DPS - Shaping the Future

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    Detroit Public Schools: Shaping the Future

    January 20, 2016

    Presented By Mr. Darnell Earley, ICMA-CM, MPA, Emergency Manager Detroit Public Schools

    Marios Demetriou, Deputy Superintendent - Finance and Operations

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    Executive Summary

    The Detroit Public School System has undergone tremendous change over the past 10+ years

    Enrollment has declined over 65% since FY2005; in response the district has closed over 150 schools,reduced its workforce by over 10,000 positions , outsourced services and garnered various concessionsto address mounting deficits

    While enrollment is beginning to show signs of stabilization, DPS continues to face operating losses inlarge part due to legacy operating debt obligations

    Without these debt obligations, DPS has a path to fiscal stability

    The initiatives currently underway and future initiatives will position DPS for success:o Complete reorganization of the central office which reduced 100 positions and overhead and

    pushes resources towards schoolso Establishment of a network structure that will enable the district to operate more efficientlyo Increased accountability to ensure the districts overall best interesto Comprehensive enrollment stabilization and retention program

    DPS needs legislative support in order to implement an orderly transition to fiscal stability allowing thedistrict to focus on stabilizing enrollment and increase educational outcomes for Detroits youth

    The time to act is now because Detroit Public Schools is running out of funds and the alternative is farworse for the State of Michigan, all Michigan school districts and for Detroit

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    Table of Content

    Historical efforts undertaken1

    Current situation2

    How to shape the future3

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    DPS has cut over $800M in expenses since 2005 but expenses continue toexceed revenue

    Detroit Public Schools, Revenue and ExpendituresFY 2005 FY 2015

    * Includes one-time grant revenue awarded under the American Recovery and Reinvestment Act (ARRA) Includes $245M revenue from new bond issuance, Deficit would have been $ (37M) without bond issuanceSource: Detroit Public Schools Comprehensive Annual Financial Reports

    $1.5B

    $1.4B $1.4B$1.3B

    $1.2B $1.2B

    $1.1B

    $0.9B

    $0.7B $0.7B $0.7B

    0

    20

    40

    60

    80

    100

    120

    140

    160

    $-

    $0.2B

    $0.4B

    $0.6B

    $0.8B

    $1.0B

    $1.2B

    $1.4B

    $1.6B

    $1.8B

    FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12* FY13 FY14 FY15

    Enrollment(in

    thousands)

    RevenueandExpe

    nses(in$billion)

    Expenditures

    Revenue

    Enrollment

    FY05 FY06 FY07 FY08 FY09 FY10 FY11* FY12 FY13 FY14 FY15

    Annualsurplus (deficit)

    $ (115M) $ (25M) $ (15M) $ (136M) $ (79M) $ (108M) $ 43M $ 208M $ (18M) $ (76M) $ (46M)

    Enrollment declined over 65% since FY05

    Over the same time DPS closed more than 150 schools and has continuously cut expenses but has been behindenrollment and revenue declines

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    DPS workforce has declined steadily since 2005 but has lagged the loss inenrollment

    Detroit Public Schools, Enrollment and Employees

    FY 2005

    FY 2015

    141.1K

    130.7K

    118.4K

    106.5K

    95.5K

    84.9K

    75.2K

    66.7K

    51.3K

    48.5K 47.2K

    15.7K15.0K

    14.2K13.6K

    12.6K

    11.0K

    8.7K7.8K

    6.6K 6.5K6.0K

    0

    2

    4

    6

    8

    10

    12

    14

    16

    18

    0

    20

    40

    60

    80

    100

    120

    140

    160

    FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

    Employees(inthousand

    s)

    Enrollment(inthousand

    s)

    Enrollment Employees

    CAGR: -10.4%

    CAGR: -9.1%

    Note: CAGR stands for Compounded Annual Growth RateSource: Detroit Public Schools Comprehensive Annual Financial Reports

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    DPS has closed over 150 schools since 2005 in response to enrollment losses.School planning will continue to be important as enrollment stabilizes

