Lansing — The state is investigating why the Detroit Public Schools received up to $30 million in U.S. Department of Education reimbursements for the pensions of grant-funded employees, but never sent the money to the state pension fund.
The U.S. Department of Education has made a claim against the school district for not properly forwarding between $25 million and $30 million in federal funds to the Michigan Public School Employees Retirement System, DPS Emergency Manager Steven Rhodes said in an April 15 report to state Treasurer Nick Khouri.
“The matter is still under review, but it appears that from June 2014 to February 2016, DPS obtained reimbursement for its share of pension payments to MPSERS that it did not actually make,” wrote Rhodes, a retired bankruptcy judge who took over operation of Michigan’s largest school district in March.
In December, the Detroit district discovered and self-reported that it had not properly forwarded federal grant funding for employee pensions to the Michigan school retirement system, said Martin Ackley, spokesman for the Michigan Department of Education.
“An outside audit is being conducted to determine and verify the actual amount of federal dollars in question,” Ackley said Monday in an email to The Detroit News. “The issue involves the school district not making any payments to the MPSERS fund for its employees, yet still drawing down federal funds that were supposed to be used for that purpose.”
Federal tax dollars for grant-funded positions account for about 24 percent of the district’s general fund revenue and include Title I funding the Detroit school district gets for educating a high proportion of children from low-income families.
Detroit school leaders didn’t think “through entirely of the implications” of keeping the federal aid instead of passing it along to the state pension system, said Craig Thiel, a senior research associate at the Citizens Research Council of Michigan.
Rhodes said the 45,786-student school district is negotiating with the federal education agency to resolve the issue.
“We are committed to implement controls to assure that this is not repeated,” Rhodes wrote in the report in a section titled “Not So Good Things Happening at DPS.”
Rhodes’ disclosure that the district mishandled money meant for employee pensions comes a month after the Legislature approved $48.7 million in emergency aid to keep the district’s doors open for the rest of the school year.
The cash-strapped school district has not been regularly making full monthly pension payments since October 2010, racking up a $138.5 million overdue bill with the Michigan Public School Employees Retirement System.
At one point in 2014, the district stopped making any of its employer contributions to the pension fund under former emergency managers Jack Martin and Darnell Earley. It resumed partial payments in October 2015.
DPS leaders have said the district’s cash crunch has forced them to skip pension payments and conserve cash to make monthly payments on operating debts to stave off a financial default.
“I’m sure that $30 million, which was supposed to go to the Visa, went to the Mastercard,” said Gary Naeyaert, executive director of the Great Lakes Education Project, a pro-charter school advocacy group. “It’s just another example of the horrible mismanagement in DPS.”
The Great Lakes Education Project is a frequent critic of DPS and Gov. Rick Snyder’s $715 million plan to rescue the state largest school district’s from bankruptcy.
Detroit Public Schools’ unpaid pension bills are projected to top $157 million by June 30, according to Rhodes’ report.
In October, while Earley was still emergency manager, the Detroit district resumed making partial payments of at least $750,000 a month toward the pension fund. The state pension board has not exercised its power to garnish the school district’s monthly state aid payments until the debt is paid off.
Despite the resumption of monthly payments, the district continues to rack up a hefty $230,944 monthly late fee and $33,560 in daily interest penalties. Of the current $138.5 million balance, $14.8 million is from interest and late fees, according to data from the state’s Office of Retirement Services.
In Rhodes’ report, he said the district’s debt payments are diverting revenue from the classroom.
“DPS’s operating expenses are not sinking DPS. Nor are teacher salaries, which are significantly below suburban teacher salaries. Rather, the cause is DPS’s debt service,” wrote Rhodes, who oversaw and approved the city of Detroit’s emergence from bankruptcy at the end of 2014. “That debt service, $63,849,494, is sucking revenues away from educating its students, approximately $1,394 per student.”
Rhodes declined to be interviewed Monday about the matter.
Detroit’s projected $157 million in unpaid pensions is included in the $515 million in debt relief Gov. Rick Snyder is seeking for the district. The remaining $200 million is associated with start-up costs for a new debt-free school district in Detroit.
“This administration has told DPS emergency managers: Don’t pay that bill, we’ve got a plan and it’s the bailout,” Naeyaert said of the pension contributions under Martin and Earley. “You would think when they’re handed an amount that’s earmarked for MPSERS, that it would make its way to MPSERS.”