...................... 45
Table 4. Revenue Enhancements by District ..................................................... 50
Table 5. Expenditure Reductions by District .................................................... 54
Table 6. Expenditure Reductions by District Continued ....................................... 55
Table 7. Average Fund Balance of Participants Compared to Non-Participants ........... 63
Table 8. Fund Equity Percentages of Surveyed Districts From 2001 to 2006 .............. 77

vi

CHAPTER I

INTRODUCTION OF THE RESEARCH TOPIC

The environment that school districts in the State of Michigan are currently
operating in would dictate that all schools feel pressure to generate new revenue through
student enrollment and reduce expenditures with budget reductions. Since 2002, annual
increases in per pupil foundation grants have not kept pace with the rising costs of
education. Furthermore, with the Passage of Proposal A in 1994, voters shifted Michigan
from a relatively decentralized school ﬁnance system to a highly centralized one under
which state aid is allocated on a per-pupil basis. The new funding structure focused
school districts’ attention on recruiting and retaining students in a competitive
environment because more students translate to more revenue. Effective management of
school resources is essential now that public schools are competing for students not only
with parochial and private schools but also with charter schools and other public school
districts through Michigan’s inter-district choice program known as Schools of Choice.
To maintain their competitive edge, public schools are reluctant to slash non-instructional
services, such as transportation, athletic offerings and student services.

To further compound the problem, Michigan is currently experiencing a downturn
in the economic climate with many families leaving the State for employment
opportunities elsewhere. Because of this out migration, local districts are competing over
a diminishing pool of students in an effort to secure additional operating revenues. Many

school districts are facing budgetary shortfalls, and are looking for creative ways to cut

costs and improve efﬁciency. Because of the pressure to attract and retain students by
maintaining quality programming with less funding coming from the State, it is important
for research to identify available options for school districts and to assess the
effectiveness of current district operations.

A statewide review of the ﬁnancial condition of school districts does not shed
light on individual district behaviors. This research seeks to discover if there are
consistencies in behaviors as it relates to the ﬁnancial condition of particular districts and
why those behaviors exist. Of particular interest are the two following issues:

0 If patterns exist in the adoption of particular practices and the level of
fund equity.

0 What factors, internal or external, inﬂuenced districts to implement or
reject certain cost cutting or revenue enhancing measures.

How school systems react to ﬁscal stress will, for the most part, determine
whether the school district will experience ﬁscal health or continue to struggle
ﬁnancially. A wide-range of measures has been proposed for school districts to reduce
their costs and increase their efﬁciency. This dissertation examines the extent to which
ﬁnancially strapped districts have adopted these various cost cutting strategies. The
research seeks to generate useful lessons about strategies for improving district ﬁnancial
conditions. The research also pays particularly close attention to districts that are either
in deﬁcit or are close to deﬁcit status. A number of these districts have been successful
in making budgetary adjustments that have permitted them to strengthen their ﬁnancial
condition and avoid falling into a deﬁcit. Accordingly, a comparison will be made of the

ﬁnances of Deﬁcit Districts, Near-Deﬁcit Districts, and all other districts in the state.

 

The Key Questions to Be Answered

In the research setting to be studied, the research addresses two basic questions.
The ﬁrst question, how have levels of ﬁscal stress—as measured by district fund equity——
changed over the past ﬁve years for all districts in the State of Michigan?” Due to the
current economic climate, it would be reasonable to assume that the level of fund equity
has declined as a result of ongoing poor ﬁscal conditions. But school districts may have
been able to respond to this decline in economic conditions by taking the appropriate
measures in order to survive. Thus, the ﬁrst task of the study is to determine whether
schools are responding effectively to the downturn in the economic climate and
preserving fund equity by expenditure reductions and revenue enhancements.

The second question, what factors have contributed to a strong or weak ﬁscal
position of Michigan’s school districts? If indeed school districts were able to respond
with the appropriate measures of revenue reductions and expenditure enhancements, what
were those measures? There are many ways districts have sought to generate additional
revenue or cut costs. The purpose of this study is to determine the reaction of local
school districts in Michigan to the state’s lengthy school funding crisis. This research
will document to what extent ﬁnancially strapped districts have implemented various cost
cutting measures and analyze their effectiveness in restoring ﬁnancial health to the

district.

 

Qualitative and Quantitative Study to Measure Fiscal Stress

To answer the two key questions noted, a survey of school districts will be
conducted. The research setting will be school systems in Oakland County, Michigan,
where budget reductions and revenue enhancements measure have been implemented in
response to the economic crisis. Furthermore, interviews of six school districts, chosen
by the varying level of ﬁscal health, will be conducted in an effort to delve more deeply

into the particular reactions of school districts during the difﬁcult economic climate.

Significance of the Study

While the results of the study will not be able to be generalized or quantiﬁed to a
very Speciﬁc set of policy rules that can be recommended for adoption by all school
districts in the State of Michigan, the results will provide insightful and useful
information about the speciﬁc ways certain school districts responded to budget
reductions and revenue enhancement initiatives, and at least in these instances identify
the factors that inﬂuenced the behaviors of the districts studied. Not only can this study
provide useﬁrl data for identifying key behaviors that exist in school districts of varying
ﬁnancial condition, but it can also provide feedback for very speciﬁc behaviors that have
been implemented in ﬁnancially healthy school districts. Thus, the information can be

useful to educational decision makers throughout Michigan.

 

CHAPTER II

REVIEW OF LITERATURE

Faced with increasing ﬁnancial challenges, school districts have struggled to
balance their budgets while continuing to maintain or enhance programming and

instructional quality. The pressure is even more intense now because for the ﬁrst time in

our nation’s history, schools are required to produce measurable evidence that all PL
students are learning, and they are being asked to do so amidst ﬁscal crises at the state !
and local levels. Current research provides limited information about how schools react i

to ﬁnancial challenges. To fully understand why districts are faced with a ﬁnancial crisis, L—
we must better understand how schools are funded and how schools use the resources

currently available to them. Fiscal stress is not just a component of how districts spend

their money. Factoring in the revenue structure is also an important component in

determining where the problem lies. Understanding the funding and resource allocation

of schools is the ﬁrst step in identifying the factors that contribute to an environment of

ﬁscal stress.

School Funding in Michigan

In 1994, the voters in the State of Michigan approved Proposal A, which
dramatically changed the system for funding K-12 public schools. Prior to Proposal A,
local property taxes were the main source of revenue for school districts. Reliance on

local property taxes produced wide and growing inequities among Michigan school

districts. Local voters approved millages for current operating and capital expenditures,
making funding education up to local discretion. Despite the allocation of state
equalizing aid through a district power equalizing formula, variations in funding levels
across districts before Proposal A were strongly linked to local property wealth. Districts
with extensive property wealth per pupil could generate large amounts of school revenue
with low millage rates. These districts were able to provide lavish support for local
schools while keeping property tax rates low. In contrast, property-poor school districts
were obliged to tax themselves at higher rates to raise smaller amounts of revenue (Arsen
& Plank, 2003). Opponents of utilizing property taxes as the major source of revenue for
school districts point to this fact as the major reason for disparate ﬁmding from one
school district to the next.

Proposal A increased the state sales tax from 4% to 6%, while dramatically
lowering local school property tax millages. Revenue from the additional 2% sales tax
went to fund school districts, which increased equity across school districts. This sales
tax increase became a major funding source for school districts, and reduced the reliance
for school funding on property taxes. School funding was now determined by the State
Legislature and the Governor, and local voters no longer had any discretion to set
millages for operating expenditures in their local schools. School funding levels were
also now more sensitive to ﬂuctuations in the State’s economy by way of sales taxes.

Through the relatively prosperous 19903 the new funding structure worked well,
as statewide real per pupil revenues increased while gaps in funding levels between high-
revenue and low-revenue districts were narrowed. However, since 2001, Michigan’s

economy has experienced a protracted downturn with no turnaround yet in sight. The

depressed economy has diminished school funding and strained many school districts. In
some years the state budget was so bleak that schools had to accept mid-year reductions

in their school aid. Calls for changes in Proposal A have become more common.

Evidence on School Funding

Local Sources — Property Taxes

Local school districts have traditionally ﬁnanced the majority of their educational
revenues through local property taxes (Odden & Picus, 2004). This is because property is
ﬁxed in a location and values tend to change slowly which gives school districts a stable
source of revenue. However, the large variation across districts in their capacity to raise
revenue relative to the educational challenges they face requires some districts to impose
much heavier tax burdens on their residents than other districts to provide a given quality
of education services. Although some of the apparent resulting inequities may be offset
in part by compensating differences in state aid to school districts or in local housing
prices, undoubtedly some inequities remain. The other aspect is the heavy reliance of
education ﬁmding on the local property tax, which many people believe imposes a
regressive burden on taxpayers (National Research Council, 1999).

State policies designed to lessen the disparities among school districts in terms of
property tax revenues generated are referred to as equalization policies. Traditional
funding equalization mechanisms—such as district power equalization and foundation
programs—ensure a basic level of educational funding through a combination of local

and state sources. In low-wealth districts, the state provides additional funding, while

 

high property wealth districts are able to increase discretionary funding from local
property taxes. Despite the long-term growth of state equalizing aid, property taxes still
remain the largest single source of revenue for school districts in many states mainly due
to the continued desire to maintain local control of school funding. Why does education
garner such ﬁnancial support from taxpayers? Local voters typically view such spending
as generating net beneﬁts in the form of enhanced educational and economic
opportunities for local children and improved market values of local real estate.

(Hummel-Rossi & Ashdown, 2002).

State Sources — Funding Formulas

While property taxes have traditionally produced the largest share of revenues for
US. public schools, the state’s role has progressively increased since the 1930’s. For the
nation as a whole, state revenues surpassed local revenues by the late 19705, although the
balance between state and local revenues varies greatly from state to state (Odden &
Pious, 2004). The state revenue is delivered to the school districts in the form of state
aid, which is typically unrestricted and can be used for the general operations of school
districts. The way states provide aid to school districts vary from state to state, but most
follow a school ﬁnance formula that allocates school revenue on a per-pupil basis based
on enrolhnent. Michigan happens to be a state that generates the majority of school
funding revenue from a foundation allowance based on enrollment. This funding based
on enrollment translates to a numbers game when it comes to educating students.

Students are tied to dollars and when enrollment increases, so does funding levels.

Federal Sources - C ategoricals and Grants

As previously mentioned, the majority of funding for Michigan’s schools comes
from state aid in the form of a per-pupil foundation allowance, which ensures that the
typical student’s education is funded at the same level in most districts across the state. It
is also apparent, however, that not all students are typical. Some students’ needs are
greater than others and these students are more costly to educate. The foundation
allowance can be inadequate to meet the needs of these special groups. State aid
formulas typically make adjustments for environmental factors, most often in the form of
a categorical provision in the school aid act. The revenue source for this additional
funding is often federal dollars that ﬂow to states based on speciﬁc criteria and then are
passed on to individual districts based on their student needs. These categoricals provide
supplementary instructional and pupil support services for students who meet certain
criteria speciﬁed in legislation. Many student characteristics are targeted for additional
resources: students diagnosed with a particular physical or emotional disability, students
with identiﬁed reading deﬁciencies in the early education years, students from low-
income families who required funding for their breakfast and lunches, students placed in
public schools by the court system, students who are English language learners, and
students with discipline problems.

If these high-cost student’s characteristics were evenly distributed across all
school districts in the state, there would not be a need for special categorical adjustments
to the state aid formula. This additional funding could simply be included in the basic

per-pupil state aid formula. Unfortunately, these special needs students are not evenly

distributed across local districts. Students from low-socio economic backgrounds and
English language learners are typically clustered in urban districts and isolated rural
districts. Some suburban districts develop extremely effective programs to serve children
with speciﬁc disabilities, which in turn induces families of children with such disabilities
to move to those particular districts (Odden & Pious, 2004).

Other federal categorical grants are earmarked for particular federal initiatives or
to address speciﬁc student needs. The money is designated to carry out the particular
initiative that the grant was written for and cannot be used as discretionary money for
schools to achieve their regular education goals. Though they supplement schools’
regular revenues, such funds only support supplemental services for Special-need students
and oﬁen require receiving districts to provide additional services from their own

revenues that would not be provided in the absence of the federal grants

Evidence on School Resource Allocation

Understanding how the education dollar is allocated and used is the ﬁrst step in
identifying the costs of various services provided by the K-12 public schools in the US.
The National Center for Education Statistics (NCES) inaugurated a project to collect
detailed and consistent data on school expenditure allocation for cross-state comparisons
(Picus, 2000). Research on school resource allocation has traditionally focused on school
districts as the level of analysis, since the data are reported to states and the NCES from
local districts. All 50 states collect some kind of ﬁscal data from their school districts.

These data include information on district revenues and expenditures, as well as numbers

10

and characteristics of district employees. The revenue data generally identify the sources
(federal, state, or local) and amounts of revenue received by each school district.
Expenditure data are most frequently collected by object of expenditure, such as
professional salaries, classiﬁed salaries, employee beneﬁts, materials and supplies, and
capital expenditures. States now also collect and report expenditure data by broad
functional areas — instruction, instructional support, student support, administration,
transportation, plant operation and maintenance, and debt service — and several also
report by program area — such as regular education, compensatory education, special
education, and bilingual education (Odden & Picus, 2004). Districts also have the
capability of allocating resources at the school level.

School-level resource allocation data is less detailed and complete. In most
urban districts, current budgeting and accounting practices provide no means to compare
resources across schools with different student populations. Because student population
isn’t reported in budgets, district budgeting processes create large differences in school
budgets that are often hidden. For example, one building could appear to have an
unequal amount of funding compared to another, but the reason for this could be the
larger student population in one building that the other building doesn’t have. Despite
the large sums of money spent annually for K-12 education we know remarkably little
about how those ﬁrnds are used at the individual student and school level. The focus of
most state ﬁnance reporting systems is on ﬁscal accountability, not understanding how or
why resource decisions are made. These systems generally focus on object level
reporting. As a result, we know a great deal about how much our schools spend for

salaries, beneﬁts, and contracts or broad function categories (e. g., instruction,

11

administration, pupil services, maintenance and operations, transportation), but we know
relatively little about how much is spent on individual programs (Picus, 2000). Current
researchers are beginning to conduct studies to clarify school-level resource allocations.

So where does the money spent on education go? The majority of school district
expenditures are dedicated to salaries and beneﬁts of the district’s professional teaching
staff. Many in education claim that because most of the education dollar is spent on
salaries and beneﬁts, schools are less able to engage in using resources differently. A
review of expenditure levels over time reveal that the amount spent directly on
instruction has remained about the same since the 1950’s although allocation of real
dollars per pupil has risen and the major portion (61 percent) of the education budget is
spent on instruction (Odden & Picus, 2004).

In the middle of the century, most instructional expenditures were for classroom
teachers - that is, licensed teachers who taught a classroom of students the regular
curriculum for most of the day — the typical elementary school teacher at the primary
level and subject-matter teachers in mathematics, science, social students, and English at
the secondary level. As a result, the stafﬁng in most elementary schools included a
principal and one teacher for every 25 to 30 students — a fairly simple stafﬁng structure.

By the close of the century, the portion of classroom teachers as a percentage of
the instructional budget declined signiﬁcantly. At the same time, the portion of specialist
teachers providing instruction in subjects such as art, music, and physical education
and/or instructing students with special needs, largely in resource rooms separate from
the regular classroom, increased (Odden & Picus, 2004). Various stafﬁng models and

stafﬁng patterns are utilized to determine what the optimal stafﬁng level should be.

12

Unfortunately, many districts run out of ﬁnancial resources before achieving this optimal
level. With ongoing budget constraints, staff reductions are about the only place districts
can turn to achieve the kind of cost savings necessary to balance their budgets.

In an effort to determine the cost of a particular educational program or
intervention, Levin & McEwen (2001) developed the ingredients method of determining
the cost of education services. The ingredients method attempts to identify the cost of the
component human and material inputs necessary for the production of a given program or
instructional service. If the ingredients necessary to provide a program or service can be
identiﬁed and valued, then the cost of the program or service can be estimated. To apply
the ingredients method, one must ﬁrst know what the ingredients used in the intervention
are. School districts typically break their expenses down into the follow categories:
personnel, facilities, equipment and materials, other inputs and required client inputs.
The most common method of placing monetary value on each of these ingredients is
using their market prices. This type of costing out is beneﬁcial because there are
reasonable competitive markets for many of the ingredients used in an intervention and
these prices are readily available and are a simple way to derive cost data. The
ingredients method offers decision makers better information regarding a given
program’s true cost than the standard budgetary items derived from a district’s
accounting records.

Rothstein (1997) examined the share of increased educational spending from 1991
to 1996 devoted to services for students with disabilities, school lunch and breakfast
program and bilingual education. Given slow growth in school revenues, state and

federal requirements for district services for special needs students could squeeze funding

13

available for regular education programs, Rothstein found. Boyd, Lankford and Wyckoff
(2002) studying budgeting patterns of New York school districts between 1980 and 2000
found that a substantial share of increased spending was devoted to students with
disabilities and inﬂation in the costs of purchased inputs. They also found that when
enrollments fall sharply, per-pupil spending patterns do not change. The same pattern
was found when enrollments rise sharply, districts tend not to raise spending sharply.
Furthermore, districts in New York appear to employ discretion in their budgeting
practices to smooth expenditures over time and to alter the mix of expenditures

depending on ﬁscal circumstances.

