Snyder: Unpaid bills could tip DPS into financial chaos

Shawn D. Lewis, and Chad Livengood

Detroit — As Gov. Rick Snyder steps up his push for the Legislature to bail out the debt-ridden Detroit Public Schools, his administration is bracing for unpaid vendors to seek court orders that could trigger what he describes as a “chaotic” financial free-fall for Michigan’s largest school system.

Snyder and his strategy director acknowledged Monday that Michigan’s school employee pension system is one such vendor — owed nearly $100 million — that could ask a judge to order the district or state to pay up. Such a move could lead to higher taxes for Detroit property owners or the need for an emergency payment by the Legislature.

The governor said the state could be on the hook for DPS’ $1.5 billion unfunded pension liability if lawmakers don’t stabilize the district’s finances by assuming a projected $515 million in operating debt payments that were mostly racked up by state-appointed emergency managers.

“That’s an unfunded liability that would get spread to the other districts if DPS wasn’t making payments,” Snyder said in an interview with The Detroit News Editorial Board. “There’s a lot of extra money that would have to go out if this doesn’t get done.”

Snyder renewed his efforts to overhaul Detroit’s fractured education system Monday ahead of the long-expected introduction of legislation to create new layers of oversight in exchange for the state assuming the operating debt piled up by emergency managers in recent years.

The Republican governor is seeking legislative action by year’s end on his plan to create a new debt-free school district at a cost of $715 million over 10 years. The current district would exist only to pay off the debt.

“This package provides an answer that’s rational, that’s comprehensive, that is lower cost and much less chaotic than the other alternatives,” Snyder said.

The governor acknowledged the cost of paying off DPS debt comes at an annual price of $50 for every child in Michigan.

But Snyder said the state’s School Aid Fund can handle the roughly $70 million annual payment for the next decade without taking money away from other schools districts.

“This does not have to come at the expense of any cut,” Snyder said during a midday press conference at his Detroit office.

One education policy analyst disagreed.

“It seems like that’s semantics,” said Craig Thiel, senior research associate at the Citizens Research Council of Michigan. “Clearly you’re taking money that would be available to other school districts to help a single school district.”

The accumulated operating debt of DPS is expected to top $515 million by June 2016, Snyder said.

Snyder’s proposed Detroit Community School District would need $200 million to cover $100 million in startup costs and initial capital improvements of facilities and $100 million to account for continued declining enrollment in the city.

The new school district would not be able to seek voter-approved millages for capital improvements until the old district’s operating debt was paid off, said John Walsh, the governor’s strategy director.

“We’re being careful because we don’t want to ask for more,” Walsh said.

It’s possible the $715 million figure could decline if Detroit’s economy continues to rebound, businesses relocate to the city and property tax collections increase, according to Walsh.

“With property values going up, it could take less time to pay off,” he said.

The state’s contribution to the city of Detroit’s bankruptcy settlement amounted to $350 million spread over 20 years. Walsh led that effort as a Republican state representative from Livonia in 2014.

Thiel said the magnitude of the governor’s request to aid Detroit’s school system will make it a “tough sell, obviously, in the Legislature.”

“The grand bargain was half this ask and it wasn’t a slam dunk, that’s for sure,” Thiel said.

The new Detroit school district would still be liable for paying down the $1.5 billion in unfunded pension liabilities. The governor has resisted the Coalition for the Future of Detroit Schoolchildren’s call for DPS to be exempted from continuing to pay its share of pension costs for current and former employees.

As of Oct. 6, DPS was $99.5 million behind in pension payments to the Michigan Public School Employee Retirement System. That debt is being exacerbated by $100,000 in monthly late fees and $12,000 in daily in interest penalties, according to state’s Office of Retirement Services.

The governor said he plans to offer legislation this month to overhaul Detroit’s troubled education system, which includes DPS, the state-run Education Achievement Authority and charter schools.

This is the second time in six months that the governor has detailed plans to overhaul education in Detroit.

Snyder’s revised plan contains a few tweaks from the proposal he detailed in April.

Originally, the governor had proposed the creation of a new financial review commission to have oversight and veto power over spending decisions of the new school district in Detroit.

In the revised plan, Snyder calls for using the existing Financial Review Commission that was set up in the Detroit bankruptcy to have long-term oversight of the city’s finances.

Snyder’s plan continues to have another layer of oversight of all city schools in a Detroit Education Commission, which would hire a chief education officer with the power to open and close academically failing schools run by DPS, charter schools and the EAA.

The commission’s membership would include three gubernatorial appointees and two mayoral appointees.

