Muskegon Heights School District to miss payroll

MUSKEGON HEIGHTS, Mich. (WZZM) The Muskegon Heights school district is telling teachers and staff that it will not be able to "fund payroll on February 17th," and that future paychecks may also be delayed.

The district is also acknowledging that a "temporary" closing of the school system is possible if it runs out of money.

The district issued a news release late Thursday with its answers to frequently asked questions about the financial crisis (see below for the full release).  One of the questions asks if the district could close if employees are not paid.  The district's answer is, "It may be necessary to close the district temporarily if employees cannot be paid...The State has been highly responsive to our needs and we expect they will continue to work with us to avoid closure."

A district email sent to teachers says they will not receive payment until February 21.

In a statement issued late Thursday, interim superintendent David Sipka says, "While we anticipate MHPS staff paychecks may be delayed by a few days in February and March, we are working closely with state officials to ensure there are no further delays. Our goal is to strengthen the district both financially and academically."

The letter sent to teachers explains the district might also miss payroll dates in April and May.

A letter from Sue McCarty, the district's manager of human resources says, "The district has more expenses than revenues and because there are three pays in March, it is highly unlikely the district will be able to make payroll on March 16."

McCarty's letter goes on to say, "Michigan Public School Employees Retirement System (MPSERS) is owed approximately $1.4 million and has the authority to garnish state aid payments. If the MPSERS board decides to take this action, the district will not be able to meet payroll in April and May." 

In December, the Muskegon Heights School Board requested the state review the districts financial status and consider appointing an emergency manager.

Gov. Rick Snyder appointed the team Tuesday in response to a preliminary report on the district's years of deficits and other financial and other administrative problems.

Dr. Dale Nesbary, president of Muskegon Community College, and seven other people were named to the team. They will determine how bad the finances are in Muskegon Heights schools and whether the Governor should appoint an emergency manager to take over the district.

"We have 60 days from when the team is set," says Nesbary. "We have to start moving."

For the current school year, Muskegon Heights is running at least an $8.5 million shortfall. Nesbary says that's taking attention away from educating children.

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Muskegon Heights Public Schools issued a "Frequently Asked Questions" release Thursday, offering answers from district leaders to common public questions about the school system's financial issues:

1. Q: How much money does MHPS owe?
A: MHPS owes the State $7.9 million in loans and owes vendors an estimated $4 million. Each day the district's deficit grows larger. The district's 2010-11 audit report shows an $8.5 million deficit. Today the deficit is estimated to be around $12 million and could reach as high as $14 million by the end of
this school year.

2. Q: Why can't the district pay back the money it owes?
A: The district has more expenses than revenues. Last year the district overspent by $4.3 million.

3. Q: How did the district get this deep in debt?
A: Rising expenses, lower revenues due to cuts in state funding, soaring health care and retirement costs, and dropping enrollment have swallowed up the district's fund balance and led to a growing debt. The district estimates about six million dollars of this debt accumulated over the last ten years due to
legacy costs.

4. Q: Can't the district borrow additional money to cover its expenses?
A: MHPS has a cash flow note from the state for $7.9 million; has issued a tax anticipation note to receive all property tax funds at the beginning of the school year instead of collecting throughout the year; and has borrowed money through Qualified Zone Academy Bonds (QZAB). Because the state has changed the rules on how much money a school district can borrow, MHPS will be allowed to borrow no more than $6.3 million for the 2012-13 school year.

5. Q: When does the district have to repay its loans?
A: The cash flow loan must be repaid annually - this year it is due on August 20, 2012. The tax anticipation note must be repaid in the same year, and the QZAB must be repaid at a rate of about $214,000 a year for 15 years (this is the third year of the repayment plan).

6. Q: How does the State ensure schools that borrow money are able to pay back their loans?
A: The state requires the district to file a cash flow report that demonstrates the loan is needed and how it will be repaid on the required date. The district also must submit a "deficit elimination plan." This plan outlines the steps the district will take to get out of debt. The most recent plan for MHPS was
approved by the state in April 2011. The district did not meet the demands of this plan. For that reason a revised plan will be submitted on February 2, 2012. However, without employee concessions in pay and benefits, this plan falls short of eliminating the deficit.

7. Q: The board has approved a number of budget reductions, is this enough to cover the deficit?
A: The board's actions to eliminate some positions, privatize support staff, contract business and preschool services to the MAISD, and shift retirees to the state health care plan together only amount to about $1.1 million savings for the remainder of this school year and $2.7 million for the 2012-13 school
year. More must be done to pay off the district's debts and strengthen the district financially.

8. Q: What kinds of concessions have MHPS unions been asked to make?
A: The collective bargaining units were asked for concessions in pay of 35% and 40% in benefits on January 10, 2012. They rejected this. There were no counter-offers made. They were asked again on January 25, 2012, for concessions in pay of 30% and 35% in benefits. They rejected this as well. The administrators and supervisors' collective bargaining unit counter-offered with a pay freeze.