The Efficiency Debate

The additional resources provided to schools over the past few decades have not
translated to increased student achievement. The lack of proportionate improvement in
student outcomes with rising expenditures raises questions about the efﬁciency of public
schools. As one examines the ﬁeld of education, few studies are found in which cost-
beneﬁt and/or cost-effectiveness analyses are undertaken in relation to program decision-
making (Hummel-Rossi & Ashdown, 2002). Progress has been slow in the adoption of
either cost-effectiveness analyses or cost-beneﬁt analyses in educational evaluations.
However, the New York Adequacy Study (Hanushek, 2005) and the Highscope Perry
Preschool Program (Barnett, 1996) are detailed examples about the efﬁcient use of
educational resources to improve student outcomes. Schools today are short sighted and

focused on balancing their budget and typically look at the cost side of programs that are

14

 

earmarked as potential eliminations to balance their budgets. Little thought is given to
the long-term effectiveness of the program or additional future costs that may arise due to
a program’s elimination. There is wide agreement that greater application of cost-beneﬁt

analyses in education is warranted.

Cost of Special Needs Students

A larger share of school budgets are being spent outside of the general education
curriculum on students with special needs, causing much debate in the educational arena.
These additional expenditures are another cause of ﬁscal stress. In examining
expenditure patterns, there is a reduction in the share of spending attributable to regular
teaching contrasted to the substantial increase in the Share for teaching students with
disabilities. Given the implementation of Public Law 94-142, the Individuals with
Disabilities Education Act, mandating free and appropriate education of all students with
disabilities in the least restrictive environment during the 19805, it is not surprising that
special education expenditures grew dramatically during this period. At the same time,
changes in accountability systems and raised standards for all students have a
disproportionate impact on students with disabilities since they have farther to go and
greater difﬁculty getting there than non-disabled students. Addressing these new
requirements is generally more expensive for students who require smaller class sizes and
more intensive services. However, it is remarkable that this growth commanded such a
large portion of all additional real expenditure per pupil. Much of this growth is
attributable to a substantial increase in the classiﬁcation of special education students,

especially among the learning disabled category (Boyd, Lankford & Wyckoff, 2002).

15

The demographics of students with different types of special education needs vary
from school district to school district. Some districts have a higher concentration of such
students than others. Some of the largest metropolitan school districts have
extraordinarily high percentages of students who need supplemental educational services.
Furthermore, the prices districts face in providing these additional services vary
considerably, further intensifying the ﬁscal burden of appropriately educating students
with special needs. Large central cities face the highest prices and usually have the
highest concentration of special-needs students. Many rural districts, which generally
have lower prices, tend to face high costs for special-needs students because the low
incidence dramatically increases the per-pupil costs of the necessary services (Odden &

Picus, 2004).

Factors Predicting Fiscal Stress

While there is no single deﬁnition of ﬁscal stress, researchers and practitioners
often distinguish between short-term ﬁscal difﬁculty, cyclical ﬁscal difﬁculty, and
longer-term or structural forms of ﬁscal difﬁculty. Katherine Bradbury (1982), for
example, distinguished between “budgetary ﬁscal distress” — difﬁculty in balancing the
budget — and “citizen ﬁscal distress” - when a citizen can’t obtain a reasonable level of
services at a reasonable sacriﬁce.

Budgetary stress often is the result of cyclical forces, such as recessions, which
can generate relatively brief but sharp deterioration in a govemment’s ﬁscal condition.

Recessions can affect the ﬁnances of school district directly through declines in

16

economically sensitive local revenue sources like sales taxes, and indirectly through
declines in intergovernmental revenue, particularly declines in aid from the state, which
in turn relies heavily on revenue sources highly sensitive to cyclical economic changes
(Boyd, Lankford, & Wyckoff, 2002).

Fiscal stress can also be exacerbated by poor ﬁnancial management practices.
School districts that do not employ prudent ﬁnancial practices are more likely to suffer ill
effects during either short-term cyclical economic downturns or longer-term deterioration
of the economic base. Typically, both short and long-term stress is beyond the direct
control of most school districts. However, how school districts anticipate and react to
economically stressful periods is not. Fiscal stress is of interest for a variety of reasons;
ultimately we are interested in stress to determine what affect it has on the education of
students (Boyd, Lankford, & Wyckoff, 2002).

Although substantial research supports the need to analyze ﬁscal stress for
corporations, cities, and school districts, many questions remain regarding how best to
predict ﬁscal stress. Although many school districts are facing ﬁscal problems now or
will in the near future, we know relatively little about the causes of the problems or how
to avoid them. If school districts could identify the factors that contribute to ﬁscal stress,
they would be in a better position to monitor their status annually and alter their ﬁnancial
behavior to prevent future problems (DeLuca, 2006).

While many researchers have attempted to identify ways to predict ﬁscal stress
for corporations and municipalities, few have investigated ﬁscal problems in school
districts. Murphy (1980), Lee (1983), and Smith (1985) investigated ﬁscally troubled

school districts in Ohio. Murphy found. that rural districts were most likely to be

17

ﬁnancially troubled, as were districts with lower median incomes and districts with
higher interest payments, lower revenue per pupil, higher plant maintenance
expenditures, higher health expenditures or fewer requests for millage increases. Lee
found liquidity to be a major predictor of ﬁscal stress, with investment earnings and
salaries, wages, and ﬁinge beneﬁts contributing much to predictive power. Borrowing
ratios, stafﬁng ratios, and operating expenditure ratios had little or no predictive power.
Smith attempted to predict ﬁscal health for three years for all school districts in Ohio.
The category of salaries, wages, and beneﬁts was the most important for the predictions.
In a qualitative study, Manca, Noonan, and Matranga (1999) found that 14 factors
common to three districts studied contributed to insolvency. These common factors
included overspending of general revenue funds, the need for a state loan, and inadequate
stafﬁng in the business ofﬁce.

Duncombe and Yinger (1998) presented a conceptual framework depicting
different dimensions of school district ﬁnancial condition and applied it to New York
School districts. Their framework included four components: short-run ﬁnancial
condition, long-run ﬁnancial condition, economic condition and student performance.
The outcome of the study was that no single indicator or set of indicators was likely to
accurately predict school districts at risk of future ﬁnancial crisis. Therefore the study
incorporated 50 different measures to provide a comprehensive view of ﬁnancial
conditions in New York school districts.

Boyd, Lankford, and Wyckoff (2002) examined changes in real per-pupil
spending for districts with different levels of fund balances at the start of the period of

ﬁscal stress. The study found that when districts have healthy cushions in the form of

18

 

large fund balances, they weathered difﬁculty without making sharp cuts in teaching
expenditures, while districts with low fund balances reduced expenditures sharply. The
results of the study had major implications that were relevant to policy makers. Namely,
what the appropriate balance in ﬁmding across a variety of expenditure categories should
be, but especially between special education and regular instruction. Furthermore,
districts Should be particularly mindful of the difﬁcult ﬁscal position they currently face
and are likely to confront for a few years. This study also mentions that rising health care
costs and increased needs for contributions to retirement funds further exacerbated
budgetary stress. The authors recommended that districts adopt conservative budgeting

practices with prudent ﬁrnd balances to help smooth out short-term economic cycles.

Measures Implemented by Fiscally Responsible School Districts

Even in the absence of compelling evidence, there are many conceptions of what
constitutes efﬁcient school district use of resources. In recent years the Mackinac Center
for Public Policy, the Michigan branch of a national network of conservative policy
advocacy groups, has embarked on a visible campaign to promote practices that it argues
will enhance school efﬁciency and ﬁscal health. The Six Habits of F iscally Responsible
Public School Districts (Mackinac Center, 2002) summarizes these prescriptions.

First, districts should minimize administrative costs by outsourcing district-run
functions, such as payroll, beneﬁts administration and records management or by
eliminating certain administrative positions all together. The Mackinac Center argues

that by trimming administrative costs, classroom expenditures can be more readily

19

maintained. Second, districts should cut costs through outsourcing the provision of all
non-instructional services (e. g., custodial, maintenance, transportation and food service)
to private companies. Private contracting enables districts to reduce payroll taxes and
retirement costs because schools are required to ﬁrnd the retirement costs of all
employees on their payroll. This cost is currently around 17% of school districts’ gross
payroll in Michigan. Eliminating the required retirement contribution by shifting to
contracted employees represents a substantial potential cost savings for school districts.
Third, Mackinac advocates negotiating increased health insurance co-payments and
deductibles with employee unions in order to lower districts’ premiums. Fourth, districts
should pass sinking fund millages to generate revenue for facility maintenance and
renovations and thereby take this ﬁnancial burden off the general fund. F itth, districts
should participate in the Schools of Choice program to generate additional revenue from
increased enrollment. Sixth, the Mackinac Center suggests that districts reform collective
bargaining so they may be free to negotiate individually with teachers instead of
negotiating collective bargaining agreements with employee unions. Many of the
recommendations of the Mackinac Center for Public Policy are being evaluated through
the research questions posed in this dissertation. The relevance of many of these factors

will be examined in the empirical work and the results will be reported.

Conclusion

In this new era of accountability based on performance, public education must

address the fundamental challenge of improving learning for all students. School ﬁnance

20

cannot stand apart from this challenge because of the limited resources typically available
to schools and also because of the link between funding and student achievement. It is
important that educational decisions be aligned with resources to increase improvement
and ensure equitable and adequate opportunities for all children to reach these elevated
standards. No longer satisﬁed with providing bare-boned schooling to prepare
individuals for an industrial society, many educators ﬁnd it imperative to educate all
students to become competitors in a knowledge and global based society. Such high
standards demand more than a bare-bones ﬁnancial system. Identifying the areas of
educational spending that are costly and inefﬁcient is essential in this era of limited
ﬁnancial resources for school districts.

Identifying key factors that contribute to ﬁscal stress of school districts is
essential to help schools alter their course of ﬁnancial insolvency. Equipping school
boards and school administration with the knowledge of what these factors are helps
better decisions to be made regarding allocating limited resources instead of leaving
decisions makers to rely on guesswork or politics to make their decisions. Discovering
what other districts with similar funding and expenditure components are doing to
maintain ﬁscal health is essential information to alter expenditure patterns to promote
ﬁscal solvency. Based on this research, it would be expected that certain thresholds for
benchmarking could be developed so each school district can readily predict the
likelihood of ﬁscal stress before it occurs and thus address ways to reduce or eliminate
the chance of becoming bankrupt. In Michigan, where state funding is tied to sales tax
revenue, which is further tied to the health of the economy, tax and expenditure limitation

movements, declining enrollments, and recessions all have negative impacts on

21

educational budgets, and it is important to take into account costs as well as other aspects
of the alternatives. Schools are continually called upon to do more and more with less
and less, which makes the value of every dollar spent more valuable.

The current research proves that studies have been done to understand how the
education dollar is allocated. The National Center for Education Statistics has collected
detailed and consistent data on school expenditure allocations for comparisons. Once an
understanding was gained on how districts allocated their resources, current research
ﬁrrther identiﬁed how resources were tied to outcomes. The additional resources
provided to schools over the past few decades have not translated to increased student
achievement. This lack of increased achievement raises questions about the efﬁciency of
public schools. Further research has been conducted regarding the rising costs of
students with special needs and how these additional expenditures have further strained
district’s budgets. Other factors besides additional special needs expenditures have been
identiﬁed to predict ﬁscal stress, however many questions still remain. Factors that
ﬁscally responsible districts engage in have also been identiﬁed in current research,
however a link has not been made between the varying degrees of ﬁscal stress a district
may be experiencing and how these districts respond to ﬁscal stress.

The focus of my research is to determine how districts in the State of Michigan
are responding to many years of inadequate funding levels, how resource allocations have
changed as a result of the ﬁnancial climate, what internal or external factors determine
where the limited resources are delegated, and what factors contribute to ﬁscal stress for
a school district. Lastly, I am interested in determining the reaction of local school

districts in Michigan to the state’s lengthy funding crisis. This will be accomplished by

22

 

identifying the factors that contribute to why some school districts faced with the same
resource allocations are able to maintain ﬁscal health, while other school districts with
the similar resource allocations are in ﬁscal stress. The hope is that this research will
bridge the gap between where current research left off - at factors predicting ﬁscal stress
and measures implemented by ﬁscally responsible districts, to answer the question of

how districts in the State of Michigan respond to varying degrees of ﬁscal stress.

23

CHAPTER III

RESEARCH DESIGN AND METHODOLOGY

Purpose of the Study

The purpose of this study is to determine the reaction of local school districts in
Michigan to the state’s lengthy school funding crisis. Since 2002, annual increases in per
pupil foundation grants have not kept pace with rising costs. Consequently, virtually
every district in the state has been forced to respond to declining real per pupil revenue
over the last ﬁve years. How school systems react to ﬁscal stress will, for the most part,
determine whether the school district will experience ﬁscal health or continue to struggle
ﬁnancially. For this study, ﬁscal stress is deﬁned as low fund equity as a percentage of
general fund revenues. Fund equity is the difference between the district assets minus
district liabilities. In other words, fund equity is the net worth of the district. Fund equity
is an appropriate measure of ﬁscal condition because it compares the annual revenue that
is generated each year with the net worth of the district. Furthermore, under current
Michigan Department of Education procedures, a district with either a deﬁcit fund
balance in the General Fund or a deﬁcit in any other funds that surpass the surplus in the
General Fund is considered a “Deﬁcit District” for purposes of this study. “Near Deﬁcit
Districts” are those districts with a low percentage of fund equity.

Michigan is a prime laboratory for exploring the questions posed because this
state does not rely on local property taxes to fund school district current operations.

Therefore school funding is centralized at the state level, eliminating the ability for local

24

schools to generate more millage in a time of budgetary constraints, and creating a
somewhat uniform per-pupil funding structure. Furthermore, the Schools of Choice
program in Michigan has created an environment of competition within school districts to
attract and retain students by enhancing educational opportunities, which could be a
contributing factor on budget reduction decision making if districts are either losing or
gaining students. Growing districts may choose to not make any budget reductions but
rather balance the budget with increased enrollment, while declining enrollment districts
may have to make severe budget reductions to accommodate the loss in per-pupil
revenue. School districts are not required to participate in the state choice program.
Schools can opt in or out of the program. Thus, we will want to ﬁnd out if schools are

participating and what factors inﬂuenced their decision.

T he ﬁrst basic question to be explored is “how has fund equity as a percentage of
general fund revenue changed over the past ﬁve years for all districts in the State of

Michigan ? ”

Because districts have been experiencing several years of moderate to no increase
in state aid, and in some years actually experiencing reductions in state aid, school
districts were left with few alternatives but to utilize fund equity to balance their budgets
if instructional quality was to be maintained. The early years of this downturn in school
funding was easier to remedy with districts cutting back on a small scale to balance their
budgets. After several years of eliminating non-essential expenditures, schools began to

face tougher and tougher choices. Drawing down ftmd equity to keep budgetary

25

reductions away from the classroom diminished many districts’ fund equity balance.
Once fund equity is depleted, slashing essential instructional programs and services for
students is the only way to balance the budget unless other revenue can be generated
through enrollment. The level of fund equity is a good measure for district ﬁscal stress

and trends among Michigan school districts fund equity will be examined.

The second key question is “what factors account for variations in ﬁscal stress

from district to district?

It is evident through a review of the data that some districts are successful at
warding off a deﬁcit while other districts with similar characteristics struggle on an
annual basis to make the necessary budget reductions and revenue enhancements that
keep that district operating at a ﬁrnctional level. My analysis seeks to assess various
hypotheses regarding the causes of ﬁnancial distress. Determining the factors that
contribute to ﬁscal stress will help decisions makers determine if current operations in the
district are ﬁnancially sustainable or identify potential areas for improving resource
allocation. This research will assess the extent to which ﬁnancial strain is generated by
district resource misallocation as opposed to factors largely beyond local district control.
Many factors contribute to districts’ ﬁnancial condition, including: employee
compensation levels, beneﬁts offered, programs provided to students, class size, and
costs of maintaining facilities. Key factors on the revenue side include districts’ per-
pupil foundation allowance, enrollment growth and property values. Finally, the level of

ﬁrnd equity that the district had on reserve prior to the start of the economic downturn

26

would be a factor in preventing ﬁscal stress because the fund equity would be relied on to
balance the budget until the ﬁnancial outlook of the state changed. My analysis will seek
to determine the correlation of these and other factors with the size of districts’ fund
balance in order to help pinpoint both factors that contribute to ﬁscal stress and

potentially steps that might be taken to improve district ﬁscal health.

Theoretical Discussion

A wide range of measures has been proposed for school districts to enhance
revenue or reduce costs or increase their efﬁciency. To what extent ﬁnancially strapped
districts have attempted these various strategies and determining how effective they have
been will gain an understanding of the factors that inﬂuence ﬁscal health. A preliminary
review of district fund equity data suggests that some school districts are highly
successful at maintaining and even enhancing their ﬁnancial position in ways that go
beyond the obvious solution of increasing enrollment, while other school districts with
Similar characteristics continue to experience reductions in their fund equity to
dangerously low levels and in some cases into the negative.