The Detroit Education Commission would be charged with streamlining some services for all schools, such as enrollment. But in the governor’s revised plan, he makes a common enrollment system voluntary.

Snyder’s announcement follows news of an FBI corruption investigation involving DPS and the governor’s K-12 reform district, the Education Achievement Authority.

“I think it’s fair to say it complicates it,” Snyder said.

Under Snyder’s revised proposal, a new seven-member school board would be created to govern the new Detroit school district. The governor would appoint four board members and Mayor Mike Duggan would appoint three board members, Snyder said.

Duggan has resisted appointing school board members and has called for the return of an elected board.

Detroit’s elected school board has been without policy decision-making powers for six years, during which the district has been under the control of four state-appointed emergency managers.

Snyder indicated he was open to changes in the legislative process.

“Let’s get the legislative process going and let’s work through that,” Snyder said. “Not everyone is going to like every piece of this.”

Reaction to the governor’s latest plan was mixed.

In a statement, DPS Emergency Manger Darnell Earley expressed support.

“Governor Snyder’s plan to reform the education landscape in Detroit, including a transformation of Detroit Public Schools into a more financially stable new district without the crushing burden of debt that exists today, represents the best way forward for the District and the children it serves,” he said.

Members of the House Detroit Democratic caucus said they were ready to work with Snyder on a reform plan — as long as it includes local control of schools.

“The state has controlled DPS for many years, and it has been a failure,” said Rep. Brian Banks, caucus chairman. “We have to find a better way, and we believe that way lies through local control. We look forward to working with all stakeholders to address all of the issues surrounding DPS.”

John Austin, president of the state school board, praised the governor’s plan while also saying there are areas that can be improved.

“An ‘old’ DPS and a ‘new’ DPS can be a sensible way to treat the financing issues of DPS,” he said in a statement. “This would work best if state subsidy to pay off the debt (which is really a state debt, not a DPS debt) does not come from the School Aid Fund — pitting Detroit against other school districts for funding — but from another revenue stream.”

Austin said he’d like to see Duggan appoint the majority of members to the new school board and the education commission to “return political accountability to Detroit residents.”

Dan Quisenberry, president of the Michigan Association of Public School Academies, said Snyder’s plan would give the chief education officer too much power without improving academic achievement.

“Based on what we’ve seen, we have concerns with any plan that takes decisions out of the hands of parents, and puts them in the hands of a single, politically appointed person,” he said in a statement. “We need to raise student achievement in Detroit and solve DPS’s financial situation, and from what we’ve seen and heard, this proposal does neither.”

Snyder took care not to alienate the Coalition for the Future of Detroit Schoolchildren, which offered a reform plan in late March.

One of the major differences between the coalition’s plan and Snyder’s is his recommendation for a voluntary enrollment system, as opposed to the mandatory system the coalition recommended.

“We looked at the best practices around the country and they were all voluntary, and we felt that was the best way to go for parents, to give them more choice,” Snyder said. “We encourage charters to join the voluntary system in terms of making their school decisions.”

Snyder also said the coalition presented far more recommendations than he used.

“It’s not that we don’t agree,” he said. “It’s just that they (many of the recommendations from the coalition) didn’t appear to be prudent for state legislation.”

In a statement, coalition members expressed a willingness to work with the governor and others to fix Detroit’s school system.

“In finding the right solution, we must preserve school choice for all families, provide quality schools for all children and take the burden of a tremendous debt off the backs of children in this community,” said the Rev. Wendell Anthony, a coalition co-chair.

Snyder said he and Duggan are still discussing the mayor’s role in school reform in Detroit. Duggan has expressed a desire for more local control of Detroit schools.

“The mayor sees the value in this, but there is a difference in governance,” he said. “The mayor’s office still has issues they want to talk about, and I feel it’s important to get this dialogue going. We’ve taken a lot of input from the mayor. We have a supportive, positive relationship. No, we don’t agree on every issue.”

Duggan’s spokesman John Roach said Monday the mayor has not yet had the opportunity to review the governor’s latest proposal.

Once he does, Duggan plans to speak with Detroit legislators. He expects to have a full response to the governor’s plan in the next week, Roach said in an email.

Earlier this month, Duggan reiterated that he is advocating for local control, including an elected school board for Detroit to run its 100 public schools. He further proposed that an election be held next spring.

Duggan has said the city needs an education commission with membership that he appoints, as recommended by the education coalition. The commission, he said, would level the playing field between public schools and charters and help to set standards for where they are needed and can locate.

Duggan also has said the EAA needs to be rolled back into DPS.

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Christine Ferretti contributed.