School Districts in Michigan Challenged by Enrollment Declines

October 12th, 2015

This week we explore enrollment data for Michigan public school districts, and revisit an old analysis of the attractiveness of municipal bonds.

School Districts in Michigan Challenged by Enrollment Declines

Moody’s most recent CreditOutlook highlighted the challenges faced by Michigan school districts due to declining enrollments.  School districts in Michigan face competition from neighboring public schools, but also from charter schools. This competition combined with aging demographics has led to enrollment declines in many districts. Moody’s points out, “Adding to the challenge for school districts is that the vast majority of revenues are derived from the per-pupil foundation funding, which the State determines”.

The problem is widespread across Michigan. Moody’s has downgraded 44 Michigan school districts in the last year.  Of the 145 Michigan school districts with more than $25 million outstanding debt, 114 experienced enrollment declines between 2009 and 2013.


Excluding Detroit, the average decline is -6.5%.  Each of the 2 school districts on the Ipreo calendar for this week have experienced enrollment declines over the last 5 years:  Hartland (-1.1%) and Otsego (-2.3%).

Eleven districts experienced great than -20% declines over the period from 2009 to 2013.


Users of DIVER Analytics-Data Access tool can view this data for their portfolio holdings to identify potential exposure to potentially troubled school districts or contact Client Services with questions.

Municipal Bonds Slightly Expensive

During the past few weeks we have been reading numerous quarterly market commentaries which cite municipal bonds as attractively priced relative to other fixed income asset classes.   This led us to update our analysis of the ratio of municipal bond yields to comparable maturity Treasuries.

This ratio is one of the most common measuring sticks for the attractiveness of municipal bonds.  The most frequent method for assessing this ratio is via a simple line graph looking at the history of the ratio over time.  The ratio is currently well above historical averages.  As we have pointed out before, this method has some shortcomings.

Over the long run, the ratio of munis to Treasuries is highly correlated (negatively) to the level of interest rates.   Due to the flight to safety nature of many Treasury rallies, the tendency of retail investors to withdraw from the municipal market at lower rates, and the callability of many munis, municipal rates rarely keep pace as Treasury rates decline.

Note that it is this negative correlation that leads to the frequent citation of municipal bonds as a preferred investment for the increase in rates that so many have been expecting for so long.

In the chart below we plot the ratio (y-axis) of the yield for the Bond Buyer 20-Bond General Obligation Index against the yield on the 30 Year Treasury Bond.


Each data point represents a weekly observation of the ratio. The chart shows a clear correlation between ratios and rates (especially when Treasury rates fall below 5%).  The bright blue data point is last week’s value (2.95%, 125%).  The data points at the upper left corner of the chart correspond to December 2008 and January 2009

The solid line is a curve fitted to the data.  Last week’s ratio value of 125% is below the level of the plotted curve at last week’s 2.95% Treasury yield.

To get some historical context for the difference between the current ratio and the plotted curve, we chart a history of the difference of each weekly ratio data point and the plotted curve.


This rough analysis shows that municipal bonds are slightly on the expensive side at this level of Treasury rates.


Have a great week,

Michael Craft, CFA