On the revenue side, perhaps some districts do not participate in the school choice
program or have limited participation because of the general philosophy of the district
regarding educating students who are not district residents. Other districts may be
stepping up campaigns to attract and retain students through the choice program and
enhance their revenue through creative, entrepreneurial ventures Another factor may be

variations in the per-pupil foundation allowance. Districts that had high property values

27

on a per-pupil basis at the onset of Proposal A have a higher per-pupil foundation
allowance than those districts with lower property values. Also, just by nature of their
geographical location, some districts are gaining pupils and others are losing them. For
example, students are leaving urban school districts in large numbers to attend
neighboring school districts, which in turn prompts the migration of students from the
neighboring districts even further out to the suburbs. Those districts that happen to be
located on the borders of large urban and suburban areas are typically growing. This
growth translates to increased revenue which aides in combating rising costs.

On the expenditure side, aligning district resources through the framework of the
uniﬁed reporting requirements of the state will help determine the areas where schools
may be over spending or under spending relative to similar districts. One of the factors
that may contribute to variations in spending by district is average class size. The larger
the class the less instructional costs are incurred because fewer classrooms and therefore
fewer teachers, are necessary.

I Another factor is average teacher salary. This factor is inﬂuenced by several
conditions for instance, geographical location, the experience of the teaching staff, or the
outcome of union contract negotiations. Typically a teacher in an urban area earns more
than a teacher in a suburban area. An experienced teaching staff may cost more because
they have progressed up the teachers’ salary schedule and are more costly to the district
than a less-experienced staff. Lastly, union contract negotiations inﬂuence the cost of
salaries and beneﬁts. Some districts are successful in negotiation less costly beneﬁt

packages or wage freezes or wage concessions when faced with budgetary constraints.

28

The ﬁnal factor could be overall expenditure allocations in particular areas, such
as administrative expenses, the costs of beneﬁts, operations and maintenance costs or the
cost of transportation. Perhaps a school district has high administrative costs or
maintains an expensive beneﬁt package for district employees. The infrastructure of a
particular school system could be aging and therefore be costly to maintain. Some
districts may have chosen to privatize some or all of their non-instructional functions
such as food service, transportation and custodial and maintenance operations. Other
districts may have been successful at negotiating shared costs between the school district
and the employee for a portion of health insurance premiums. Finally, a district could be
spread across a large geographical area, causing increased expenditures in the
transportation area.

Identifying these revenue and expenditure variances aids in the understanding of
the changing climate that helps enhance a school districts ﬁnancial position or continues
to prevent a school district from returning to ﬁscal health. A key component of this
research will be to go beyond simple answers to the above questions and delve into the
internal and external factors that caused districts to react as they did as the budget crisis
progressed over time. This will be valuable as we attempt to understand the uniqueness
of each school district. The school system is a reﬂection of community values, which are
expected to differ from community to community. Exploring these dynamics and
determining the factors that determine school budgets will data to gain an understanding

of the long-term impact of a stagnant revenue stream.

29

Research Design

The research design is developed in a way that will both answer the questions
posed above and delve into the explanations of what actually occurred that caused
districts to react as they have to budgetary constraints. Furthermore, factors will be
identiﬁed and the data will be summarized with overall observations from the
information presented. At the state level, data for all school districts will be analyzed to
determine trends in revenues, expenditures, and fund equity. In addition, a sample of
school districts data gathered at the district level will help to determine where district
resources are allocated and how much on a per-pupil basis will be designated for each
area identiﬁed by function and object codes according to State guidelines. This expense
allocation on a per-pupil basis will help identify areas with large variances of resource
allocation between the districts. A key component of this study will be the trends in ﬁrnd
equity patterns for every district in the state and variances that are expected to occur

between districts in a smaller sample.

Methods Used to Answer the Research Questions

The empirical work will be based on an analysis of the ﬁnances of all districts in

the State of Michigan, plus a detailed study of the budgets and decision-making in a

sample of six districts. Below are the methods that will be used to perform the research

that will answer the identiﬁed questions.

30

Question I: How has the fund equity as a percentage of general fund revenue changed

over the pastﬁve years for all districts in the State of Michigan?

All school districts in the state will be studied to answer the ﬁrst question. Data
will be obtained from the Center for Educational Performance and Inforrnation’s
ﬁnancial information database (FID) on ﬁmd equity levels for the ﬁscal years 2001-02
through ﬁscal years 2005-06 for all school districts in the State. All school districts are
required to submit their ﬁnancial information annually in the framework of the F ID. The
2005-06 school year is the most recent data submission, but prior years will also be
evaluated from the ﬁnancial information database to gain a historical perspective on
district revenue and expenditure characteristics. The historical analyses will show
whether ﬁscal stress has become more or less severe among Michigan school districts

over time and how many districts have gone into deﬁcit.

Question 2: What factors account for variations in ﬁscal stress from district to

district?

Two types of methods will be utilized to examine this question. First, a
quantitative statistical analysis will be performed on a statewide level. Data obtained
from the Center for Educational Performance and Inforrnation’s F ID will be used, as well
as information obtained from the Michigan Department of Education’s most recent
Bulletin 1014 which provides ﬁnancial information for all Michigan school districts

including:

31

Revenues

Total revenue per pupil
Enrollment

Enrollment change from 2001 to 2006

Expenditures:

Average class size (pupil/teacher ratio)

Average teachers’ salary

Administrative expenditures as a share of current operating expenditures
Operations and maintenance expenditures as a share of current operating
expenditures

Transportation expenditures as a share of current operating expenditures

Employee beneﬁts as a share of current operating expenditures

The analysis seeks to determine the correlation with multiple regression analysis

between these factors, which will serve as the independent variable, relating to both

revenues and expenditures and district ﬁscal health as measured by fund balance as a

share of total general fund revenues and as a share of total general fund expenditures,

with each of these serving as the dependent variable. The major focus will be on the

dependent variable of fund equity as a share of general fund revenues. The dependent

variable of fund balances as a share of total general fund expenditures is included for

additional reference. Identifying these factors will help develop a proﬁle of what some

schools are doing right to maintain ﬁscal health.

Because not all information can be gleaned from reviewing ﬁnancial data, a

second method will be utilized to answer this question also. The second method will be

32

case studies of a smaller sample of school districts which provided a more in-depth
review of individual school districts and will be conducted to determine what some
school districts are doing to ward off or create ﬁscal stress. The environment that school
districts in the State of Michigan are currently operating in would dictate that all schools
feel pressure to generate new revenue through student enrollment and reduce
expenditures with budget reductions. Depending on the severity of the ﬁnancial
situation, districts may become increasingly desperate to make difﬁcult and deeper
reductions to balance the budget. To determine what budgetary changes districts have

implemented six districts were selected for an in-depth study.

School District Sample Selection

A survey was developed administered to all twenty-eight local school districts
within Oakland County. Twenty-ﬁve of the twenty-eight school districts responded to
the survey. This survey was designed to determine what, if any, cost savings measures or
revenue enhancements measures have been implemented. Furthermore, from these
twenty-eight school districts, a smaller sample of districts was chosen and a semi-
structured interview with an interview tool was conducted with district business
managers to acquire a more in-depth look at the reaction to budgetary stress in this
smaller sample of districts. Six school systems ranging in size from 3,500 to 7,500
students were selected as the sample to also answer the second question. Two of those
school districts were selected because of the strong ﬁnancial position the school district is

experiencing based on the fund equity percentage to overall revenues. Districts with fund

33

equity percentages of at least 15% are considered to be in good ﬁscal health. Two
districts were chosen because their fund equity was at or near zero. Two other
comparable school districts were chosen based on their fund equity position being in a
deﬁcit. Once a district has deﬁcit fund equity, it is mandatory that the deﬁcit district
participated in the State of Michigan’s deﬁcit reduction program. Efforts were made to
choose urban school districts with similar ethnic, racial and socioeconomic status and
similar student achievement results. Choosing districts with essentially the same
characteristics, other than fund equity levels will eliminate other factors as possible
contributors to the ﬁnancial health of the district. Some of the characteristics of school
districts that could inﬂuence ﬁnancial health are the school district setting because school
districts in urban areas typically have a higher special education population, which would
account for larger expenditures in this area. Schools in a rural setting typically have low
population levels which don’t accommodate a variety of course offerings and therefore
would have a different expenditure pattern than an urban district. It is expected then that
suburban school districts would be a blend of these two populations, but would also have
unique expenditure patterns such as low transportation costs because of geographical size
compared to rural districts that are required to transport students over long distances or
urban school district that may rely on public transportation. Lastly, if a district is a large
urban district, it might be explainable why a large percentage of resources are allocated to
enhanced curriculum programs because students from large urban districts typically
struggle with student achievement. Choosing school districts with similar characteristics

controls for these other factors inﬂuencing the outcome of the study.

34

Data Collection Methods

Factors were analyzed to determine what changes these districts have made.

These factors are identiﬁed below:
Revenues

0 Participation in Schools of Choice

0 Enhance revenue by allowing advertising on school property

0 Require students to pay a portion of the cost for extra—curricular activities
Expenditures

0 Privatize non-instructional areas

0 Require employees to contribute to a portion of the health insurance premiums

0 Negotiate pay freezes or wage concessions

0 Increase class size

0 Reduce beneﬁt offerings

0 Eliminate programs or services

0 Consolidation of Services

Analyzing these factors would provide information regarding how districts have

responded to the funding crisis in the long-term. Comparing revenue enhancement ideas
from district to district will determine what factors have been successful at generating
additional revenue for cash strapped districts. Comparing expenditure reduction patterns
from district to district may generate common areas that many schools have reduced in
order to balance the budget but may also produce some inventive ways that some of the

more successﬁrl districts have achieved ﬁnancial stability.

35

Determining what school districts have done to either enhance their revenue or reduce
their expenditures was discovered through the interview process. Particular attention was
given to the unique pressures each school district felt to either implement a certain
revenue generation plan or reduce certain programs or expenditures over others. It would
be expected that preserving some programs while eliminating others as well as
participating in revenue generation programs, such as Schools of Choice would be unique
from district to district based on community values and preferences. The last three years
ﬁnal budget documents were also collected for each school district in the sample for

further analysis.

Conclusion

The purpose of this research was to investigate factors that contribute to
ﬁscal stress for school districts in order to establish a model using benchmarks for
maintaining ﬁscal health. My analysis sought to determine the correlation of these and
other factors with the size of districts’ fund balance in order to help pinpoint both factors
that contribute to ﬁscal stress and potentially steps that might be taken to improve district
ﬁscal health.

It was not the expectation that the outcome would be a “one size ﬁts all” model,
but important factors that indicate ﬁscal health was identiﬁed. This research will also aid
schools in determining if they are headed for ﬁscal stress and may help districts
determine what factors are creating ﬁscal stress so that their course may be altered before

running into a ﬁnancial deﬁcit.

36

CHAPTER IV

ANALYSIS OF FINANCIAL DATA

It would be expected that as the funding crisis in the State of Michigan continues,
more and more districts would be utilizing ﬁrnd equity to maintain competitive in the
school choice environment by not eliminating course offerings, programs and extra-
curricular activities. It would also be expected that school districts would begin to
operate more efﬁciently as a result of the lack of resources during the ongoing funding
crisis.

Table 1. School District Fund Equity Levels In The State of Michigan, 2001-2006

Number of Districts
Fund Fiscal Fiscal Fiscal Fiscal Fiscal Percentage Percentage
Equity Year Year Year Year Year 2005-06 Change
Percentage 2001-02 2002-03 2003-04 2004-05 2005-06 Total 2001-2006

> 20% 208 190 186 159 123 22.4% -40.9%
16-20% 82 89 93 104 98 17.9% 19.5%
11-15% 102 112 106 114 110 20.0% 7.8%

6-10% 95 90 1 15 94 122 22.2% 28.4%

0-5% 54 62 4O 65 78 14.2% 44.4%

<0% 8 6 9 13 18 3.3% 125.0%

37

RESULTS OF FUND EQUITY COMPARISONS

Table 1 shows that school district fund equities are declining as the ﬁnancial
downturn continues. In the ﬁrst category, the range of fund equity is the ﬁmd equity
level of greater than 20%. In the ﬁrst year analyzed, the 2001-2002 school year, 208 (or
37.8% of Michigan’s) school districts maintained 20% fund equity or greater. The share
of districts with such a relatively comfortable ﬁnancial cushion has progressively
declined in each subsequent year. By 2005-06 only 123 school districts (22.4%) were still
able to maintain a 20% or greater fund equity. The overall decline in this category over
the ﬁve—year period was 40.8%.

In the second category, the range of fund equity is the fund equity level of 16% to
20%. In the ﬁrst year analyzed, the 2001-02 school year, 14.9%, or 82 school districts,
had fund equity between 16% and 20%. The share of districts with this somewhat
relatively comfortable ﬁnancial cushion has slightly increased in each subsequent year.
By 2005-06, 98 (or 17.8% of Michigan’s) school districts were able to maintain fund
equity between 16% and 20%. The overall increase in this category over the ﬁve-year
period was 19.5%.

The third category, the range of fund equity is the fund equity level from 11% to
15%. In the ﬁrst year analyzed, the 2001-02 school year, 102 (or 18.57% of Michigan’s)
school districts maintained fund equity levels of between 11% and 15%. The share of
districts that was able to maintain this average level of fund equity has not consistently
increased throughout the ﬁve years, but instead has gone up and down through the ﬁve

year’s examined. However, by 2005-06, 110 (or 18.21% of Michigan’s) school districts

38

were able to sustain this relatively healthy fund balance. The overall increase in this
category over the ﬁve-year period was only 7.84%.

The fourth category range was the fund equity level of between 6% and 10%. In
the ﬁrst year analyzed, the 2001-02 school year, 95 (or 17.3% of Michigan’s) school
districts were maintaining this fairly modest level of fund equity. The share of Michigan
school’s at this level has also varied from year to year, with some years experiencing
overall increases while others experienced decreases. This category ﬁnished the 2005-06
school year with 122 (or 22.22% of Michigan’s) school districts in this relatively modest
fund balance category. The overall increase in this category over the ﬁve-year period
was 28.42%.

The ﬁfth category range analyzed was the fund equity level between 0% and 5%.
In the ﬁrst year analyzed, the 2001-02 school year, 54 (or 9.8% of Michigan’s) school
districts maintained fund equity between 0% and 5%. The share of districts that
consistently reported that dangerously low levels of fund equity also increased and
decreased over the ﬁve years examined, settling at 78 (or 14.2% of Michigan’s) school
districts maintaining this low level of fund equity. The overall increase of districts in this
range over the ﬁve year’s examined was 44.44%.

In the ﬁnal range, the districts that are maintaining fund equity levels below 0%
are the districts that are experiencing deﬁcit fund equity. Once a district reaches this
negative level of fund equity, the State of Michigan requires that districts submit a deﬁcit
elimination plan to the Michigan Department of Education. In the ﬁrst year analyzed, the
2001-02 school year, there were 8 (or 1.5% of Michigan’s) school districts that had

negative fund equity. The share of districts that maintained a deﬁcit fund equity position

39

over the ﬁve year’s examined did not consistently grow, but rather increased and
decreased over the ﬁve year’s examined, settling at 18 (or 3.27% of Michigan’s) school
districts maintaining this deﬁcit fund balance position. The overall increase in this
category was by far the largest increase of any category studied, with 125% increase at
the end of the ﬁve-year period.

Table 1 clearly indicates that school districts fund equity levels have declined in
recent years in Michigan. One would think that larger numbers of school districts would
fall into the deﬁcit range, but upon analyzing the data, only 10 additional school districts
fell into the deﬁcit range over the ﬁve-year span. This small increase would indicate that
as districts fund equity declined, districts made expenditure reductions or increased
revenue to maintain the lower levels of fund equity and but still stayed of the deﬁcit fund

equity range.

SUMMARY OF FUND EQUITY COMPARISONS

The only range of fund equity that declined over time was the 20% or greater fund
equity range. All the other ranges experienced increases over the time span analyzed.
The conclusion that can be drawn from analyzing the data, is that while the highest
ranges is decreasing, the lower ranges are increasing as districts fell out of the highest
ranges into the lower ranges. What can also be determined from analyzing the data is
that districts are falling quickly through the ranges and not just falling from one range to
the next, but in most instances, the fund equity is falling several ranges in one year. This

can be determined by looking at the changes from the greater than 20% range from one

40

year to the next and comparing those changes to the increases in the lower ranges in the
following years. For example, in the greater than 20% range between 2001-02 and 2002-
03, the districts the decline in that ranges was the difference between the 208 districts in
the ﬁrst year to the 190 districts in the second year. That amounts to 18 school districts
that fell out of the greater than 20% fund equity range. It would be logical to conclude
that all of those districts fell directly into the range below, which is the 16-20% range.
However, that range only increased by 7 school districts from 82 districts to 89 school
districts in the 2002-03 school year. From that comparison, one can conclude that the
other 11 districts fell into the ranges further below the 16-20% range, with 10 of them
falling into the 11%-15% range. It is uncertain what ranges the remaining districts fell
into because in the next range, the 6-10% range, actually experienced a decrease of 5
districts in the 2002-03 school year, not an increase as one would expect. The decrease in
this range points to another fact in comparing the data. With the information that is
provided, it is uncertain to determine if some districts’ fund equities are growing, while
others are declining because the data isn’t tracked from district to district but as a group
of 549 districts as a whole. Therefore, one cannot determine unequivocally that all
districts fund equities are declining. Some may actually be increasing through the ranges,
while others are declining through the ranges. One can conclude, however that as a
whole, district’s fund equity in the State of Michigan over the ﬁve-year period of 2001-

2006 are declining.

