New Study Explores Michigan’s Financially Troubled School Districts

Written by: Amy Auletto

Primary Source: Green & Write, December 2, 2015

The Education Policy Center at Michigan State University has recently released a paper titled Which Districts Get Into Financial Trouble and Why: Michigan’s Story. Written by Dr. David Arsen of Michigan State University, along with his colleagues Dr. Thomas A. DeLuca, Dr. Yongmei Ni, and Dr. Michael Bates, this piece examines which Michigan districts get into financial

Dr. David Arsen

trouble and why, along with whether there are significant differences between districts in which the state chooses or does not choose to intervene. The following is a brief synopsis of key points from this study along with a discussion of its implications.

Recent Michigan Laws Allow for Increased State Intervention

In recent years, Michigan has passed several laws that grant the state increased authority in dealing with districts that are struggling financially. In 2011, Public Act 4, the Local Government and School District Accountability Act, allowed the governor to appoint an emergency manager in cases where districts are experiencing financial emergencies. Public Act 96, passed in 2013, allows the state to dissolve districts that are no longer found to be financially viable. Most recently, Public Acts 109-114 increased districts’ reporting requirements along with the state’s ability to intervene. Arsen and colleagues argue that the assumption of these laws is that financial distress is a result of “…poor or misguided decision making by local district officials.”

Deficits on the Rise, Districts Have Little Control Over Revenue

With a highly centralized school finance system, local districts have little control over how much they receive in revenue. Most funding is determined by the state and districts do not have much authority to levy additional funds. As a result, Arsen and colleagues argue that local districts can only respond to financial stress by reducing spending. Yet despite these efforts, ten percent of Michigan’s districts had deficits in 2012-2014. A handful of these districts have been dissolved or placed under the control of an emergency manager.


Using data from 1995 to 2012 from the Michigan Department of Education and the State of Michigan’s Center for Educational Performance and Information, this study models how districts’ fund balances are influenced by various factors. These factors include: revenue, enrollment, choice (percentage of students participating in charter schools or inter-district choice), student characteristics (such as percentage receiving special education services or free and reduced-priced lunch), and resource allocation. Resource allocation is a measure of spending decisions that districts do have control over – teacher salary, pupil-teacher ratios, administrative spending, employee health insurance, and privately contracted services.

80% of Fiscal Stress Outside of Local School Districts’ Control

While recent legislation has suggested that local districts are making poor decisions that lead to deficits, this study found that only 20% of variation in fund balances between districts is explained by local school districts’ resource allocation decisions. Worth noting is that employee health insurance expenses and contracting with private vendors are not significantly related to district deficits, despite the push in Michigan towards cutting insurance costs and contracting services out to private companies as cost-saving measures. Eighty percent of the variation in fund balances is out of the control of local school districts. High percentages of charter school enrollment and high numbers of special education students contribute to the problem. So while the onus falls on districts to balance their budgets, they actually have very little control over their fund balances.

State More Likely to Intervene in African American and Low-Income Districts

Emergency managers have been appointed in three districts (Detroit, Muskegon Heights, and Highland Park), two districts have been dissolved (Inkster and Saginaw Buena Vista), and in Pontiac, a consent decree has been established. However, these haven’t been the only districts in the state to experience financial troubles. In 28 of the 34 districts where the state could have intervened, no actions were taken. These districts had significantly fewer African American students, fewer students qualifying for free or reduced-priced lunch, and less charter school influence. While there was no difference in the number of consecutive years of deficit between districts in which the state did and did not intervene, the six districts that did receive intervention were in worse shape in terms of fund balances and three-year deficit trends.

Emergency Managers Do Not Appear to be the Answer

Arsen and colleagues argue that school choice policies and the state’s school finance system are contributing to the financial difficulties of already struggling districts. While local school districts’ decisions can have a modest impact on financial stress, Michigan’s current system does not adequately support special education students and real per-pupil funding has been declining since 2002. In the three districts run by emergency managers – Detroit, Muskegon Heights, and Highland Park – deficits have yet to be eliminated. An explanation as to why emergency managers have been less successful in Michigan than elsewhere has yet to be identified. Findings from this study indicate that the financial difficulties experienced by local school districts in Michigan are not the result of poor local decision-making, but rather broader issues of state funding and school choice policies.

The full paper can be found here.

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Amy Auletto
Amy Auletto is a doctoral student in Educational Policy. She is interested in the impact that equitable funding and access to effective teachers have on the educational outcomes of disadvantaged student populations. Prior to beginning her studies at Michigan State University, she taught middle school math in Detroit. Amy earned her bachelor’s degree in psychology, master of Social Work, and MA in educational studies from the University of Michigan.