9. Q: Is there a threat that employees may not be paid?
A: At this point we expect the pay due to employees on February 17 will be delayed until February 21, 2012. Because the district has more expenses than revenues, and because there are three pays in March, we anticipate the pay intended for March 16 will be paid on March 20. Michigan Public School Employees Retirement System (MPSERS) is owed approximately $1.4 million and has the authority to garnish state aid payments. If the MPSERS board decides to take this action, MHPS will not be able to meet payroll in April and May.

10. Q: If employees are not paid, will the district close?
A: It may be necessary to close the district temporarily if employees cannot be paid. Currently the MAISD and MHPS Board are focused on overcoming these financial challenges and making the district stronger both financially and academically. The State has been highly responsive to our needs and we
expect they will continue to work with us to avoid closure.

11. Q: The MHPS Board voted to privatize support staff positions. How will this help the district financially?
A: Many districts throughout the State of Michigan (and locally) have used privatization as a way to reduce costs. On January 23, 2012, the MHPS board approved the privatization of custodial, clerical and transportation staff as soon as possible. The transition will take time, but work is already underway.
(Muskegon Heights currently has a private food service provider.) Privatization of these services will save the district $308,000 this school year and $925,000 in 2012-13.
12. Will support staff be hired by the new private vendors? Current Muskegon Heights Public Schools support staff are encouraged to apply to the new private vendors. Other members of the public may also apply. The most qualified candidates will be selected to work for the private vendors.

13. Q: Can the district file for bankruptcy?
A: Yes, MHPS meets all the criteria to file for bankruptcy, but it is a highly complex process.

14. Q: Why did the MHPS Board of Education request an Emergency Financial Manager (EFM)?
A: The MHPS board understands the district cannot continue to operate with the load of debt it is under. Asking for an EFM is the first step in a long process of rebuilding the district's future.

15. Q: How has the State responded to the MHPS Board of Education's request for an Emergency Financial Manager?
A: The State Superintendent of Instruction Michael Flanagan authorized a preliminary review in late December through early January to determine if there is a financial emergency at MHPS.
On January 10, 2012, Superintendent Flanagan sent a letter to Governor Snyder stating there is a financial emergency. He asked the Governor to appoint an official review team to determine if an EFM should be appointed. The Governor appointed the team on January 31, 2012.

16. Q: Who has the Governor appointed to serve on the review team?
A: Deputy State Superintendent Carol Wolenberg; Deputy State Treasurer Tom Saxton; Office of Internal Audit Services in the Department of Technology, Management and Budget Doug Ringler; Muskegon Community College President Dale Nesbary; Retired Public Affairs Officer for GTE/Verizon/Frontier Communications John VanWyck; Director of Michigan Department of Treasury's Local Government Services Bureau Frederick Headen; Executive Director of Michigan School Business Officials Association Dave Martell; and Senior Policy Advisor in the Department of Treasury Brom Stibitz.

17. Q: Who decides if Muskegon Heights Public Schools will be assigned an EFM?
A: The review team appointed by the Governor has up to sixty days to complete its review and determine if an EFM should be appointed. The final decision will be made by the Governor.

18. Q: What would an Emergency Financial Manager do?
A: The EFM's role would be to analyze the district's financial position and make necessary changes to help the district recover from its financial stress including voiding collective bargaining agreements. The EFM then acts in the place of the Board of Education and Superintendent.

19. Q: What role would the Board of Education and Superintendent play if an EFM were assigned?
A: The Board of Education and Superintendent take on an advisory role and are no longer "in charge" of the district.

20. Q: Who decides who the Emergency Financial Manager is?
A: The Governor of the State of Michigan, Rick Snyder

21. Q: Will Marios Demetriou be named the Emergency Financial Manager as requested by the MHPS Board of Education?
A: The Governor will decide this.

22. Will the MAISD loan Muskegon Heights the money it needs to get through this tough time?
A: No, the MAISD does not have the authority to loan money to the district. However, we are loaning Muskegon Heights Public Schools our staff and their expertise without payment from the district.

23. How is the MAISD assisting Muskegon Heights during this crisis?
A: As Interim Superintendent of the District, MAISD Superintendent David Sipka and MAISD Deputy Superintendent of Administrative Services Marios Demetriou offer recommendations to the Board of Education and support implementation. The MAISD will support the efforts of the Review Team and an EFM if one is appointed.

24. Q: Could programs or positions be eliminated or buildings closed due to the district's financial hardship?
A: We know there will be further changes; we don't know what the changes will be at this time.

25. Q: Will the district be closed or be dissolved?
A: We strongly believe with hard work the district will be fiscally viable again. It will take all of us and the State of Michigan working together to accomplish this. It will also take time.

26. Q: Should parents move their children to other schools?
A: Regardless of a school's financial situation, only parents can decide what is best for their children. We are doing everything we can to strengthen MHPS both financially and academically so the children of Muskegon Heights are able to attend school in their own neighborhoods for decades to come.