41

RESULTS OF MULTIPLE REGRESSION ANALYSIS

The analysis seeks to determine whether there are systematic correlations between
measures of school district ﬁscal stress and district resource allocation decisions. Two
alternative measures of ﬁscal stress are employed: (1) fund balance/total revenue and (2)
fund balance/current operating expenditures. District ﬁscal stress is inversely related to
both measures — the larger a district’s fund balance relative to its total general fund
revenues or its total expenditures, the less ﬁnancially strapped the district is. These two
variables serve as dependent variables in multiple regression models that include all
Michigan School districts.

The regression models include a set of explanatory variables reﬂecting ﬁscal
characteristics that have been cited as inﬂuencing district ﬁscal health. District
“Enrollment” in 2005-06 measures whether there is any systematic relationship between
district size and district fund balance. “% Enrollment Change” between 2001 and 2006
captures whether district growth or decline is systematically related to ﬁscal stress, with
an expectation of a positive correlation. “Average salary” of teachers would expect to be
negatively related to fund balances; while average class size (identiﬁed by the
“Pupil/Teacher” ratio) should be positively related to fund balance.

Four explanatory variables assess the inﬂuence of districts’ resource allocation across
various functions that have attracted considerable attention in recent years. “Admin
Exp/COE” measures the share of district current operating expenditures devoted to
administration. This is a measure of administrative bloat or bureaucracy and

conventional wisdom and prevailing rhetoric suggest that it is inversely related to district

42

fund balances. “Transp Exp/COE” and “Oper & Maint Exp/COE” represent the share of
current spending devoted to transportation and operations and maintenance respectively.
District efforts to reduce costs by contracting out (i.e., privatizing) the provision of
transportation or custodial services should be reﬂected in these two variables insofar as
they are systematically related to district ﬁscal health. In both cases, I expect a negative
relationship with district fund balance. Likewise, “Beneﬁts/COB” measures the share of
district expenditures devoted to employee beneﬁts, with the expectation of declining fund
balances with rising employee beneﬁts.

Table 2 displays the models for Fund Balance/Total Revenues, and Table 3 presents
the Fund Balance/COB regressions. In each case three models are estimated. The ﬁrst
model (Equation 1 in both Tables 2 and 3) includes only district enrollment, enrollment
changes and per pupil revenue. The second model (Equations 2 in Tables 2 and 3)
includes only the resource allocation variables. Equation 3 in both tables presents the full

model.

43

 

Table 2. Influences of District Characteristics on District Fund

Balance

Dependent Variable: Fund Balance/Total Revenue

 

 

Explanatory

Variables 1 2 3
Constant 0.29" 1 .24** 1.31 **
(7.44) (11.94) (12.16)
Enrollment -4.74E-6** -6.76E-9**
(2.84) (0.49)
% Enrollment Change -0.01** -0.01
(3.74) (1.85)
Revenue/Pupil -1 .43E-5** -1.05E-5**
(2.95) (2.67)
Admin Exp/Current operating expenditures -2.08** -2.13**
(5.92) (6.10)
Oper & Maint Exp/Current operating expenditures -1.94** -2.16**
(4.39) (4.76)
Transp Exp/Current operating expenditures -0.52 0.52
(1.42) (1.43)
Beneﬁts/Current operating expenditures 0.38“ 0.37“
(16.40) (16.11)
Average Salary -2.17E-6 2.68E-6*
(1.55) (1.88)
Pupil/Teacher Ratio 0.03" -0.02**
(9.05) (7.66)

R2 0.05 0.44 0.45

 

Notes: Absolute values of t-statistics in parentheses
*signiﬁcant at 95% level, “signiﬁcant at 99% level

 

 

Table 3. Influence of District Characteristics on District Fund Balances
Dependent Variable: Fund Balance/Current Operating Expenditures

 

 

Explanatory
Variables 1 2 3
Constant 31.86" 154.09“ 162.59“
(8.80) (13.73) (14.18)
Enrollment -0.01** -0.12**
(3.20) (4.66)
% of Enrollment Change -0.13** -0.001**
(4.31) (2.96)
Revenue/Pupil 0.002" -9.49E-5
(3.90)
Admin Exp/Current operating expenditures -240.10** -81.10**
(6.33) (2.1 1)
Oper 8 Maint Exp/Current operating expenditures -232.99** -1.38**
(4.81) (0.56)
Transportation/Current operating expenditures -80.43* 0.01 **
(2.03) (2.69)
Benefits/Current operating expenditures 0.20 -2.30**
(0.08) (7.14)
Average Salary 0.01* -249.88**
(2.27) (5.19)
Pupil/Teacher Ratio -2.69** -255.73**

(8.63) (6.89)

R2 0.07 0.27 0.31

 

Notes: Absolute values of t—statistics in parentheses
*signiﬁcant at 95% level, “signiﬁcant at 99% level

45

 

SUMMARY OF RESULTS OF MULTIPLE REGRESSION ANALYSES

The results in Tables 2 and 3 are largely consistent with one another, as one
would expect. In general, the Fund Balance/Total Revenue models ﬁt somewhat better
than those standardizing district ﬁrnd balance by expenditures. The full model (Equation
3) in Table 2 has an R2 of 0.45 which is respectable for a cross sectional regression of this
sort. The interpretation that follows focuses on the Table 2 results.

District ﬁscal stress is not signiﬁcantly related to either district enrollment size or
growth. Large districts are not systematically more or less likely to have low fund
balances than smaller districts. Surprisingly, although it is not statistically signiﬁcant in
the full model, district enrollment change has the wrong Sign. Per pupil revenue has a
signiﬁcant negative relationship with district fund balance.

The analysis also discovered that districts with higher foundation allowances on a
per-pupil basis have lower fund balances, which is also the opposite of what one would
expect. There are two likely explanations for this. First, high revenue districts tend also
to be high cost districts and those differential costs (which by deﬁnition are beyond a
district’s control) have not been fully accounted for in the regression models. Second, the
negative coefﬁcient on Revenue/Pupil could simply be a statistical artifact, (spurious
correlation) since total revenue is in the numerator of the explanatory variable and
denominator of the dependent variable.

A comparison of Equations 1 and 2 in Table 2 clearly indicates that most of the
explanatory power in the full model comes from the resource allocation variables to

which I now turn. The clearest story here seems to be that districts that devote a larger

46

share of their spending to administration tend to have lower fund balances. The share of
spending devoted to operations and maintenance expenditures also had a signiﬁcant
negative relationship with district fund balances in Table 2, but not in Table 3. In
addition, districts that pay high average teacher salaries are those that have low fund
equity levels. The results suggest that district efforts to reduce administration and
operations and maintenance expenditures and teacher salaries will ease ﬁscal stress.

The share of expenditures devoted to transportation had an insigniﬁcant inﬂuence
on district fund balances. Whatever cost reductions might be achieved through the
privatization of transportation services, to date variations in district transportation
expenditures do not account for the variations in the levels of ﬁscal stress.

The share of cost of expenditures devoted to operations and maintenance and
transportation had an insigniﬁcant inﬂuence on district fund balances. Privatization of
non-instructional costs, which is a popular expenditure reduction measure, has an
insigniﬁcant affect of fund equity levels and therefore does not account for the variations
in the levels of ﬁscal stress.

Two resource allocation variables in Equation 3 of Table 2 — Beneﬁts/COB and
Pupil/Teacher — have signiﬁcant coefﬁcients with the wrong, or unexpected, Sign.
Ordinarily, one anticipates that district ﬁscal stress increases as employee beneﬁt
expenditures consume a larger portion of revenues. On the other hand, one anticipates
that smaller class sizes are an expensive luxury that tends to strain district budgets. The
fact that Beneﬁts/COB had a signiﬁcant positive coefﬁcient and Pupil/Teacher had a
signiﬁcant negative coefﬁcient is most likely a consequence of reverse causation in the

regression models. These regressions, after all, demonstrate correlation, not causation.

47

So the causation to some extent may run from the dependent to explanatory variables.
Districts that have strong fund balances have been able to maintain employee beneﬁts
where as those that have experienced the most ﬁscal strain have been forced to curtail
beneﬁt expenditures. Similarly it is likely that districts experiencing ﬁscal stress have
been forced to raise average class size, which accounts for the observed negative

correlation on Pupil/Teacher.

48

CHAPTER V

ANALYSIS OF SURVEYS AND INTERVIEWS

Survey Results

The purpose of this chapter is to present and analyze the ﬁndings of the surveys
and interviews conducted. What we have learned from the statewide overview is that
district’s fund equity levels are declining in general, but this broad overview doesn’t shed
light on speciﬁc district behaviors. This research seeks to analyze behaviors and identify
patterns in the adoption of practices, if such patterns exist. Furthermore, why a district
adopted one particular budget reduction or revenue enhancement measure while rejecting
another will be answered, which options produced results, and the effectiveness of each
option.

Because not all information can be gleaned from reviewing ﬁnancial data, a
second method was utilized. This method involved a more in-depth review of individual
school districts and was conducted to determine what speciﬁc districts did to ward off or
create ﬁscal stress. A survey was administered to all 28 school districts in Oakland
County. Of the 28 school districts, 25 responded to the survey. I ﬁrst analyzed revenue
enhancement measures taken by these districts, and then turned to an analysis of speciﬁc

expenditure reduction measures.

49

Revenue Enhancements

The survey asked district business managers to indicate which, of four common
revenue enhancement measures, they have implemented. Table 2 displays the results for
the 25 responding school districts.

Table 4. Revenue Enhancements by District

 

 

 

 

 

 

 

Revenue Enhancements
Schools of Advertising Pay to Other
Choice Participate

Avondale Yes No Yes No
Berkley Yes Yes Yes Yes
Birmingham No No Yes Yes
Brandon Yes No Yes Yes
Clarkston No No Yes No
Clawson Yes No Yes Yes
Farmington Yes No Yes Yes
Femdale Yes No No No
Hazel Park Yes No No No
Holly Yes No Yes No
Lake Orion No Yes Yes No
Lamphere Yes No No Yes
Madison Yes No No Yes
Novi No Yes Yes Yes
Oak Park Yes No No Yes
Oxford Yes No No No
Pontiac Yes No No Yes
Rochester No Yes Yes Yes
Royal Oak Yes Yes No Yes
South Lyon Yes No Yes No
Southfield Yes No No Yes
Troy Yes No No Yes
Walled Lake Yes Yes Yes No
Waterford Yes Yes No Yes
W Bloomﬁeld Yes Yes Yes Yes
Yes 20 8 14 16
No 5 1 7 1 1 9
Total 25 25 25 25
% Yes 80.00% 32.00% 56.00% 64.00%

50

Schools of Choice

Participating in the Schools of Choice is the largest revenue producer a school
district can embark on. Under Michigan’s system of school ﬁnance, the more students a
school district has enrolled the more revenue it has to operate. Some districts are hesitant
to participate in Schools of Choice because it is a controversial issue. Advocates
maintain that it is unfair to force parents — and especially poor parents — to send their
children to schools that are failing or to schools they dislike with no other option for
them. The opportunity to choose a preferred school should be available for all parents,
not just middle and upper-class ones. In addition advocates maintain that market
competition and discipline will improve the performance of all school districts.
Opponents argue that non-resident students unfairly beneﬁt from bond issues and other
improvements funded by resident taxpayers. Furthermore, non-resident students may
change the socioeconomic or racial composition student population in ways opposed by
local residents. The survey results indicate that participation in the Schools of Choice
program is a popular revenue enhancement option in Oakland County, with 80% of
districts participating in the program. Only ﬁve out of the 25 school districts chose not to
participate in the Schools of Choice program. Families in each of these districts are
relatively afﬂuent. With the exception of Birmingham, these districts are also relatively

fast growing communities on the outer periphery of suburban Detroit.

51

Advertising on District Property

The other revenue enhancement measures--advertising, paying to participate in
athletics and extra-curricular activities and other miscellaneous revenue enhancement
opportunities--generate smaller amounts of revenue for school districts. Advertising on
school district property is not without controversy either. Typically, school districts
advertise inside of school buses or around the perimeter of their athletic ﬁelds. These
contracts with advertisers generate smaller amounts of revenue, typically under $100,000
annually, and are also controversial because parents have concerns about having their
children being subjected to marketing. From the survey results, advertising on school
district property is not a popular revenue enhancement alternative, with only 32%, or 8

out of 25, school districts participating in some form of advertising on district property.

Pay to Participate

Some school districts also charge a fee for students to participate in athletics or
extra-curricular activities. This revenue enhancement typically ranges from $50 to $600
per family annually, with varying amounts charged for middle school and high school
athletics or extra-curricular activities, and caps on the total amount that a family must
pay. Some stakeholders are in disagreement with this because pay to participate fees
could exclude some students from low socio-economic backgrounds from participating in
athletics or extra-curricular activities because they cannot afford the participation fee.
The survey indicates that participation fees are a somewhat popular revenue enhancement
measure 14, or 56%, of the school districts charging fees for athletic or extra-curricular

activity participation.

52

Other Revenue Enhancements
Lastly, the other revenue enhancement activities, while creative, do not generate
large amounts of revenue districts. These additional revenue enhancements include
increasing lunch prices, starting a day care program, raising building rental fees and
renting out cell tower space. The survey indicates that 16, or 64%, of the school districts

utilize some form of miscellaneous revenue enhancements.

Expenditure Reductions
The survey conducted county wide, expenditure reductions were also analyzed.
Below are the survey results of those twenty-ﬁve districts that participated in expenditure
reductions. Nine common expenditure reductions were analyzed to determine what
components of expenditure reductions were implemented to reduce the budgetary

expenditures.

53

Table 5. Expenditure Reductions by District

 

 

 

 

 

Privatize Pay Freeze or Increase
Insurance Concession Class Size

Avondale Yes Yes Yes Yes
Berkley Yes Yes Yes No
Birmingham Yes No No No
Brandon Yes No No No
Clarkston No No Yes Yes
Clawson Yes No No No
Farmington No Yes No Yes
Femdale Yes Yes No No
Hazel Park Yes No Yes No
Holly Yes Yes Yes No
Lake Orion No No No No
Lamphere No Yes No No
Madison No No Yes No
Novi No No Yes No
Oak Park Yes No Yes Yes
Oxford Yes Yes No No
Pontiac Yes No Yes No
Rochester No Yes Yes Yes
Royal Oak Yes Yes No No
South Lyon Yes Yes Yes Yes
Southﬁeld Yes No Yes Yes
Troy Yes No No No
Walled Lake Yes Yes Yes Yes
Waterford Yes No No No
W Bloomﬁeld Yes No Yes No
Yes 18 1 1 14 8
No 7 1 4 1 1 17
Total 25 25 25 25
% Yes 72.00% 44.00% 56.00% 32.00%

54

Table 6. Expenditure Reductions by District, Continued.

 

 

 

 

 

 

Expenditure Enhancements
Reduce Eliminate Eliminate Eliminate Consolidate
Benefits Programs Admin Principals Services

Avondale No No Yes Yes Yes
Berkley No Yes Yes No Yes
Birmingham Yes No Yes Yes Yes
Brandon No Yes No No No
Clarkston No No No No No
Clawson No No No No No
Farmington No Yes Yes No Yes
Femdale Yes No Yes Yes Yes
Hazel Park Yes No No Yes No
Holly No Yes Yes Yes Yes
Lake Orion Yes Yes Yes No No
Lamphere No No No No No
Madison No No No No No
Novi Yes No Yes No No
Oak Park Yes No Yes Yes No
Oxford No Yes No No Yes
Pontiac Yes Yes Yes Yes Yes
Rochester No No Yes No Yes
Royal Oak No No Yes Yes No
South Lyon No No Yes No No
Southﬁeld No Yes No No No
Troy Yes No No No No
Walled Lake No Yes Yes No Yes
Waterford No No Yes Yes Yes
W Bloomﬁeld Yes No Yes No No

9 9 1 6 9 1 1

16 16 9 16 14

25 25 25 25 25

36.00% 36.00% 64.00% 36.00% 44.00%

55

Privatizing Non—Instructional Staff

Keeping the budgetary reductions away from the classroom has become the
mantra of school districts as they respond to heightened ﬁscal pressures. Privatizing non-
instructional services by contracting their provision through an external private company
is one of the most widely discussed cost—cutting strategies. Key areas for contacting
include food, transportation, and custodial and maintenance services. Other popular areas
to privatize are substitute teachers, substitute clerical workers, paraprofessionals and
coaches. The costs that can be avoided by privatizing non-instructional costs are the
matching payroll FICA taxes and the mandatory retirement contributions to the Michigan
Public School Employees Retirement System (MPSERS). These two required payroll
contributions total almost 25% of the gross payroll. This doesn’t mean that the district
can expect to save 25% over current costs. These savings are negotiated by the
contracted company and vary from district to district.

Privatizing non-instructional services is controversial partly because of the way
the MPSERS functions. Current employees’ contributions are funding current retirees’
pensions. With fewer current employees funding the actuarially based retirement plan,
may make the district contributions increase to keep pace with current retirees’ pensions,
thereby increase the retirement rate to districts. Another controversial issue surrounding
non-instructional service privatization is that it may lower the earnings and/or beneﬁts of
former district employees, who may be residents of the community and less inclined to
support the district with bond issues and other initiatives. School boards are reluctant to
vote to privatize the jobs of their neighbors and school district supporters in the name of

cost savings. The survey results indicate that some form or privatization is occurring in

56

74% of school district in Oakland County with 18 out of 25 school districts privatizing at
least one non-instructional service. Some school districts have been successful in
privatizing all non-instructional services while other districts have privatized only one or

two areas.

