Passing the test, but making the grade?

When the Public Policy Forum decided to dive deeply into the finances of the Milwaukee Public Schools (MPS) six months ago, we did so with considerable trepidation. Having tracked MPS' finances on a general level for the past several years, we were well aware of the district's huge retiree health care liability, the fiscal threat posed by declining enrollment, and the impacts of the latest state budget. Despite the good news we were hearing from MPS officials about the impacts of soon-to-be-implemented fringe benefit changes, we were concerned about precisely what we would find when we lifted the hood and dug into the mechanics of MPS' finances.

Today, after completing our comprehensive assessment of MPS' fiscal condition, we are relieved to say that the school district’s short-term fiscal outlook is not as ominous as we had feared. In fact, the district’s most recent five-year forecast projects a 2017 deficit of about $41 million, which is actually more optimistic than similar forecasts prepared by the City of Milwaukee and Milwaukee County. We also find, however, that the volatile and uncontrollable fiscal environment in which the district must operate creates an “untenable fiscal structure” that continues to raise serious questions about MPS' longer-term future.

Our 84-page report - entitled Passing the Test, But Making the Grade? and released this morning – uses the same fiscal monitoring methodology used previously for reports on Milwaukee County, the City of Milwaukee, MATC, and MMSD. It examines fiscal trends, compares MPS to state and national peers, and analyzes the causes and scope of the district’s fiscal challenges.

A major undercurrent of the report is MPS' lack of control over its own financial destiny. The district is far more dependent than other local governments on state funding, and much more susceptible to fiscal upheaval from policy and program decisions made in Madison and elsewhere. Those decisions not only can involve state appropriations and revenue limits, but also regulatory changes to charter school or private school choice programs that can sharply affect MPS enrollment. MPS' finances also can be hit hard by the chartering decisions of outside entities, and by demographic trends impacting the city.

Other key findings from the Forum's new report on MPS' financial condition:

• While the near-term future is looking better, deep structural issues remain. MPS' health care changes planned for the 2013-14 school year – assuming the continued legality of Wisconsin Act 10 – will save almost $35 million annually and reduce its retiree health care liability by $1.4 billion. The longer-term future looks far more challenging, however, as the district’s revenue streams are likely to be constrained well into the future; its retiree health care liability will remain daunting; and its ability to further reduce personnel costs will be limited by its need to attract and retain quality teachers and administrators to compete with voucher, charter and suburban schools.
• MPS’ high expenditure levels must be placed in context. While prohibitive fringe benefit costs have been an issue, MPS’ high levels of per-pupil spending are driven much more by its receipt of large amounts of state and federal categorical aids. Those funds are used largely to support economically disadvantaged and special needs students, who comprise the vast majority of MPS’ student population. When categorical funds are excluded, the district’s per-pupil spending is only slightly above the state average.
• MPS’ greatest challenge is its lack of fiscal options. After its initial rounds of benefits changes, MPS will have few alternatives left to counter the effects of flat state funding and declining enrollments. The district does not have program revenue, as do other local governments, and it is unlikely to be able to grow the property tax at the same rate as in the past. Meanwhile, enrollment competition exerts pressure on MPS to maintain its teacher compensation structure and capital footprint, and potential programmatic cutbacks run the risk of reducing program quality and engendering further enrollment and revenue loss.

The report credits MPS leaders for pursuing a balanced approach to stabilize the district’s finances that includes not only substantial fringe benefits changes, but also a new facilities master plan and renewed dedication to operational efficiencies. Overall, however, it is difficult to gauge whether successful implementation of those strategies will be enough to solve the district’s fiscal challenges.

For example, the report's fiscal modeling shows that if the 2013-14 benefit changes are implemented, if the district can achieve marginal annual growth in combined equalization aids and property tax levy under future state revenue limits and appropriations, and if MPS can achieve a limited reduction in salary expenditures, then balanced budgets are readily achievable in the next five years. Under another plausible scenario, however, in which the benefits changes made possible by Act 10 do not fully take effect, major revenue streams remain flat, and salary expenditures decrease by a lesser amount, a dire fiscal picture emerges.

The report concludes by stating that “perhaps the most troublesome question raised by the fiscal assessment is whether any entity could be expected to effectively manage a fiscal predicament as challenging as that faced by MPS in an environment that is plagued with such uncertainty."

That finding leads us to urge local and state leaders to reach agreement – once and for all – on the role MPS will play in the city’s education framework, and to define and secure the resources required to effectively fulfill that role.

The full report can be accessed here.