    Detroit Public Schools, School closures and School sizeFY 2005 FY 2016 Budget

    255232 225

    198172

    146 146130

    100 96 96 96

    141.1 K

    130.7 K

    118.4 K

    106.5 K

    95.5 K

    84.9 K

    75.2 K

    66.7 K 51.3 K 48.5 K 47.2 K46.3 K

    553 563

    526 538555

    582

    515 513 513 505491 483

    0

    100

    200

    300

    400

    500

    600

    0K

    20K

    40K

    60K

    80K

    100K

    120K

    140K

    160K

    FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

    Schools/Studentspersc

    hool

    Enrollment

    Schools* Enrollment Students per school

    Creation of EAA resulted in transfer of 15 schools.*Includes elementary schools, middle schools, high schools, alternative education schools, special education schools, and career technical and vocational centers.Source: Detroit Public Schools Comprehensive Annual Financial Reports

    (Budget)

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    DPS has undertaken a number of cost cutting measures but moretransformation is necessary to align the district with current enrollment levels

    Actions Taken

    Wage concession of 10% and pay freezes dating back to FY 2000

    Sale of assets to generate revenue (>$15M in FY14 and FY15 alone)

    Reduction of nearly 10,000 positions since 2005 (62% decrease)

    Reduced number of schools by 159 since 2005 (62% decrease)

    Multiple modifications to healthcare benefits to reduce costs

    Implementation of two Employee Severance Plans to reduce payroll costs

    Continual effort to cancel, renegotiate and re-bid vendor contracts to reduce

    operating costs

    Enrollment stabilization campaign

    DPS is transforming the way it operates beginning in FY16 with a smaller centraloffice that includes new functions and a shift of resources to schools

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    Table of Content

    Historical efforts undertaken1

    Current situation2

    How to shape the future3

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    DPS faces a structural imbalance due to legacy debt and high fixed coststructure

    Source: FY14 actuals

    Drivers of Expenses

    High personnel cost due to costlybenefits and state pension system

    High transportation costs

    Legacy debt payments (~$53M peryear)

    DPS serves a higher proportion ofhigh school students than otherLEAs in Detroit that cost more toeducate

    DPS serves a higher proportion ofspecial education students thanother schools in Detroit

    DPS serves a higher proportion of

    English Language Learners,homeless students, and otherstudents that require additionalsupport and services

    Other

    Federal

    State

    Property Tax

    Personnel

    Pension

    Benefits

    Non Personnel

    Debt$668M

    $714M

    $-

    $100

    $200

    $300

    $400

    $500

    $600

    $700

    $800

    Revenues Expenses

    Per Pupil $14.2K $15.2K

    General Fund

    FY15 Revenue and Expenses

    ($ in millions)

    DPS 2014-150Foundation Grant was $7,296

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    Without debt expenditures, DPS budget would have been balanced in FY2015

    Source: FY14 actuals *This actual figure was $22.3 mill ion less than th e projected figur e in the FY15 adopted bu dget

    Other Other

    Federal Federal

    State State

    Property Tax Property Tax

    Personnel Personnel

    Pension Pension

    Benefits Benefits

    Non Personnel Non Personnel

    Debt$668M

    $714M$668M

    $655M

    $-

    $100

    $200

    $300

    $400

    $500

    $600

    $700

    $800

    Revenues Expenses Revenues Expenses

    Per Pupil $14.2K $15.2K $14.2K $13.9K

    General Fund FY2015

    ($ in millions)

    (without Debt)

    Actual Results Illustrative

    $13M surpluswithout the debt

    costs

    $46M* deficit

    in FY 2015

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    OldCo will continue tooperate in its currentform through6/30/2016 (FY16)

    Steady elimination oftotal OldCoobligations withdedicated funds fromproperty tax receipts

    What does DPS need?Approximately $515M of legacy obligations and $200M of start-up costs

    Legacyoperatingliabilities

    ($ ~515M)

    Startup cost/reinvestment

    financing

    ($ ~200M)

    Total OldCoobligation

    ($ ~715M)

    Deferred maintenance

    Operational supportduring transition

    Investment in key

    academic programs

    Operating cashrequirements

    Transition costs

    Other

    Remaining operatingdebt (2011/2012bonds)

    Short-term borrowing

    Deferred pensionpayments

    Deferred vendorpayments

    Other

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    To start with a clean slate at the beginning of FY17 DPS needs to retire itslegacy obligations and start up funding

    Outstanding operating liabilities as of 12/31/2015 after set asidepayments ($ in millions)

    $245M 2011/2012 Operating Bonds

    66M 2015B SAN (State Aid Notes)

    96M 2015E SAN (State Aid Notes)

    117M MPSERS

    51M Trade debt

    575M Subtotal

    (66)M Cash on hand (12/31/2015)