Employees Contribute to Health Insurance Costs

Requiring employees to pay a portion of the health insurance premium is another
option for school districts to curtail the rising costs of providing health insurance to
district employees. Most non-administrative employees work under some kind of union
contract. The portion of the health insurance premiums paid by employees is negotiated
with the appropriate union groups. One of the arguments against increasing school
employees’ share of health insurance costs is that their salaries are generally lower than
those of similarly trained employees in other occupations. One reason the salaries are
low is that the health insurance plan school district employees enjoy are considerably
more generous than the health insurance plans provided to other groups. However, health
insurance costs have been increasing in double-digit percentages for several years, which
dramatically increased the cost of providing health insurance to school district
employees. The cost of employee beneﬁts is typically the second largest expenditure,
next to salaries, that school districts incur. Requiring employees to be responsible for a
small portion of the health insurance premium is something that school districts have
been negotiating in employment contracts in recent years. According to the survey, 44%,
or 11 out of 25 school districts surveyed, require that employees contribute at some level

to employee health care costs.

57

Reduce Employee Beneﬁt Offerings

Reducing employee beneﬁt offerings is another way that school districts are able
to reduce expenditures without affecting student learning. There are a variety of ways
that school districts are able to accomplish a beneﬁt reduction. Some districts raise
prescription drug card co-pays or ofﬁce visit co-pays, which in turn reduces the insurance
premiums that districts are required to pay. One way that districts have reduced the
impact of these increased co-pays is to compensate the employee for the difference.
Another way districts reduce beneﬁt offerings is to eliminate the types of procedures or
limit the types of services covered under the speciﬁc health insurance plan. For instance,
annual physicals may no longer be covered because they are considered preventative, or
chiropractic care may be completely eliminated from the health insurance plan. Other
districts have turned to self-insurance for certain aspects of health care coverage, like
dental or vision. This completely eliminates the cost of health insurance premiums for
those types of coverage, but also increases the risk to school districts for large
expenditures that could be incurred on behalf of district employees. Based on the survey
results, this is not a popular choice for balance district budgets, with only 36%, or 9 out

of 25 school districts choosing this as a viable option for balance district budgets.

Wage Freezes 0r Concessions
AS noted, salaries represent districts’ largest overall cost. Over the years of this
economic downturn, districts have been negotiating smaller and smaller percentage
increases in employee salaries. Some districts in ﬁnancial distress have negotiated pay
freezes or even salary concessions where employees are obligated to return earnings that

have been paid to them. This is an extreme measure that some districts are forced to turn

58

to in order to align their expenditures with district revenues. Wage freezes or
concessions impair employee morale because employees are required to either forgo a
pay increase in one or several years, or return a portion of the pay increases they have
enjoyed in the past, while the cost of living increases annually. The effect of the wage
freezes or concessions is that the employee, from a ﬁnancial perspective, is sliding
backwards. Upon review of the survey results, 11 out of 25 school districts have required
at least one employee group to either freeze their pay or take a wage concession. This

represents 56% of all districts that participated in the survey.

Increasing Class Size

Increasing class size is another way that districts are able to reduce expenditures.
By placing more students in each classroom, fewer teachers are required to deliver
instruction. This is also controversial because research suggests that small classes
enhance student achievement especially in the elementary grades. For this reason, district
administrators are reluctant to increase class size. Increasing class size is in direct
conﬂict with the concept of keeping the reductions as far away from the classroom as
possible. This reduction is placed directly in the classroom. Class size is usually
determined through contract negotiations with class size limits written into the labor
contracts. The survey conﬁrms that this is not a popular position for districts to take.
According to the survey, 32% of districts have increased class sizes at some level to
reduce costs. This represents only 8 out of 25 school districts that have increased class

size.

59

Eliminating Programs or Services

In an effort to reduce costs, some districts turn to the option of eliminating
programs or services. As in increasing class size, this reduction typically hits directly in
the instructional area, which makes it an unpopular area for reduction. The districts that
did make reductions in programs or services cited eliminating police liaisons, foreign
language and music at the lower elementary levels and reducing paraprofessionals.
These reductions aren’t directly related to the core instructional areas. Even though some
districts have chosen to eliminate programs or services, most of them choose to reduce in
areas that would have minimal impact on student achievement. According to the survey
results, eliminating programs and services was not a popular area to reduce district

expenditures, with only 36%, or 9 out of 25 districts choosing this as an option.

Reduce Administrative Positions

Once a school district begins to experience ﬁscal stress, the district will begin to
evaluate areas where reductions can be made. Many stakeholders typically favor
reductions in administration instead of in the instructional area. Administration makes
budget reduction recommendations to the school board. The school board usually looks
to the administration for reductions in the administrative area ﬁrst before moving to
reductions in the instructional area. Therefore, it only makes sense that a large
percentage of survey responds reported reductions in administrative costs. This area was
the second most popular area for budget reductions next to privatizing non-instructional
services, with 64% or 16 out of 25 districts reporting administrative reductions as a way

to reduce expenditures.

6O

Reduce Building Principals
Enrollment declines may prompt districts to seek expenditure reductions by
closing school buildings, typically at the elementary level. When buildings are closed,
the building principal is no longer needed. Even if an entire building isn’t closed,
enrollment may drop to levels that only require one principal instead of a principal and an
assistant principal, for instance. According to the survey results, reducing the number of

principals has occurred in 36% of the districts surveyed, or 9 out of 25 districts.

Consolidation of Services

On September 19, 2007, Public Act 63 was enacted by the Michigan Legislature
that required intermediate school districts to conduct to a study to identify opportunities
for sharing services among their local constituent districts. Because of this recent interest
in service consolidation was included in the survey. Oakland County is somewhat unique
in that many special education services are provided on a county-wide basis, with
individual local school districts providing services based on the disability. Furthermore,
some special education busing consortiums are active in Oakland County between several
local school districts. Even though was is a new initiative, 44% of survey respondents, or
11 out of 25 districts have reported some type of consolidation of services with other
districts. Most of the respondents who are participating in consolidation of services cited

some type of transportation or technology services sharing.

61

Average Fund Equity Comparisons

Now that we have gained an understanding as to what degree of revenue
enhancement measures and expenditure reductions have been implemented, next this
study will look at making connections between practices adopted and the level of fund
balance of a particular district. Simply put, theory would lead us to believe that the
greater the number of revenue enhancements and expenditure reductions that have been
implemented, the higher a district’s fund equity level. Table 7 is a comparison of average
fund equity levels between districts that did or did not choose to implement particular

measures.

62

Table 7. Average Fund Balance of Participants Versus N on-Participants

 

District Action
Revenue Enhancements
Schools of Choice

Participated
Did Not Participate
Advertising
Participated
Did Not Participate
Pay To Participate
Participated
Did Not Participate
lOther
Participated
Did Not Participate

Expenditure Reductions

lPrivatize support services

Yes

No

IPay Insurance

Yes

No

Wage Freeze or Concession
Yes
No

Increase Class Size
Yes
No

IReduce Beneﬁts
Yes
No

Eliminate Programs
Yes

L No

Eliminate Administration
Yes
No

WEliminate Principals
Yes

No

Consolidate Services

Yes

No

 

Average Fund Balance]
Total Revenues
8.0%

20.0%

13.9%
8.8%

13.1%
7.0%

11.1%
9.2%

8.9%
14.3%

11.6%
9.4%

7.1%
14.5%

12.3%
9.5%

10.1%
10.6%

11.8%
9.6%

10.9%
9.4%

7.3%
12.1%

10.2%
10.6%

 

63

 

Analysis of Revenue Enhancements

Schools of Choice Program

The ﬁrst revenue enhancement measure analyzed was the participation in the
schools of choice program. As we previously noted, only 5 school districts of the 25
surveyed choose not to participate in schools of choice. This high level of participation is
expected, since the schools of choice program has the ability to increase revenues more
substantially than any other revenue enhancement option. Therefore, one would expect
that those that participate would enjoy higher fund equity levels than those that did not.
However, upon review of the results of the fund equity levels of the participants
compared to non-participants, it is apparent that the districts that participated in the
schools of choice program had an average fund equity balance of 8% and those that did
not participate had a 20% fund equity balance.

The results of this particular measure prove to be exactly the opposite of what one
would expect. This high level of fund equity despite not participating in schools of
choice could have several different explanations. Perhaps the districts with low fund
equity have decided to participate as a desperate measure to increase their low fund
equity levels. Another explanation could be that the 5 districts that choose not to
participate, Birmingham, Clarkston, Lake Orion, Novi and Rochester have high levels of
per-pupil foundation allowance and this keeps their fund equity level high. Another
conclusion could be the schools of choice program is a sum zero proposition, with as
many resident students leaving choice districts who participate as non-resident students

enter.

64

Advertising

The next revenue enhancement measure that was analyzed was advertising.
Districts have resorted to advertising on district website, school property such as athletic
ﬁelds, and inside school buses to generate additional revenue. Of the 25 districts
analyzed, only 8 out of the 17 districts have generated revenue by means of advertising.
The districts that have generated revenue by advertising had an average 13.9% fund
equity, while the districts that chose not to participate in any type of advertising endeavor
had an average 8.8% fund equity balance. The percentage difference between these fund
equity levels is fairly signiﬁcant, and can’t be explained by just advertising alone.
Advertising generates only a small amount of revenue in all cases, under $100,000. This
amount would have a fairly insigniﬁcant inﬂuence on fund equity percentages.
Therefore, one could conclude that while advertising does generate additional revenue
and contributes to an increase in fund equity levels, advertising does not explain the
larger average percentage of fund equity that exist in the districts that participate in
advertising. However, districts that do generate additional revenue by advertising to

enjoy a larger fund equity percentage than those districts that do not chose to advertise.

Pay to Participate
The third revenue generation measure that was analyzed was charging students to
participate in athletic events and extra-curricular activities. This measure is commonly
known as “pay to participate” in the academic environment. Of the 25 districts surveyed,
15 districts chose to participate in some form of charging students to participate in
athletics and activities, while 10 districts did not. The average fund equity percentage of

the districts that chose to charge was 13.1%, while the average fund equity percentage of

65

the districts that did not charge was 7.0%. The revenue that is generated by charging
students to participate is fairly insigniﬁcant compared to the overall district’s total
revenue and could not explain the large difference in the variance between the districts
that do charge and the districts that do not charge. One can conclude that though
charging students to participate in athletics and activities does generate revenue, and the
districts that do charge students enjoy a larger fund equity percentage than those districts
that do not. However, charging to participate in athletics and activities does not explain

the larger average percentage of ﬁmd equity that exists in the districts that charge.

Miscellaneous Revenue Enhancements

The last revenue enhancement measure that was analyzed was a miscellaneous
category of revenue generation ideas. The participants where asked if they chose any
other revenue enhancement measures besides the ones that were posed in the survey. A
variety of measures where reported, from increasing the rental fee for building usage to
renting space for cell tower companies to put towers on district property. Of the 25
school districts that were surveyed, 16 participated in some other variety of revenue
production measures, while 9 did not. The districts that generated revenue through other
measures had an average fund equity level of 11.1%, while the districts that implemented
no additional revenue generation measures had an average fund equity level of 9.2%.
The revenue that is generated from other measures only produces a small amount of
additional revenue and could not explain the variance in fund equity percentages between
the districts that have implemented other revenue enhancements measures and the
districts that have not. One could conclude that though additional revenue enhancements

measures increase fund equity level percentages, additional revenue enhancement

66

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measures do not contribute signiﬁcantly to the variance between the districts that do

generate additional revenue from other measures and those that do not.

Analysis of Expenditure Reductions

Privatization

A variety of expenditure reductions measures were analyzed as well. The ﬁrst
measure analyzed was if school districts privatized any of their non-instructional services,
such as transportation, food service and operations and maintenance. Of the 25 districts
surveyed, 18 had privatized at least one non-instructional service areas, with the
remaining 7 districts choosing not to outsource any services. This was the most popular
expenditure reduction choice of all measure analyzed. Of the 18 districts that did choose
outsourcing, the average fund equity balance was 8.9% and of the districts that didn’t
choose to outsource, they had a 14.3% average fund equity balance.

The choice to privatize non-instructional services is a very difﬁcult decision for
school districts to make. There is a great deal of pressure internally and externally to
retain district employees. When districts make the choice to privatize, it is not a decision
that is made lightly and is typically made once a variety of cost cutting measures have
already been implemented. There is a great deal of savings to be garnered from such
privatization, because districts aren’t required to pay payroll costs associated with
employees once the district privatizes. It would be logical to conclude that the districts
that have chosen privatization would enjoy a larger percentage of fund equity than the

districts that have not made that choice. However the results of the analysis Show just the

67

opposite. Districts that have chosen to privatize have a smaller fund equity level than
districts that have not privatized.

There are many conclusions that can be drawn from analyzing the fund equity
levels of districts that have chosen privatization and those that have not. One conclusions
could be that districts with lower fund equity become increasingly more desperate to
maintain their ﬁmd equity levels and make the difﬁcult decision to privatize their own
employees and that districts that enjoy higher levels of fund equity have yet to be faced

with the more increasingly difﬁcult budget reduction decision. Another conclusion could

‘—.-u-. Jun; ~ I

be that the fund equity levels of the districts that have chosen privatization have done so

in an effort to either stay out of deﬁcit of maintain their low levels of fund equity and

 

without such a measure more districts would be in deﬁcit or have a signiﬁcantly lower

ﬁrnd equity than if that choice had not been made.

Payment of Health Insurance Premiums

Another expenditure reduction measure that was analyzed was whether school
district employees are required to pay a portion of the health insurance premiums. Of the
25 school districts surveyed, 11 out of the 25 chose to require their employees to pay a
portion of the health insurance premiums, while 14 of the 25 did not. Upon review of the
corresponding levels of fund equity between the two groups, the districts that chose to
require their employees to pay a portion of the health insurance premiums had an 11.6%
average fund equity percentage and the districts that did not require their employees to
pay a portion of the health insurance premium had a 9.4% fund equity percentage.

Obviously paying a portion of health insurance contributes improves the ﬁnancial

position of school districts. The conclusion that can be drawn from analyzing this

68

measure is that though districts that require their employees to pay higher percentage of
health insurance premiums enjoy a larger fund equity percentage, it is not a large
variance. Therefore, require employees to contribute to health insurance costs increases

fund equity levels, but not to a large degree.

Wage Concessions or Freezes

Negotiating pay concessions or pay freezes was another expenditure reduction
measure that was analyzed. Of the 25 school districts, 14 districts negotiated pay
concessions or freezes and 11 school districts did not. A review of the corresponding
fund equity levels of these two groups show that the districts that were successful in
negotiation pay concessions or pay freezes had a 7.1% average fund equity percentage,
and the districts that did not had a 14.5% fund equity percentage.

It would be logical to conclude that the districts that were successful negotiating
wage freezes would enjoy a higher level of fund equity than those that were not, but this
was not the case. The ability to successfully negotiate a pay concession or a pay freeze
has the impact of ﬂattening or even reducing the cost of salaries. Because of the labor-
intensive environment, salaries are the largest cost that a school district incurs. Having
the ability to keep this large cost ﬂat, or even reduce the cost of the biggest expense
component has a large impact on a district’s ﬁnancial position, particularly when the
revenue stream has remained relatively ﬂat. The conclusion that can be drawn from
analyzing this particular expenditure reduction measure is that those districts that were
successﬁrl in implementing a pay concession or pay freeze had a higher percentage of
average fund equity than if they were not able to garner these cost savings. However, the

districts that did not implement such concession still enjoyed a larger average fund equity

69

percentage than those that did. One explanation could be that the districts that have
implemented this measure where already experiencing lower fund equity levels which
forced them to resort to freezing or reducing salaries just to keep the district from either
going into a deﬁcit, or experiencing signiﬁcantly lower fund equity levels than they

would have experienced had this measure not been implemented.

Increased Class Size

Another expenditure reduction measure analyzed was if school districts increased
class size in an effort to improve their ﬁnancial outlook. Of the 25 school districts that
were analyzed, 8 increased their class sizes, while 17 did not. Upon review of the
corresponding average fund equity of these two groups, the districts that increased class
size had an average fund equity percentage of 12.3%, while the group that did not
increase class size had a 9.5% fund equity percentage.

As previously stated, salaries are the largest cost component of a school district.
Increasing class sizes results in fewer teachers on district payrolls. Reducing salary costs
has a large impact on the ﬁnancial position of a school district. The conclusion to be
drawn is that districts that were able to reduce stafﬁng levels by increasing class size
enjoyed a higher level of fund equity percentage than the districts that did not increase
class size. Many districts are bound by the language in labor contracts and without

negotiations are unable to increase class size beyond the contractual amounts.

Reduction of Beneﬁt Offerings
Reducing the beneﬁt package that is offered to district employees was another

expenditure reduction measure that was analyzed. Of the 25 school districts surveyed, 9

7O

reduced beneﬁts while' 16 did not. A review of the corresponding fund equity levels of
the districts that reduced beneﬁts and those that did not show that the districts that did
reduce beneﬁts had a 10.1% average fund equity level, while the ones that did not had a
10.6% fund equity level.

