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DPS debt payments mount to unsustainable levels

Chad Livengood
Detroit News Lansing Bureau

Lansing — The debt payments of Detroit Public Schools — already the highest of any school district in Michigan — are set to balloon in February to an amount nearly equal to the school district’s payroll and benefits as the city school system teeters on the edge of insolvency.

Detroit Public Schools has to begin making monthly $26 million payments starting in less than a month to chip away at the $121 million borrowed this school year for cash flow purposes and $139.8 million for operating debts incurred in prior years. The city school system’s total debt payments are 74 percent higher from last school year.

The debt costs continue to mount while Gov. Rick Snyder and the Legislature remain at odds over how to rescue Michigan’s largest school district. A bankruptcy of the district could leave state taxpayers on the hook for at least $1.5 billion in DPS debt.

The school district’s payroll and health care benefits are projected to cost $26.8 million in February — meaning the debt payments will be 97 percent of payroll. General fund operating debt payments that exceed 10 percent of payroll are “a major warning flag,” municipal bond analyst Matt Fabian said.

“That’s extremely high,” said Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts, who also followed the city of Detroit’s bankruptcy case. “That’s no longer, really, a normal school district. The school district has turned into a debt-servicing entity. It’s making its own mission impossible.”

As a result, the Detroit district won’t have enough cash to pay any bills in four months.

“We’re running out of money in April,” said Marios Demetriou, deputy superintendent of finance and operations at DPS. “We need help to fix the school district once and for all. Our kids deserve a good education and when you don’t have cash there are things that are lacking.”

Financial analysts say the skyrocketing debt payments owed to the state expose an unprecedented amount of money being diverted from classroom instruction to pay off past debts, even as the city school system eliminates 100 central office jobs this month.

The Detroit district’s payments on old debts some dating back a decade or longer amount to $3,019 of the $7,296 per student grant the district will receive from the state this school year, a Detroit News analysis of public records shows.

“That’s $3,000 that isn’t available for each kid this year, and it pays for the education of kids 10 to 15 years ago,” said Craig Thiel, senior research associate at the Citizens Research Council of Michigan. “They’re as close as they’ve ever been to being insolvent, where you’ve got multiple bills that are owed to the state that have gone unpaid.”

The operating loans are owed to a state revolving loan fund, which analysts say is the district’s only available lender.

“For DPS, unfortunately, the only entity they can borrow money from right now is the state of Michigan,” Thiel said. “If they were to go to Comerica Bank and try to get a line of credit, they’d probably laugh them out the door.”

Why debt payments rising

At issue among state lawmakers is how to pay for the Detroit school system’s $515 million in past debts and unpaid vendor and pension bills and about $200 million Snyder has requested for assistance in creating a new debt-free Detroit school district.

Legislators on both sides of the aisle have expressed support for aiding the Detroit district, but no legislation has been introduced after eight months of talks.

Detroit district officials and financial analysts said lawmakers have as little as two-and-a-half months to address the problem — since the 46,325-student district has lost 100,000 pupils in the past decade and may need to borrow more money this spring to keep its 103 school buildings open through June.

“This is a really serious problem,” said Jeff Williams, CEO of Public Sector Consultants in Lansing. “There’s such a cash flow crunch looming for DPS.”

The district’s debt payments are spiking in February because it is carrying an extra $83 million short-term cash advance it couldn’t pay off last school year — plus another $3.8 million in interest penalties, records show. After the state Treasury Department let the district defer repayment of last year’s loan, it added $14.8 million in costs to the district’s $6.6 million monthly debt payments in October.

But to make payroll this year, the district borrowed another $121 million through an advance on its state aid, which is common among school districts because they do not receive a payment from the state in September.

“The State Aid note borrowings were necessary in order for the district to be able to continue operating and educating its students,” Treasury spokesman Terry Stanton said in an email.

Fabian, the bond analyst, said the Treasury Department’s continued short-term loans have put the Detroit district “in an impossible position.”

“How is there any expectation that they could pay that back?” Fabian said. “Just loaning DPS money that it can’t possibly pay back doesn’t fix the long-term problem.”

Bills piling up

Financial analysts say the year-after-year borrowing shows the school district is on a fiscally unsustainable path.

“There’s not a layperson on the street who would call that a sustainable business model,” Williams said.

As a percentage of payroll, DPS debt payments on a monthly basis range from a low point of 59 percent in October to a projected 97 percent in February, June and August, a Detroit News analysis shows.

The Detroit school district’s August budget plan calls for borrowing another $80 million in June from the state for cash flow purposes before its fiscal year ends June 30, records show.

To avoid a default, the district has made the debt payments before honoring bills for vendors and employee pensions. DPS owes the state’s school employee pension system $114 million — a bill that’s expected to top $157 million by July.

The district has another $40 million in vendor bills that are more than 90 days past due, Demetriou said.

In March, Moody’s Investors Service downgraded the school system’s credit rating with a negative outlook given the mounting debts, low cash flow and “sustained financial stress.”

In August, DPS projected it would be down to $10 million in cash-on-hand by the end of May, in part because of this year’s higher debt repayments.

“If you look at overall their cash low point is about $10 million and if you compare that to a $660 million overall general budget, that’s very narrow,” said Andrew Van Dyck Dobos, a public finance analyst at Moody’s Investor Service. “It’s very tight.”

A tight window

The Detroit district is starting 2016 with 100 fewer positions in central administration, reductions that resulted in layoff notices last month, Demetriou said.

A Detroit News analysis last year found Detroit had among the state’s highest per-pupil costs for administration in districts with more than 1,000 students.

“We have to find work-arounds in a lot different areas to make things work,” Demetriou said.

Republicans and Democrats alike have resisted tapping the School Aid Fund for bailing out DPS because it would come at the expense of Michigan’s other 600 school districts and 300 public charter schools.

House Minority Leader Tim Greimel, D-Auburn Hills, said the escalating debt costs for the Detroit district is “another good reason why the state needs to help resolve the fiscal distress of the Detroit Public Schools system.”

“But again, the state needs to do so in a way that does not adversely affect the finances of other school districts,” Greimel said.