    $509M Net debt (12/31/2015)

    ~$515M Net debt projected as of 6/30/2016

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    DPS has taken recent action to

    address the mounting cash flowtroubles, including more costreductions, State Aid Note (SAN)debt issuance ($120M in Sep15),and deferrals

    Even so, DPS is expected to face acash shortfall of ~$45M by June 2016

    We are exploring options to address

    the FY16 shortfall including thefollowing:

    Further deferrals

    Personnel and benefitsreductions (transformationalsavings)

    Another refunding and/or

    SAN/TAN transaction Distress funding from State (i.e.

    cash flows presented do notinclude distressed district funds of$50M)

    Why act now?DPS faces near term cash shortfalls due to maturing debt and past dueoperating obligations

    6886

    136

    77 7555

    33 461616

    -6 -22-45 -57

    -77

    -126

    Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

    Ending Cash Balance($ in millions)

    20162015

    Cash balance if

    monthly required

    pension

    contr ibut ions are

    made

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    Table of Content

    Historical efforts undertaken1

    Current situation2

    How to shape the future3

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    The Central Office moved from 60 departments to 16 offices within 5 divisions

    0

    20

    40

    60

    80

    100%

    Academics

    Office Of Social Work Srv

    Dept-Staff&LeadershipDev

    Office Of Athletics Education

    Ofc Of History Society & Cultu

    Ofc College & CareerReadiness

    Off/EngLangLearn& Glob Lang

    Adult Education Dept

    Department OfCurriculum

    Specialized StudentSvcs

    Off Of Psychological Serv

    Off Of Foundations/EarlyLearn

    Associate Superintendent- Lea

    Ofc Of Arts Education

    Office - Literacy Support

    Guidance

    Off Student Asst/Int Prog

    Off OfHealth &Phy. Educ

    R.O.T.C. Instruction

    Office/General Superintendent

    Finance andOperations

    InformationSystemsManagement

    Office Of Risk Manage ment

    Office OfBudget

    Environ Health& Safety

    Office Of Procuremen t

    Office Of Accounting

    Office Of PublicSafety

    Off ComplianceTitle1/31A

    Program Development

    Office Of Payroll

    Grant Development

    Dept Of ChiefOper Ofcr

    OfficeOfThe Cfo

    Central Hub

    Office Of Auditor General

    Office Of The InspectorGenera

    Office Of StudentTranspProgram Evaluation

    SchoolBased

    Positions

    Departmen

    tOfCurr

    icu

    lum

    PupilPopulationManagement

    Vacanc

    ies

    Vacanc

    ies

    Ta

    len

    t

    Office Of

    Labor

    Relations

    Ta

    len

    tAcqu

    isition

    Hris

    /Adm

    inSrvcs

    &

    Consu

    lting

    Hr

    Operations

    Benefits AndCompensation

    EmployeeRelations

    Emergency

    Manager

    Dep

    tOfCommun

    ica

    tions

    OffOfGenera

    lCounse

    l

    Office

    OfStudentTransp

    Secretary T oTheBoard

    Office

    OfComm

    Respon

    Stra

    tegy

    O f f O f E v a

    l & A s s e s s m e n

    t

    Pup

    ilPopu

    lation

    Managemen

    t

    O f f i c e

    O f A u

    d i t o r

    G e n e r a

    l

    Source: DPS Internal Data

    DPS Central Office BudgetedOffices and Departments

    FY15

    DPS Central Office ProjectedOffices and Departments

    FY16

    Student Services

    Finance Safety

    Acco

    untability

    HR

    Talent

    Planning

    Enrollment

    Commun-ications

    GeneralCounsel

    Operations

    IT

    Network

    OCCR

    Curriculum

    Early Childhood

    Academics Finance andOperations

    Emergency

    Manager/

    Superintendent

    Strategy

    Talent

    0

    20

    40

    60

    80

    100%

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    Addressing the debt will allow for a shift in focus towards improving academicoutcomes

    Building Staff Capacity New Teacher Intensive Pre-Service Training Ongoing/Differentiated Teacher Professional

    Development

    School Leadership Institute (Building the Pipeline)Data and Accountability

    Implement Data Cycles in Schools to focus on studentacademic progress data

    Creating/enhancing Data Dashboards to communicateongoing progress

    Increased Performance ManagementNetwork Supports

    Continuing to build out network systems to supportschool improvement, leadership coaching, and program

    effectiveness.