Next to salaries, beneﬁt costs are the second largest expense component of school
district operations. Any effort to reduce this cost would therefore have a large inﬂuence
on ﬁmd equity levels. It would be logical to conclude that the districts that were able to
reduce this cost component would experience a larger fund equity percentage than the
districts that were not able to contain the costs of this component. However, when
reviewing the average fund equity percentage the there is not a signiﬁcant difference
between the fund equity percentages of the districts that were able to reduce beneﬁt
offering compared to the districts that were not. An explanation for this outcome could be
that had the districts that reduced beneﬁt costs not implemented this expenditure
reduction measure, their fund equity levels would be signiﬁcantly lower than if they
hadn’t, and the districts that haven’t yet implemented a beneﬁt reduction would be

experiencing a higher level of ﬁrnd equity if they had offered a reduce beneﬁt package.

Elimination of Programs and Services
Despite the mantra of keeping budget reductions away from the classroom, a
difﬁcult economic environment causes districts to review all aspects of operations.
Districts often decide to eliminate programs or services that may not have high
participation levels in an effort or directly impact student learning to balance the budget.
Of the 25 districts surveyed, 9 districts chose to eliminate programs or services while 16

did not. Did the decision to eliminate programs or services have a signiﬁcant affect on

71

fund equity levels? A review of the corresponding fund equity levels Show that the
districts that eliminated programs or services had an average fund equity of 11.8%, while
the districts that did not eliminate any programs or services had a 9.6% average fund
equity.

The outcome of these results is what one would expect to ﬁnd. In an attempt to
balance the budget, districts would begin eliminating programs or services that had the
potential of costing the district money and didn’t impact core instruction, for instance on-
site employee day care, police liaisons or community education programs. These
reductions aren’t directly related to the core instructional areas and have the result of
reducing district expenditures without directly impacting student learning. From the
analysis one could conclude that districts that eliminated programs enjoyed a higher
average fund equity percentage than the districts that continued to maintain programs that

were an additional expense to the district.

Reduce Administrative Positions

During times of ﬁscal crisis, a popular outcry from the community is to reduce
administration rather than teaching staff. Therefore, this expenditure reduction measure
is the second most popular area for budget reductions next to privatization of non-
instructional services. From the survey respondents, 16 of the 25 districts chose to
eliminate administration, while 9 did not. Reviewing the average fund equity level
percentages, the districts that eliminated administration had 10.9% average ﬁmd equity
and the districts that chose not to eliminate administration had 9.4% average fund equity.

Thus, those districts that chose to eliminate administration have a larger ﬁrnd equity

72

percentage and one could conclude that reducing administrative expenses is an effective

way to increase fund equity levels.

Reduce Building Principals

Another way that districts look to reduce their non-instructional costs is to reduce
the amount of building level supervision currently on staff, namely the principals. This
reduction is difﬁcult to implement because even though enrollment is declining, unless
buildings are closing, each building still needs at least one principal. Of the districts
surveyed, 9 of the 25 districts surveyed chose to eliminate building principals and 16 of
the 25 did not. Most of these reductions came as a result of building closures related to
declining enrollment, or a reduction of assistant principals in some buildings that were
experiencing enrollment decreases.

Comparing the percentages of ﬁrnd equity between the groups who have
eliminated principals and those that have not, those that reduce principals had a 7.3%
fund equity level and those that did not eliminate principals had a 10.1% fund equity
level. It would be reasonable to believe that if principal reductions were taking place,
that fund equity levels would be larger than if they were not, however the results of the
analysis show just the opposite. One of the reasons for the variance could be that as
enrollment declines, so does revenue and therefore fund equity. As a result of this
declining enrollment building level supervision is also reduced. In other words, the
decision to reduce a principal could come as a result of the enrollment decline, which

reduced fund equity, instead of reducing principals to enhance the fund equity position.

73

Consolidation of Services

Recent attention has turned to the consolidation of school districts services.
Legislation has even been enacted to require districts to review opportunities to
consolidate services with other school districts. Despite that fact that this is a fairly new
initiative, 11 out of the 25 school districts have already implemented some kind of
consolidation of services with other school districts, while 14 have not. Most of the
consolidation of services is a result of the special education needs within local school
districts. It is less costly for a to provide a joint classroom of students with the same
disability than to each run separate individual classrooms. Furthermore, many districts
were already participating in consolidating special education transportation as an
effective measure to reduce costs.

Based on the analysis of the average fund equity levels of the districts, the
districts that are participating in some form of consolidation of services have a 10.2%
fund equity level, while the districts that do not participate have a 10.6% fund equity
level. Again, these are not large variances between the groups, but one could conclude
that the consolidation of services occurred because the consolidated alternative was less
costly than the original method of service delivery and therefore, contributed to an
increase in average fund equity percentages than if the district had not participated, and
consequently, the districts that do not participate in some form of consolidation of

services would enjoy a larger average fund equity percentage if they chose to participate.

74

Conclusion

This research attempts to identify patterns of behaviors that exist between districts
with high fund equity levels and those with low fund equity levels. Based on the patterns
that are identiﬁed in Table 7, it appears that the districts who have generated revenue
from advertising, charging students to participate in athletics or activities, and have found
alternate ways to generate revenue besides participating in schools of choice have the
high fund equity levels.

On the expenditure side, those districts that have reduced their budgetary
expenditures by requiring employees to pay a portion of health insurance costs,
increasing class size, eliminating programs and services and eliminating administration
have higher levels of ﬁmd equity than those districts that chose not to implement these
measures. However the districts that chose to privatize non-instructional services, freeze
wages, reduce beneﬁts, eliminate principals and consolidate services have a lower fund
equity percentage.

The results Show that patterns of behaviors do not exist between schools with high
fund equity levels and those with lower fund equity levels. For example, it would be
reasonable to expect that the districts that have participated in schools of choice would
have a higher fund equity level than those that did not. Likewise, those districts that have
privatized non-instructional costs should have a higher fund equity level than those that

did not.

75

Interview Results

From the 25 surveyed school districts, a sample of six was chosen for further
analyses through interviews with their business managers. These semi-structured
interviews provided a more in-depth look at districts’ reaction to budgetary stress. Six
school districts ranging in size from 1,800 to 8,100 students were selected. Two of these
school districts had strong ﬁnancial positions based on the fund equity percentage to
overall revenues. Districts with fund equity percentages of at least 15% were considered
in good ﬁscal health. Two districts were chosen because their fund equity levels were at
or near zero. Two districts were chosen because their fund equity levels were in a deﬁcit.
The two districts that were chosen because they were in good ﬁnancial health were
Clarkston Community Schools and the Royal Oak School District. The two districts that
were chosen because they were at or near zero fund equity levels were Avondale School
District and Berkley School District. The two districts that were in a deﬁcit were Oak

Park City School District and Madison Public Schools.

76

Table 8. Fund Equity Percentages of Surveyed Districts from 2001-2006

 

 

 

 

2001 - 2002- 2003- 2004- 2005- 5 Yeagr—J

District Name 2002 2003 2004 2005 2006 Avera e
Avondale School District 7.4% 2.7% 5.8% 3.8% 1.7% 4.3%
Berkley School District 4.2% 3.6% 5.0% 4.0% 3.1% 4.0%
Birmingham Public Schools 20.6% 18.9% 17.7% 17.4% 18.1% 18.5%
Bloomﬁeld Hills School District 27.5% 28.5% 27.1% 28.4% 29.0% 28.1%
Brandon School District 13.8% 13.6% 14.4% 15.3% 15.7% 14.6%
Clarenceville School District 14.0% 14.2% 16.1% 18.8% 16.5% 15.9%
Clarkston Community School
District 10.3% 18.9% 23.4% 25.3% 23.7% 20.3%
Clawson City School District 13.9% 8.1% 8.2% 5.5% 5.5% 8.2%
Farmington Public School
District 20.8% 27.9% 27.9% 24.6% 21.3% 24.5%
Femdale Public Schools 2.2% 1.5% 1.3% 3.5% 5.0% 2.7%
Hazel Park School District 6.6% 5.9% 5.5% 0.5% 0.2% 3.7%
Holly Area School District 12.5% 13.6% 14.5% 12.0% 9.1% 12.3%
Huron Valley Schools 21 .9% 23.3% 21.9% 17.8% 15.4% 20.1%
Lake Orion Community Schools 11.2% 10.9% 14.9% 17.8% 18.1% 14.6%
Lamphere Public Schools 17.0% 15.5% 15.2% 15.1% 16.0% 15.8%
Madison Public Schools 60% -7.9% -13.2% -16.9% -19.0% 42.6%
Novi Community Schools 15.8% 17.4% 19.4% 19.4% 16.9% 17.8%
Oak Park School District 21 .3% 19.1% 17.1% 8.3% -4.7°/o 12.2%
Oxford Area School District 11.7% 12.8% 14.9% 10.5% 5.9% 11.1%
Pontiac School District 12.4% 11.0% 9.6% 1.3% 6.9% 8.2%
Rochester Community School
District 8.2% 10.2% 17.8% 23.2% 22.8% 16.4%
Royal Oak School District 22.7% 19.8% 26.1% 27.4% 23.9% 24.0%
South Lyon Community Schools 6.4% 7.3% 7.0% 6.8% 7.0% 6.9%
Southﬁeld Public Schools 17.2% 18.8% 20.9% 17.9% 13.6% 17.7%
Troy School District 35.3% 29.8% 33.4% 23.5% 22.8% 29.0%
Walled Lake School District 17.4% 14.6% 15.5% 16.1% 12.5% 15.2%
Waterford School District 9.1% 8.8% 8.6% 7.5% 6.0% 8.0%
West Bloomﬁeld School District 10.2% 8.6% 11.6% 11.2% 7.8% 9.9%

77

The following narratives outline key details from each case study that provide
information essential for understanding each district’s reactions to the level of budgetary
stress experienced. The narratives will help us understand what factors were inﬂuential
in each district’s decision-making process. We will also see how each district responded
to new pressures as the economic downturn continued over a number of years. As
outlined in the “Research Design and Methodology” section, the data gathered to tell the
story of each school district in the study came from several sources. The most insightﬁrl
and informative data came primarily from the ﬁnance managers in each school district.
These individuals provided the most detailed and rich data to help explain how their

district reacted to budgetary stress.

Clarkston Community Schools

Clarkston is a school district that has enjoyed a strong ﬁnancial position despite
the tough economic times. At the end of the 2005-2006 school year, Clarkston had 23.7%
fund equity balance and has an average fund equity balance of 20.3%. Clarkston has
approximately 7,900 students and serves a community that is located on the northern end
of Oakland County and was chosen as an interview candidate because of the strong
ﬁnancial position the district enjoys. Clarkston Community Schools’ fund equity
increased from 10% in 2002 to 24% in 2006. As urban sprawl progressed, demographic
shifts occurred, Shifting the population from the core of Detroit outward. This northern
area of Oakland County has experienced population grth as a result of the urban
sprawl. The development in this school community is diverse. It includes a quaint

downtown area, shopping centers, modern afﬂuent subdivisions and open farmland.

78

While the downtown has been established for some time, much of the development is
rather new. Once made up of a great deal of underdeveloped land, this community has
experienced a substantial amount of residential and commercial growth. It can probably
best be described as a middle-to-upper-income suburban area that has experienced
growth with moderate-to-upscale development. Clarkston currently has one high school,
one middle school, one upper elementary school, and seven elementary schools.
Revenue Enhancements

Clarkston does not participate in the Schools of Choice program at any level.
Therefore, the large fund equity level cannot be attributed to non-resident population
growth. One of the factors that contributed to the district not participating in Schools of
Choice was the superintendent’s desire not to participate. The leadership of the district
feared that large populations of special education students would ﬂock to the district
through the Schools of Choice program because of the district’s excellent special
education programs. Students with disabilities are extremely expensive to educate
compared to the general education population. For this reason, districts typically lose
money educating a special education student. Once a district becomes a School of
Choice district, they are prevented from denying any student an education in the district
based on their educational needs provided the student lives within Oakland County. The
idea of Schools of Choice is to generate additional revenue for the district, not cost the
district additional expenditures.

Another factor contributing to the decision not to participate in the Schools of
Choice program is Clarkston’s close proximity to Pontiac School District. The

southeastern tip of Clarkston Community Schools borders the northwestern tip of Pontiac

79

School District. Pontiac has a many low-achieving and minority students. Clarkston
ofﬁcials anticipated that large numbers of these students would enroll in Clarkston
Conununity Schools, if the district participated in Schools of Choice. This would change
the district’s student composition such that it would not be representative of the
cormnunity. Furthermore, there were fears that these low-achieving students would
lower test scores. In an environment of the No Child Left Behind Act, test scores have
become high stakes business, contributing signiﬁcantly to a district’s ability to make
adequate yearly progress.

As an additional revenue enhancement, Clarkston has allowed private parties to
advertise on school property. Most of this advertising occurs on the athletic ﬁelds, with
signs posted on the baseball and football ﬁelds. The local hospital has placed an
advertisement on the scoreboard. This type of revenue enhancement is governed by a
board policy, which allows only ten percent of the sign to be covered with advertising.
This revenue enhancement generates a small revenue stream to the district, with the
hospital advertising being the largest revenue producer at $45,000. This type of
advertising began roughly ﬁve years ago in an attempt to generate revenue for the
district. Some declines in advertising revenue have occurred over the years due to the
beverage association standards restricting sales of certain unhealthy beverages to
students. The factors that were most responsible for the district’s decision to accept
private advertising was the district business ofﬁce pursuing advertising opportunities for
the district.

C larkston Community Schools charges students to participate in sports and

activities as a means of revenue generation. The fee is based on an annual rate of $200 at

80

the junior high level and $225 at the high school level. Additional revenue enhancements
include renting of facilities, which generates approximately $200,000 a year and
operating a “Young 5’s” program which allows the district to count the student for
fourteen years of education provided the student has attained the age of ﬁve prior to the
December ﬁrst State imposed deadline. Clarkston Community Schools also had a unique
opportunity to lease the high school to a movie production crew for $10,000. One of the
incentives to stimulate the economy in Michigan was tax credit given to movie producers
for creating movies in the State. This initiative has brought many requests to school
districts for use of their property in movie productions.

Expenditure Reductions

Clarkston Community Schools is one of the few districts in Oakland County that
has not privatized any non-instructional services. There is a cost savings to utilizing a
private company to deliver these services because the district is not obligated to pay
retirement costs on the wages paid to private companies. This is a way to reduce the
budget without cutting instructional areas. These types of reductions have been referred
to as “low hanging fruit” because of how easy they are to attain.

Because Clarkston Community Schools enjoys a strong ﬁnancial position, they
have not had to negotiate wage concessions or freezes from any employee groups or
require that the employee groups pay a portion of the health insurance premium. To keep
beneﬁt costs low, the district does not offer any Michigan Education Association
sponsored beneﬁts to their employee groups, namely MESSA insurance. This is
signiﬁcant because the costs of these products are typically higher than other comparable

products in the beneﬁt market. To further reduce beneﬁt expenditures, the district is self-

81

funded for dental and vision, and the district pays the employees deductibles of $1,250
for a single person and $2,500 for a couple for these beneﬁts.

To help reduce instructional expenditures, the district has increased the class size.
The class size maximums are addressed in the union contract and are fairly small
increases implemented by grade level. The district has also made some programmatic
changes in special education and delayed textbook adoptions in an effort to assist the
district with their ﬁnancial goals. Further reductions have come through the reducing of
department chairs, eliminating administrative performance incentives, reduced travel and
reduced capital needs. Supply budgets have also been reduced by means of allocating a
smaller supply amount on a per pupil basis. The district does not participate in any
consolidation of services, but would be willing to entertain any efforts to consolidate
services with other districts.

Summary

Clarkston Community Schools is one of the districts that do not conform to the
expected outcomes of the research. The district enjoys a high level of fund equity despite
the fact that they do not participate in schools of choice at any level, or have privatized
any of their non-instructional services and has not made wage concessions or freezes or
required employees to pay a portion of the health insurance premiums. Clarkston appears
to be able to operate on the revenue that is provided without taking drastic measures to
maintain the strong ﬁnancial position that they currently enjoy. Based on a review of the
behaviors and the level of fund equity percentage, it appears that Clarkson Community
Schools has a low level of ﬁscal stress and is not experiencing a great deal of pressure to

improve the fund equity percentage.

82

Royal Oak School District
Royal Oak School District in the southeast comer of Oakland County has
approximately 5,000 students. Royal Oak has been experiencing declining enrollment
over a number of years and has had to close instructional buildings in response to this
decline. Nevertheless, Royal Oak has an enjoyed a strong ﬁnancial position with fund
equity at 23.9% at the end of the 2005-2006 school year. Of the ﬁve years span being
analyzed in this research, Royal Oak has experienced an average of 24% ﬁrnd equity
levels. Royal Oak is an older suburban district mostly developed shortly after World War
II, with not much vacant land available for new construction. It has a mixed racial/ethnic
population and has minority populations close by. This city is basically a small bedroom
community with its major landmark being Beaumont Hospital. Royal Oak has one high
school, one middle school and six elementary schools.
Revenue Enhancements
Since 1997, Royal Oak School District has participated in limited Schools of
Choice on a space available basis. In the beginning, the district piloted the program in
one building and went on to further expand the program. Enrollment increased
dramatically, but so did the perceived student behavior problems. Therefore the program
was adjusted to limit the enrollment to students only in grades kindergarten through third
and only through section 105 of the school code, which allows only students in Oakland
County to enroll. This limited Schools of Choice enrollment adds less than one hundred
students to the student population. The district has never participated in Schools of
Choice through section 105C of the school code, which would allow students from

outside the county to enroll in the Royal Oak School District. The reason that Royal Oak

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School District does not participate in 105C Schools of Choice is because of their close
proximity to Detroit. Detroit Public Schools has a large majority of minority students
with signiﬁcantly lower average achievement levels than Royal Oak. The concern is that
large numbers of Detroit Public School students would enroll in Royal Oak School
District changing the student population so that it would not be representative of the
community that Royal Oak School District serves. Additional concerns of reduced test
scores would impair the district’s ability to make adequate yearly progress in the high
stakes testing environment that public schools are currently operating in. This district
would seem attractive to families from perceived failing school systems nearby.

