District finance leaders told Fitch Ratings the district was undertaking a “district transformation plan” that would reduce the number of buildings the district operates and increase the ratio of students to staff, in a meeting on May 17, 2023. Following those assurances, Fitch Ratings upgraded the district’s credit outlook from “neutral” to “positive” on May 25, 2023.
Once the outlook was upgraded, the district’s communications and finance department employees used the upgraded outlook to craft a financial story that would highlight the improved ratings outlook and downplay the district’s looming financial crisis. These talking points were shared in an internal email to district employees and in a press release on June 15, 2023, and at a press conference with local media on June 27, 2023.
Credit rating agencies like Fitch typically provide two separate evaluations of the entities, like school districts, that sell bonds. The first is the credit rating, which in the case of Fitch is a set of letters where AAA is the highest and D is the lowest. The rating agency will also issue an outlook, which is negative, neutral or positive, which indicates how the agency expects the credit rating to change in the near future. In May 2023, Fitch upgraded the district’s outlook, but not its credit rating.
The main impact of the district’s credit rating is on the cost of issuing debt by selling bonds. Minnesota has a program called the Credit Enhancement Program, which allows school districts to use the State’s credit rating when issuing bonds. The State guarantees it will pay investors if the school district defaults.
School districts also have the ability under State statute to levy local property taxes for the full amount of the interest they owe their bond holders. Together, these statutes ensure a very low risk to investors that a school district in Minnesota would default on its bonds.
The district’s credit rating has no impact on its operating budget, unless the district is borrowing to fund its operating expenses. The main impact of the credit rating is on local property taxpayers.
The timeline of these events is detailed in public press releases, and internal district emails and documents obtained from through multiple public records requests. Heather Casperson, a senior managing consultant with PFM Financial Advisors, which advises the district on its bond sales, sent finance team members a list of questions on May 12, 2023, from Kristine Tjia, a senior analyst with Fitch Ratings. The questions were sent in advance of a meeting between Tjia and district finance department employees scheduled for the following week according to district emails.
The district’s former finance controller Joe Olson and former director of budget and planning Thom Roethke, working in consultation with former executive director of finance Duke Fokuo, sent a draft of answers to the questions to senior officer of finance Ibrahima Diop the afternoon before the meeting. Casperson shared the district’s responses with Tjia about one minute before the May 17 meeting began.
The questions from Tjia concerned the district’s 2022 audit report and its 2023 financial projections, as well as other topics related to the district’s financial condition. Among the responses provided by the district, the district twice mentions increasing the student to staff ratio and reducing the number of schools it operates as ways it plans to address its looming fiscal challenges. The district also said that the board of education had already started on a plan for “district transformation” which would lead to “fiscal sustainability” for the district.
Tjia also asked about the district’s expectations for contract negotiations with teachers and educational support professionals. The district responded that it expected the total cost of both contracts to increase by 2.5%.
While the district did recently increase its class sizes in order to increase the ratio of students to teachers, the district still has not started to develop a plan to close or consolidate schools. And, according to the district’s own analysis, the cost of wages and benefits in the teachers contract increased 12.2%, and 11.6% for educational support professionals.
Fitch Ratings upgraded its outlook for Minneapolis Public Schools from neutral to positive on May 25. In a press release, the ratings agency said the improved outlook was based in part on the district’s growing general fund balance, particularly its unassigned fund balance that was above the school board’s policy minimum of 8% of general fund expenditures. Although they expected the district’s costs to continue to grow faster than its revenue, the press release said the ratings agency believes the district will continue to cut costs by “reduce[ing] headcount, institut[ing] hiring freezes, increas[ing] class sizes, and redesign[ing] academic, athletic and extra-curricular [sic] programs to control costs.”
Last year the district stopped providing information about its unassigned fund balance as part of its monthly financial statements. The most recent district monthly financial statement is from April 2024 and shows the total general fund balance at $87.6 million. To meet the 8% unassigned fund balance target the district would have needed at least $55 million at the close of fiscal year 2024, and will need about $57 million at the end of fiscal year 2025 because of higher operating expenses this school year. The district had been building up its general fund balance by using the majority of its federal pandemic aid to pay for ongoing district expenses.
The most recent district financial statement from August shows the total general fund balance is at $66.3 million and the district ended the 2024 fiscal year with a general fund balance of approximately $90 million. Fitch said that if the district’s unassigned fund balance drops below 8%, the rating agency could downgrade the district’s credit rating.
Seventeen months after the district told the rating agency the school board had started to develop a plan, the district’s new transformation website says school building walk-throughs, seen as the potential first step in a plan to close or consolidate schools, will not begin until at least October. The transformation website does not mention the potential for school closures or consolidations as part of the transformation process. The website states the transformation process is focused on meeting the district’s strategic plan goals.
After the outlook was upgraded, former executive director of communication Julie Schultz-Brown asked Fokuo to comment on a document titled “MPS Financial Story,” according to emails and documents obtained as part of a public records request. The document summarized a meeting between Diop, Fokuo and Schultz-Brown on May 25 in Diop’s office. Fokuo replied to Schultz-Brown, “I look forward to collaborating to tell the positive Fitch story v. the financial cliff projection.”
According to the emails, Fokuo then worked with Roethke to develop answers to Schultz-Brown’s questions. In an email to Diop informing him about Schultz-Brown’s questions, Fokuo wrote, “I reflected more on Julie’s concern regarding telling the Fitch A+ Positive rating story opposite the financial cliff warning, and, truthfully, while I see the cadence she would like to build into the story, I am not sure it would be necessary.”
On May 26, Roethke sent back his responses to Schultz-Brown’s questions to Fokuo. Rather than reflecting a narrative focused on the Fitch upgrade, Roethke’s answers highlight the looming gap in the district’s budget when federal pandemic aid ends. He notes, for example, “We have not fixed out structural issues.” And later, he says that increases in the district’s costs are only making “the structural gap wider.”
Schultz-Brown asks how the district will cope with the loss of pandemic relief funds. Roethke responds saying the district will use the newly appropriated state funding and that the board’s district transformation process “will ultimately lead to an ongoing operational savings of $60-80 million annually.”
Three weeks later, Diop sent an email to district staff celebrating the passage of the fiscal year 2024 budget. Diop writes, “I’m proud to share that for the first time in recent history, MPS has an elevated financial outlook – moving from stable to positive – according to Fitch, an international credit ratings company. This upgraded outlook indicates Fitch’s confidence in the school district’s ability to manage through its financial difficulties and gain control over its cost structure.”
The email also notes the district will begin the 2024-25 budget cycle with a gap of at least $77 million to fill, before accounting for annual cost increases. It does not make any mention of the potential for school closures and consolidations, or other cost cutting measures, like increasing the ratio of students to staff.
The school district invited local media to a district finances press conference on June 27, 2023 where Diop reiterated that the 2024-25 school year budget would have a deficit of about $60-80 million, not including any increases in district costs. Diop called the deficit manageable through budget cuts but did not say what those budget cuts might include.
Fitch Ratings increased the district's credit outlook to a AA-rating in May of this year. In June, the school board approved a budget for the 2024-25 school year that increased the district’s spending by $18 million compared to the 2023-24 school year and that relies on over $90 million in one-time funding to balance revenue and expenses.