    Curriculum/Program Enhancements Begin work to enhance the curriculum Determining additional needs for curricular programs Piloting special programs

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    The DPS transformation has begun, and the pending legislation will be animportant step to ensure long-term sustainability

    School Planning Enrollment

    To date, DPS has taken a number of important steps to begin this transformation:

    Central office reorganization and downsizing (~100 positions eliminated as of 12-31-2015)

    Creation of network structure to better support and empower schools

    Focus on shifting resources to school level

    Procurement process overhaul and contract negotiations

    Benefits modifications resulting in cost savings

    Improved alignment of grants with district needs

    Legislative Action

    Transforming DPS Education

    Financial Support

    Address number andlocation of schools andcapacity issues

    Stabilize enrollment

    Common enrollmentsystem

    Debt relief

    Establish fullfoundation allowancefor NewCo

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    School School

    Central Central

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    90%

    100%

    FY15 Actual FY16 and Beyond

    9%8% 8%

    5%

    0%1%

    2%

    3%

    4%

    5%

    6%

    7%

    8%

    9%

    10%

    FY13 FY14 FY15 FY16

    Historical Future State

    Examples of how DPS is realigning the districts focus on the schools

    Percent of Central Office FTEsFY13-FY16

    Comparison of Personnel expensesFY15-FY16

    1 2

    Source: 2014 CAFR and internal data

    Central office operations and services are significantly downsized as resources are shifted closer to students

    Schools have access to a much larger pool of funds to be used and allocated at the school-level

    Achieving this shift required support from MDE, as well as additional capacity at the school level

    (effective 1/1/2016)

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    The proposed structure creates a new entity (Detroit Community School

    District) with the same amount of revenue and no debt

    Detroit Community SchoolDistrict (NewCo)

    DPS (OldCo)

    DPS

    Operating Debt

    Operating Debt

    Teachers/Students

    Schools/Buildings

    Operations

    State Foundation Allowance(reduced by property taxes)

    Federal & other revenue

    Property Taxes

    State Foundation Allowance(full amount)

    Federal & other revenue

    Teachers/Students

    Schools/Buildings

    Operations

    Current Structure Future Structure

    State revenueincreases to full

    allowance to replacelost property taxes(i.e. revenue does

    not decrease)

    Property taxesdedicated to pay

    legacy operating debtand start-up costs

    Property Taxes

    Start-up costs

    Start-up revenueOne-time start-upfunds (~$200M)provide NewCo

    runway to transition

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    What are the implications of doing nothing?Tax payers could become liable for a majority of DPS costs and obligations

    The State is required to ensure education is provided to over 47,000 pupils currently enrolled in DPS.

    If DPS is unable to support current operating and legacy expenditures, it may need to consider formal insolvency proceedings,

    potentially requiring taxpayers to finance the following obligations:

    Unlike the City of Detroit, DPSwould not benefit from abankruptcy as it would

    predominantly shift liabilities ontoother municipalities

    *Risk assessment relates to impact to State; Direct denotes liabilities that immediately fall onto the State or statewide municipalities, Potential direct denotes liabilities with uncertainty what bankruptcy ruling wouldbe, Indirect denotes liabilities which are indirectly associated with the State and where default would negatively affect o ther important or critical local and state-wide market participants that in turn could default.State backing includes: Unlimited tax general obligation pledge, State aid and the limited tax general obligation pledge of the District, Michigan Public School Employee Retirement System

    Pension,$1,151M

    SLRF,$196M

    Capital Bonds,$1,452M

    Operating Debt,$464M

    Past due accountspayable, $51M

    ~$3.4 billion inoutstandingliabilities

    most of whichare secured viaa tax or stateaid pledge.

    Direct

    Potential Direct

    Indirect

    Risk to state*

    State backed

    Not secured

    Security

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    Key Takeaways

    Detroit Public Schools (DPS) has undergone tremendous change over the past 10+ years

    DPS has implemented a variety of best practice and cost saving measures and will continue to do so;removal of the debt will allow for a districtwide shift toward improved student achievement

    DPS is positioned to thrive in a debt free environment as evidenced by the 2014-15 audit which shows a$13M surplus if the debt is removed

    The time to act is now; Detroit Public Schools is rapidly running out of funds and the alternative is far

    worse for the State of Michigan (all Michigan school districts) and for Detroit