As Royal Oak School District has closed instructional buildings, the number of
Schools of Choice seats available has declined because there is less space available and
the district is obligated to educate the resident students ﬁrst before it looks outside of the
district for additional students to ﬁll empty seats. The district believes that participating
in the Schools of Choice program has been ﬁnancially beneﬁcial but continues to limit
the enrollment so that the student population can be controlled. The factor that
contributed to the decision to participate in Schools of Choice was an internal factor,
coming from a desire expressed by the Superintendent. The Superintendent of Royal Oak
was concerned about maintaining fund equity levels and also saw that other districts in
the area were participating in the Schools of Choice initiative so he introduced the
concept to the school board as a way to enhance revenue and maintain fund equity levels.

Regarding other revenue enhancement opportunities, Royal Oak School District
does advertise on school district property. Royal Oak School District allows the local

bank to advertise on the football ﬁeld scoreboard for a one-time fee of $30,000. The

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advertising was placed on the scoreboard for a period of three years and was in
compliance with the district policy regarding how much of the face of the scoreboard
could be covered by the advertisement. The district also sells advertising in publications
that are distributed through the school and community and also generates some additional
revenue by renting out district facilities to outside groups. The district believes that the
advertising has been somewhat successful with generating additional revenue, though not
a large amount of revenue has been generated. The factors that were responsible for the
district’s decision to advertise were internal, with the Executive Director of Business and
Personnel Services promoting and securing the advertising.

Royal Oak School District does not charge for students to participate in sports,
except for ice hockey and lacrosse, which are self-supporting sports. The reason for this
is that both of these sports are expensive to operate. All of the other sports are provided
to the students free of charge. The district also generates some additional revenue from a
beverage consortium that is operated within the school district.

Expenditure Reductions

Royal Oak School District has privatized its food service program but no other
non-instructional services. The food service area is a place that a district would privatize
with the least impact on district employees. The reason for this is that food service
employees only work a few hours a day, making it almost impossible to fully vest in the
Michigan Public School Employee Retirement System. Furthermore, food service
employees are typically not entitled to health beneﬁts through the district because of their
lack of full time employment status. Royal Oak School District also out-sources an

occasional bus run in the event that the in house transportation department is not

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available to accommodate the demand. Substitute teachers are also contracted through a
privatized company thereby eliminating the district’s contribution to the Michigan School
Employees Retirement System, which is approximately sixteen percent of the gross pay
of each employee.

Royal Oak School District has never negotiated a pay free or a wage concession
because the district is not in dire ﬁnancial straits. However, the district has increased the
insurance deductible an employee is obligated to pay and has also changed insurance
plans that the district offers their employees in an attempt to reduce expenditures.

In an effort to reduce expenditures, class size in the all day kindergarten program
has increased. There is contract language in the Royal Oak School District that speaks to
class sizes and sets forth a maximum class size that a teacher is contractually obligated to
instruct. The class sizes addressed in the teacher’s contract have not increased.

Royal Oak School District has reacted to budgetary stress by actually increasing
class offering to make the district more attractive to incoming families and to students
who may have chosen private schools within the district boundaries or to students who
have left the district to attend other neighboring schools through the Schools of Choice
program. In a pro-active effort to retain its existing student population and possibly
recruit some students back into the district, the district has expanded the kindergarten
program to all day long, instead of just half days and has also added foreign language
instruction at the elementary level.

Royal Oak School District has reduced the number of district and building level
administrators through attrition and through closing buildings. As buildings have been

closed, the district eliminated the building level administrator because the position was

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no longer necessary. Furthermore, as district administrators that were located in the
administration building retired, their positions were not re-staffed. An example of this is
when the Human Resources Director retired, the duties were split between the Executive
Director of Business and Technology Services and the Executive Director of Business
and Personnel Services. Furthermore, the Executive Director of Vocational Education
and the data processing positions were eliminated through attrition and a reassignment of
responsibilities.

Royal Oak School District has engaged in consolidation of services, but not with
other local school districts. Instead, the district has partnered with the City of Royal Oak
to barter services that would otherwise have been an expense for each entity. For
example, the City of Royal Oak picks up the districts garbage for free in exchange for
free use of the districts facilities.

Summary

Royal Oak School District has a high fund equity percentage, averaging 24% over
the ﬁve years of this study. They have participated in the typical revenue enhancements
measures such as participating in the schools of choice program, advertising on district
property and generating revenue through alternative means, particularly selling property
to Beaumont Hospital. The only revenue enhancement measure that Royal Oak does not
participate in is charge students to participate in athletics or activities. Royal Oak has
also implemented a variety of expenditure reduction measure in an effort to retain fund
equity, such as privatizing non-instructional staff, require employees to pay a portion of
the health insurance premium, eliminating administration through attrition and

implementing creative ways to consolidate services with the City of Royal Oak. Royal

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Oak School District has also maintained a pro-active position to attract and retain
students by not eliminating programs and services or increasing class size, but instead
expanding course offerings and maintaining class size. From a review of the behaviors
and the fund equity percentage, it does not appear that Royal Oak School District is

experiencing a high level of ﬁscal stress or pressure to respond to ﬁscal stress.

Avondale School District

Avondale School District is a district of approximately 3,800 students and is
located in the center of Oakland County but close to the eastern border of the county.
The student population in the Avondale School District has remained fairly stable,
despite the fact that the community that Avondale serves is highly dependent on the
suffering automotive industry with the headquarters of the Chrysler Corporation right in
its backyard. Avondale School District was chosen to interview because of their fairly
weak ﬁnancial position. Over the ﬁve-year span of this study, Avondale has been
experiencing a fairly slow decline in the percentage of fund equity from seven percent in
2002 to two percent in 2006. Avondale was chosen as an interview candidate because of
this low fund equity percentage. Avondale currently has one high school, one middle
school, one upper elementary school, three elementary schools and one lower elementary
school.

Revenue Enhancements

Avondale School District has chosen to participate in the Schools of Choice

program throughout the schools years 2002-2006 under section 105 of the Michigan

School Code. However, the district participates in a very limited basis, with only 20 seats

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available and only in grades kindergarten through second. Therefore, almost all of the
students that are attending Avondale School District are resident students. The factors
that were responsible for the district’s decision to participate in the Schools of Choice
program on such a limited basis were internal, mostly coming from the direction of the
Superintendent. Avondale School District’s entire northeast region is bordered by
Pontiac School District. There was great concern that opening the district to Schools of
Choice in large numbers would generate a large inﬂux of Pontiac School District students
who are typically minority, low-achieving students from a low socio-economic
background. The students that attend Avondale are predominantly fairly high achieving
students from middle class backgrounds. It was thought that opening the district to
Schools of Choice would change the district population and achievement dramatically,
which would impact test scores and impede the district’s ability to attain adequate yearly
progress.

Avondale School District does not allow private parties to advertise on school
district property, however Avondale School District does charge their students to
participate in athletics. The fee is one hundred and thirty ﬁve dollars a year and is not
contingent upon the number of sports or activities a student may participate in and there
is not a maximum limit that families pay.

Additional revenue enhancements that Avondale School District has embarked on
are increased lunch prices of twenty cents across the entire district. Avondale School
District also has a latchkey program, where parents can place their children for before

and after school care, which generates additional revenue for the district. Avondale

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School District also participates in vending machine consortiums with Coca-Cola and the
district receives vending revenue from this arrangement.
Expenditure Reductions

Avondale School District privatizes all of its non-instructional services except
transportation. The non-instructional services that are privatized include custodial
services incorporating the cleaning and minor repairs of the buildings. Grounds services
are also privatized, which include snow removal, landscaping and grass cutting. Food
services, which is the preparation and serving of breakfast and lunches to the student
population are also privatized. Maintenance of the buildings, which include electrical
and plumbing repairs, which typically are performed by a skilled labor force are also
privatized.

Avondale School District has negotiated pay freezes for all of the district’s
administrators, however no concessions have ever been negotiated. Furthermore, the
district offers MESSA health insurance, which is an insurance product backed by the
Michigan Educational Association and no changes or reductions in beneﬁt offerings have
been negotiated. However, administrators are required to pay ﬁve percent towards the
cost of their health insurance, but during negotiations the district was able to compensate
these individuals by four hundred dollars in other areas of the contract, which according
to the Chief Financial Ofﬁcer had no impact on the employee’s net compensation.

As far as reductions in expenditures that would impact the classroom, Avondale
School District negotiated an increase in class size in the teacher’s employment contract
by two students per class. This increase has not resulted in the reduction of any teachers.

Avondale School District has not reduced any programs or services since the economic

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downturn. The reason was because the district would like to continue to remain
competitive with neighboring school districts.

Avondale School District has eliminated an assistant principal at the upper
elementary building due to the decrease in student enrollment. The athletic director’s
position has been combined with the assistant principal’s position at the high school and
the assistant principal has been contracted, upon retirement, to be the human resources
coordinator. Avondale School District shares a technology person with the neighboring
school district, Rochester Community Schools. All of these position consolidations,
eliminations and service consolidations have resulted in cost savings to the district.

Summary

Avondale School District is a district that is teetering on the brink of plunging into
a deﬁcit fund equity position. At the end of the 2005-2006 school year, Avondale School
District was maintaining a 1.7% fund equity level. The revenue enhancement and
expenditure reduction measure that were implemented are behaviors that are clearly a
result of an effort to maintain, if not improve the fund equity position. Avondale
participates in the schools of choice program, though not extensively. They charge
students to participate in athletics or activities and have generated revenue through other
sources, however they do not advertise on district property. Avondale has privatized
almost all of the non-instructional staff except transportation, has required employees to
pay a portion of the health insurance premium, negotiated pay freezes but not wage
concessions, increased class size, eliminated administrative positions and building
principals and has consolidated services with other school districts. The only expenditure

reduction measures that have not been implemented are reducing employee beneﬁt

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offerings and the elimination of programs. From a review of the behaviors, it appears
that Avondale is feeling pressure to implement as many measures as possible to steer

clear of a deﬁcit ﬁnancial position.

Berkley School District

Berkley School District has approximately 4,200 students and is located on the
southeast border of Oakland County. Berkley School District has one high school, one
middle school, and ﬁve elementary schools. This district was chosen to interview
because of the weak ﬁnancial position that the district has been in. The fund equity
percentage of Berkley School District has varied between three and ﬁve percent in the
ﬁve years included in the span of this study. At the end of the 2005-2006 school year
Berkley was maintaining a Berkley a 3.1% fund equity percentage. Berkley School
District is also considered an urban school district, with not a lot of vacant land to
develop for new housing starts. Berkley is also one of the few school districts in the state
that does not provide transportation for any students other than special education
students. Berkley contracts for these limited transportation service because it is required
by the State of Michigan. Because of this reason, Berkley is reluctant to close any of the
elementary school buildings because they have sold themselves as a “neighborhood
school” which means that every neighborhood is within walking distance to an
elementary school building.

Revenue Enhancements
Since 2001, Berkley School District has been participating in the schools of

choice initiative. The district participates in the 105 section of the school code, which

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allows for students residing in the county to enroll in Berkley, but does not participate in
the 105C section of the school code, which would allow students residing outside of
Oakland County to enroll in the Berkley School District. During the ﬁrst years of
participation, the district had unlimited enrollment in an effort to increase enrollment.
The participation in the Schools of Choice program changed the population of the school
district as the district began to be removed from the neighborhood school image that the
community wanted. Schools of Choice students now make up about nineteen percent of
the overall student population in the Berkley School District. Because of the perceived
unwanted changes that Schools of Choice brought to the district, enrollment through
Schools of Choice began to be limited to concentrate on kindergarten through second
grade, with Schools of Choice seats available on from kindergarten through ﬁfth grade.
The Deputy Superintendent of Finance and Human Resources believes the program has
been very successful at generating revenue for the school district. The factors that were
responsible for the original decision to participate in Schools of Choice came from the
internal administration and the school board was involved from the beginning of the
process. The factors that contributed to the reduction in the participation of the schools
of choice program came mainly from external stakeholders, namely the community not
pleased with the students that were attracted through the program and the current board
president was not a big supporter of the program.

Berkley School District has allowed the local grocery store to advertise on the
scoreboard at the high school for a one-time fee of $15,000. The district also has a policy
that would allow anyone interested in purchasing the naming rights to various district

facilities or rooms. The factors that were responsible for both of these additional revenue

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enhancements were the athletic director promoting the scoreboard advertising and the
Deputy Superintendent of Finance and Human Resources promoting the policy that
paved the way for additional advertising revenue if the situation presents itself.

Berkley School District charges students $65 per sport at the high school to
participate in athletics, with a maximum of $130 per student. The middle school students
are charged $40 per sport, with a maximum of $80 per student. There is also a $215
family cap on pay to participate fees. The pay to participate has generated a small
amount of revenue to offset the cost of athletic offerings.

Berkley School District has also been very creative in maximize other revenue
enhancement opportunities. The football stadium has artiﬁcial turf and a stadium
manager was hired to handle stadium rentals, which also covers the cost of this position
and generates additional revenue for the district. The district sells ﬁtness center public
memberships to the district athletic facilities, operates an alternative education program
for students that are eighteen to twenty one years of age without a GED, and has sold an
unused building to a willing buyer for one million dollars. Furthermore, the district has
partnered with Southﬁeld Public Schools for a day care program in an effort to
consolidate services. Berkley School District also allows some private school students to
take non-core classes and in return, Berkley receives the enrollment count for state aid
reimbursement.

Expenditure Reductions

As previously mentioned, Berkley School District is fairly unique compared to

other local school districts in that they don’t operate a transportation system. The district

likes to promote itself as a neighborhood school district, thereby having an elementary

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school within walk-able distance to every neighborhood. The middle school and high
school are centrally located and easily accessible to students in the district. This leaves
the transportation of special education students, which is mandatory that the district
provides. Berkley School District privatizes the transportation of these students as well
as the food service non-instructional areas as well. The other area that Berkley School
District privatizes is the substitute teachers and the substitute support staff and coaches.

Berkley School District has never negotiated wages concessions or freezes, but
everyone except paraprofessionals contribute ﬁnancially in some way to the payment of
the health insurance premium. The beneﬁt offerings have been reduced from a more
expensive plan to a less expensive plan but still remained inside the MESSA group of
health insurance offerings.

Berkley school district has neither increased class sizes or decreased or eliminated
any programs. The reason for this is that Berkley School District wanted to remain
competitive and attractive to potential families compared to other neighboring districts.
The district has reduced the number of administrative staff by one at the central ofﬁce
level and has eliminated two positions at the cabinet level by reassigning duties to the
ﬁve remaining cabinet members. Berkley School District has been fairly creative with
other expenditure reductions. Some of those reductions have been to eliminate overtime
costs for custodial and maintenance, eliminate two secretarial positions, reduce the para-
educators hours so they are no longer eligible to receive health beneﬁts, and continue to
downsize the teaching staff as enrolhrrent declined. As previously mentioned, Berkley
School District also participates in several consolidation of services opportunities with

Southﬁeld schools including a technical career center.

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Summary

Berkley School District is also a school districts that is experiencing severe
ﬁnancial stress. At the end of the 2005-2006 school year, Berkley School District was
maintaining a 3.4% fund equity level. The revenue enhancement and expenditure
reduction measure that were implemented are behaviors that are clearly a result of an
effort to maintain, if not improve the fund equity position. Berkley participates in the
schools of choice program, though not extensively. They charge students to participate in
athletics or activities and have generated revenue through other sources and charge for
advertising on district property. Berkley has also generated revenue through other
alternate sources. Berkley has privatized almost all of the non-instructional staff except
custodial and maintenance, but has not required employees to pay a portion of the health
insurance premium or negotiated pay freezes but not wage concessions. They have
eliminated administrative positions and consolidated services with other school districts.
They too have maintained a pro-active position to attracting and retaining students by not
increasing class sizes or eliminating programs. From a review of the behaviors, it
appears that Berkley is feeling pressure to implement as many measures as deemed

feasible to steer clear of a deﬁcit ﬁnancial position.

Madison Public Schools
Madison Public Schools has approximately 1,600 students and is located in the
southeast comer of Oakland County. Madison Public Schools has been a concern for the

Michigan Department of Education for a number of years due to the districts on going

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negative fund balance. During the ﬁve-year span of this study, the fund equity
percentage of Madison Public Schools has decreased dramatically from a negative six
percent to a negative nineteen percent. At the end of the 2005-2006 school year,
Madison Public Schools had a —19% fund equity level. Madison Public Schools’ ongoing
negative ﬁrnd equity is the reason this district was chosen as an interview candidate.
Once a school district has a negative fund balance, the district is obligated to ﬁle a deﬁcit
elimination plan with the Michigan Department of Education, which outlines a plan to
restore ﬁscal health to the district.
Revenue Enhancements

Madison Public Schools participates in the Schools of Choice program through
the 105 section of the school code as well as the 1050 section of the school code. This
means that students residing within Oakland County and students residing in contiguous
counties can enroll in Madison Public Schools. The district began participating in
Schools of Choice during the 2005 school year and has made unlimited seats available to
incoming students. The Schools of Choice program has been fairly successful at
generating revenue for the district and slowing the continual decline of enrollment but
has not done much to increase enrollment. The factors that were responsible for the
decision to participate in the School of Choice program were the internal and external
pressures on the district administration to balance the district budget.

Madison Public Schools does not sell access to private parties to advertise on
school district property, nor does the district charge students to participate in sports. The

district does generate some additional revenue from leasing space for a cell tower to a

97

cell phone company, but outside of this cell tower arrangement there are no other revenue
enhancements opportunities being maximized.
Expenditure Reductions

Madison Public Schools has not privatized any non-instructional services except
for the grounds maintenance in the summer, particularly lawn mowing. Non-
instructional services include transportation of students, food services, custodial and
maintenance of buildings and grounds maintenance.

Madison Public Schools has negotiated wages freezes with several employee
groups, but no concessions have been negotiated. The principals, the teachers, and the
para-educators have all received a negotiated pay freeze. The length of the freeze is for
two years until the contract is renegotiated. Employee beneﬁts have also been nominally
affected by reducing the number of banked sick days that were allowed from one hundred
and seventy days to one hundred and twenty ﬁve. This only results in a cost savings to
the district when an employee happens to retire. Insurance caps were also negotiated so
that if the insurance increases over a certain amount, the employees are obligated to pay
the increase. Again, this cost savings is only realized if the insurance is increased over
the percentage negotiated. Consistently over the past several years, increases in health
insurance costs have been nominal.

Madison Public Schools has not increased their class size or eliminated any
programs or services. The district has, however, eliminated on central ofﬁce
administrator in response to budgetary stress. The district has so few buildings that

eliminating principal positions is not an option. Furthermore, the district has

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consolidated services with nearby Clawson Schools by consolidating transportation

services with that district.

Summary

Despite the obvious extreme ongoing ﬁscal distress, it does not appear that
Madison Public Schools are implementing very many revenue enhancement or
expenditure reduction measures. Of the four revenue enhancement measures, Madison
chose to implement only two, participating in schools of choice and generating revenue
from alternative sources. They do not charge students to participate in athletics or
activities and do not advertise on district property. Part of the decision to not charge
students could have to do with the socio-economic backgrounds of the students the
district serves. On the expenditure side, it appears that much more could be done to
improve the ﬁnancial health of the school district. Madison only privatizes summer
grounds work, does not require employees to pay a portion of their health insurance nor
has the beneﬁt offerings been reduced. They have not negotiated a signiﬁcant wage
freeze and no wage concessions have been negotiated. Furthermore, class sizes have not
increased and programs and services have not been reduced. Administration has been
eliminated through attrition only, however the district is participating in consolidation of
transportation services. It appears that Madison Public Schools does not feel pressure to
respond to ﬁscal distress due to the low level of implementation of revenue enhancing

and expenditure reduction measures.

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Oak Park School District
Oak Park School District is located in the southeast corner of Oakland County and
has approximately 4,400 students. The district has one high school, one middle school,
one upper elementary school and three elementary schools. The district has had a
declining fund balance for the ﬁve-year span of this study, starting with a very strong
fund equity percentage of 21% and ending the 2006 school year with a negative 5% fund
equity. The rapid decline in fund equity and the subsequent negative fund equity is the
reason this district was chosen for an interview. The district demographics are
predominantly minority (in the upper 98%) though the community has a large Jewish
population. The Jewish students attend private Jewish schools inside the city of Oak
Park. Therefore, the population of the school district is not representative of the
community as a whole.
Revenue Enhancements
Oak Park School District participates in Schools of Choice 105 and has since the
inception of the Schools of Choice program in the late 1990’s. AS of the 2005-06 school
year, the district began to participate in 1050 Schools of Choice as well, on an unlimited
basis, which means that students from inside Oakland County and from counties that are
contiguous to Oakland County and enroll in Oak Park Schools. The Schools of Choice
program has been very successful, particularly the 105c initiative, with enrollment
increasing from 3,400 students to over 4,400 students in just the three years the district
has been participating in the 105C program. The district was able to end the 2007 school
year, which is outside of the scope of this study, with a positive 2% fund equity.

Therefore, the Schools of Choice program has been largely successful restoring ﬁnancial

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health to the district. The main factor that contributed to the participation of the School
of Choice program is that in 2005 a new administration was hired at the Oak Park School
District with the charge of turning the district ﬁnances around. The Superintendent was
the key inﬂuencer, persuading the school board at the time that participation in the
Schools of Choice program would beneﬁt Oak Park Schools.

Oak Park Schools does not allow private parties to advertise on school district
property, nor do they charge their students a fee to participate in sports. Other revenue
enhancements that the district has undertaken, was to increase lunch prices by a nominal
amount to make the cafeteria operations self sufﬁcient, and rent out the district facilities
to interested parties in the community to generate additional revenue for the district. The
district also earns revenue from the vending machines that are operated by a private
vendor.

Expenditure Reductions

Oak Park School District has not privatized any non-instructional services, except
food services and some special education transportation. The district is reluctant to
privatize because many of the staff members that provide non-instructional services to the
school district also reside in the school district and recently voted for a new bond issue
for building renovations. The administration would like to if the district can be restored
to ﬁnancial health through growth in the Schools of Choice program before drastic
budget reductions such as privatizing are implemented.

Oak Park School District employees have not taken a wage freeze or concession,
however the beneﬁt offerings have been reduced. All district employees have been

transferred to a less costly package but still within the MESSA insurance offerings.

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Furthermore, the co-pay on prescriptions have been increased from $2 for generic brand
prescriptions to $10 and from $5 for name brand to $20 for name brand prescriptions.
This resulted in a $500,000 cost savings to the district. District employees are not
required to pay a portion of their health insurance beneﬁts.

The average class size has increased at all levels within the school district,
particularly because at the start of the economic downturn the class sizes were too small.
No programs or services have been eliminated at Oak Park School District. In fact
offerings have been expanded to incorporate foreign languages at the elementary level
and dual enrollment and vocational educational opportunities at the high school. The
reason for the expansion of programs is an attempt to retain resident families, who are
sending their children to neighboring school districts, and attract students to Oak Park
School District through the Schools of Choice program.

Oak Park School District has not eliminated the number of building level
administrators because of the increase in enrollment. However, even though the
enrollment has increased by 1,000 students in three years, no additional building level
administrative staff has been added. The district does not participate in consolidation of
services initiatives with other school districts but would be willing to consider all
opportunities to reduce expenditures.

Summary

At the end of the 2005-2006 school year, Oak Park had a deﬁcit fund equity
position, with ﬁmd equity at —4.7%. Despite the obvious ﬁscal distress, Oak Park did not
pursue a variety of revenue enhancement or expenditure reductions measures, but rather

chose to focus on increasing the schools of choice enrollment through 105C, rather than

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reduce expenditures or seek alternative revenue generation sources. Oak Park did not
allow advertising on district property, nor did they charge students to participate in
athletics or activities, largely due to the low socio-economic background of the students
they serve. However, they did generate revenue through alternative sources. Oak Park
participates in privatization on a limited basis, only privatizing food services and a small
component of transportation. They have not required employees to take a wage
concession or a wage freeze, or pay a portion of their health insurance premiums. They
have however, negotiated a reduction in the beneﬁts by increasing the co-pays on the
prescription drug insurance. Oak Park Schools has also taking a pro-active position to
attract and retain students by expanding programs and services. As a result of the grth
the district has experienced, they were not able to eliminate administrative or building
principal positions, and only participate in consolidation of services to the level of special
education transportation that is a countywide initiative. It appears that Oak Park Schools
does feel some pressure to respond to ﬁscal distress and has implemented an aggressive
marketing campaign to increase the schools of choice revenue rather than reducing

expenditures to improve ﬁnancial health.

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CHAPTER VI

FURTHER ANALYSIS OF FINDINGS

The variety of revenue enhancement and expenditure reductions measures that
were implemented in the research setting elicited both predictable and unpredictable
results from what one would expect. Clearly the unique circumstances of each district
studied affected the results. Generally speaking, the research has proven that districts
that are able to contain their administrative costs and have a low average teacher’s salary
experience lower levels of ﬁscal stress. These districts also require employees to pay a
portion of the health insurance premiums, have eliminated programs or services that are
either costly to the district or have low participation rates, and have increased class size
and therefore have higher fund equity levels than the districts that don’t exhibit these
behaviors. These successful districts also participate in advertising on district property,
charge students to participate in athletics and activities and ﬁnd other means to generate
revenue.

Contrary to what one would expect, the districts that participate in the schools of
choice program, have privatized non-instructional services, have frozen wages, reduced
beneﬁts, eliminated principals and consolidated services in some form have lower fund
equity levels than the districts that have opted not to implement these revenue
enhancement and expenditure reduction measure. The two measures that districts chose
to implement most, participating in schools of choice and privatizing non-instructional
services, have proven to be behaviors of districts with low fund equity balances. Perhaps

a reasonable explanation could be the net affect of the schools of choice program. There

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are only so many school age children in the State of Michigan. If a student enters a
school district through schools of choice, they are also exiting another district.
Furthermore, what was the cost savings associated with the privatization of non-
instructional services and what would fund equity levels be if these services were not
privatized? There appears to be somewhat of a mismatch between some of the measures
implemented and the outcomes of those measures. It appears that some measures
produce a reverse causation. Though no strong patterns have appeared, each measure
implemented that has resulted in an unpredictable outcome doesn’t mean that the
implementation didn’t improve the fund equity level to some degree. Some districts only
embrace large changes, such as privatization when they are in a deﬁcit.

The one revenue enhancement option that would have the largest impact on
district revenues is the schools of choice program. The current economic environment
would lead us to the conclusion that this would be a key factor that would inﬂuence
school districts in their decision to opt in to the state choice program. More and more
districts are beginning to feel signiﬁcant ﬁnancial pressure and have run out of
expenditure reductions options and are looking for additional revenues through accepting
nonresident students.

The decision to accept schools of choice students is often not an easy one for
districts to make. A signiﬁcant factor in choosing this option is the racial and
socioeconomic makeup of surrounding school systems. Earlier studies have identiﬁed
that students typically opt for choice schools in the more afﬂuent communities. Thus, if
school systems are near lower socioeconomic communities, they will face the

consideration of having lower socioeconomic students come to their schools and the

105

impact that may have on their community in terms of the perception and the desirability
of their schools. We know that the perception of the school districts is often measured by
socioeconomic-inﬂuenced factors such as racial makeup, income, and student test scores.
A change in the perception of the schools could drive out current resident students. Thus,
school districts may risk the loss of revenues when current resident students themselves
participate in the schools of choice program and choose to move to more desirable
neighboring districts as the conditions and environment inside their resident schools
decline as a result of the changes in the socio-economic background of the student body.
The fear of a decline in the socio-economic status and racial makeup of the student body
and lower test scores was exactly the reasoned cited by several of the districts that
participated in interviews for choosing to opt out of the schools of choice program. Two
of those school districts were in close proximity to Pontiac public schools, which serves a
low socio-economic population.

Lastly, local dynamics of each community, inﬂuenced by key players such as the
superintendent, board members, special interest groups, and inﬂuential community
leaders, also can impact school district decisions. It is assumed that ﬁnancial condition
would bring about the most pressure on a school district to opt in to the school choice
program. Other considerations could be the makeup of the surrounding districts and the
local dynamics. Schools are more willing to market themselves to the surrounding
districts if those districts have the same socio-economic makeup as their own. Unique
dynamics exist when combining economic pressure and local political pressures.

Taking all of these dynamics into consideration, it is important to note that the

districts that have been able to maintain large fund equity balances are the districts that

106

service communities with high socio-economic status. These wealthy districts typically
do not participate in the schools of choice program and have effectively created borders
for entry into the school system. Only residents of these districts are able to attend the
local public schools, thereby guaranteeing the student body will mirror the socio-
economic and racial makeup of the community. If market forces are beginning to be
unleashed, why aren’t all school systems reacting to them?

There is no doubt that some form of competition has been generated through
choice initiatives. The districts most threatened by the loss of revenues tend to be the
ones most likely to compete. It is also widely acknowledged that when students opt in to
the schools of choice program, they are essentially escaping poor school systems that
serve a low socio-economic community to move to a more wealthy school district that
serves a higher socio-economic community. Such actions have resulted in a sorting of
students and creating winners and losers within the school choice system. Therefore,
wealthier districts that have chosen to participate in the schools of choice program
continue to remain wealthy while poor districts continue to remain poor as more and
more students opt to move out of the district. Furthermore, this market competition has
created social harms such as segregation and sorting that will have an impact on student
achievement. The most affected are those urban districts that service areas with little
grth potential, such as Detroit.

More than just the choice initiative is threatening the ﬁnancial success of some of
the poorer school systems in the State of Michigan. The funding structure implemented
under Proposal A is in dire need of a reconﬁguration. Proposal A was implemented

without consideration for any downturns in the economic climate. Now that districts are

107

unable to generate local revenue to Operate their school systems, districts are
experiencing ﬁscal stress because the ﬁnancial condition of the State has proven to be
one that is unable to support school systems with adequate revenue to operate.
Furthermore, even when districts are able to pass local bond issues for such things as
infrastructure improvements and technology, districts that have low property values are
not able to generate as much property tax revenue as districts that are property rich. This
disparity in the ability to generate local property tax revenue between poor districts and
wealthy districts guarantees that students from low socio-economic environments will be
educated in deteriorating school buildings that lack the necessities conducive to student
success. The wealth of a district heading into Proposal A is a large indicator of how
wealthy a school district is in this post-Proposal A era.

Furthermore, the non-homestead component of Proposal A provides for 18 mills
to be levied on non-homestead property to be used for general operations of a school
system. Districts that serve low socio-economic communities typically serve
communities with low property values, including non-homestead property values.
Therefore, the ability for a poorer district to generate property tax revenue to operate their
school district is much less than the ability for a property wealthy district to generate
operating revenue. This is essentially the major reason for the disparity in per-pupil
funding from district to district.

When one considers the ﬁnancial condition of school districts in the State of
Michigan, many factors come into play, which makes the topic such a signiﬁcant and
widely debated one in educational and public circles. It is evident that further study is

needed to determine the long-term affect on school districts of the revenue enhancement

108

and expenditure reduction measures implemented by the districts in the study. It is also
evident that with this prolonged downturn in the economic climate, ﬁnancial pressures
are moving up the wealth chain with more and more districts implementing changes in
the way they conduct business that wouldn’t have been considered if it weren’t for the
pressures of ﬁscal stress. With no changes in the economic environment in sight, there

can only be more ﬁnancial pressure on Michigan school districts in the future.

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EXHIBIT 1 FINANCE MANAGER SURVEY

Reaction to Budgetan Stress 1L] Michigan Public Schools:

A School Business Administrator’s Perspective

School District Survey

 

 

School District Name of Responder

Which of the following steps has your school district taken to enhance revenues over the

last ﬁve years?

El
Cl

Participate in Schools of Choice

Sell access to advertising on school property, on
DAthletic ﬁelds or gyrnnasiums

DBuses

UCafeterias

.Hallways

DClassrooms

L—JOther

 

Institute pay to participate in sports
If so, which sports
What is the fee

 

 

Other revenue enhancement strategies undertaken in the last ﬁve years

 

 

 

Which of the following steps has your school district taken to reduce expenditures over
the last ﬁve years?

El

Privatize non-instructional services?

[:1 Transportation
1:] Custodial

D Food Service
1:] Maintenance
[:1 Grounds

110

Other

D Security
[:1 Substitute Teachers

[:1 Other

 

Negotiate employee pay freezes or concessions
If so, with whom?

E] Teachers

1:1 Support Staff
El Administration
[:1 Bus Drivers
[:1 Custodians

1:1

 

EDD El 1:1

Increase employee payments for health insurance
Reduce services covered by employee health insurance

Increase class size
If so, which grades

 

Eliminate or curtail instructional programs
If so, which ones

 

Eliminate or curtail instructional support services
If so, which ones

 

Reduce number of district administrators
Reduce number of building-level administrators

Consolidate service provision with other school districts.

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EXHIBIT 2 INTERVIEW QUESTIONNAIRE

Interview Tool
For Six Select School Districts

Revenue Enhancements

In the past ﬁve years:

1.

Has your school participated in Schools of Choice? If so, do they participate
under 105? 105C?

Has your school advertised on school property? If so, where exactly?

Has there been a charge for students to participate in sports? If so, what is the fee
and how many sports is the fee based on? Are there special arrangements for
multiple sports athletes or families with multiple athletes?

Are there any other revenue enhancements that your district participates in that

were not mentioned?

Expenditure Reductions

. Has your school privatized any services, non-instructional or otherwise? If so,

which ones?
Have there been negotiations of wage concessions or freezes? If a freeze has been
enacted, how long was the freeze? If a concession was enacted, how much of a

concession was negotiated?

. Have there been negotiations of reductions in beneﬁts or offerings? If so, what

were the reductions or changes in beneﬁts?
Has the district required employees to pay a portion of health insurance

premiums? If so, how much are employees required to pay?

112

Has class sizes increased? If so, what was the increase?

Have any programs or services been eliminated? If so, what programs or
services?

Has there been any consolidation of services with other districts? If so, what

services?

113

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