Snyder advisers seek debt 'relief' for Detroit schools

Chad Livengood
Detroit News Lansing Bureau

Editor's note: This article was originally published on Feb. 19, 2015.

Lansing — Gov. Rick Snyder's administration is exploring ways to link a change in governance of public education in Detroit with "financial relief" for the debt-ridden and cash-strapped Detroit Public Schools.

The governor's top advisers told The Detroit News that a $75 million request for distressed school districts in Snyder's 2016 budget plan could be used to help the Detroit school district pay a $56 million annual debt service bill it is saddled with through the end of the decade.

Snyder's office and members of a Skillman Foundation-led coalition are studying options to better manage Detroit's fractured education system and are saying that reducing DPS debt is vital to the district's survival.

"We're not talking about bankruptcy — the governor has been very clear about that," Snyder's strategy director, John Walsh, told The News. "We have to find a method that will recognize that they can't bear the weight (of their debt)."

Walsh said the $75 million could be used to give Detroit and other urban school districts "financial relief."

"It's not just for Detroit — there's other school districts that are financially distressed," Walsh said.

The Detroit district's $56 million annual debt service payments, which stem from a 2012 refinancing of $300 million borrowed to finance operations, represent nearly a third of its $170 million on-going deficit or 8 percent of its operating budget.

"That's a significant drain ... of scarce resources away from the classroom," said Bill Aldridge, chief financial officer of Detroit Public Schools.

Since DPS is managed by its fourth emergency manager in six years, the issue of giving the district some financial breathing room looms large as the the Coalition for the Future of Detroit Schoolchildren tries to craft a new school reform plan for Snyder to pursue in the Legislature.

"That has to be addressed for the district to be financially viable," said David Hecker, president of the American Federation of Teachers Michigan, whose Detroit affiliate represents DPS teachers.

Hecker is one of the co-chairs of the coalition of Detroit education, civic, business, religious, labor and community leaders working on a self-imposed March 31 deadline to send Snyder recommendations for better management of Detroit's patchwork of public schools run by DPS, charter schools and 15 schools overseen by the state-created Education Achievement Authority.

Snyder wants the plan before spring so he can pursue potential legislative changes before the next school year, Walsh said.

Walsh, a Livonia Republican, was term-limited from the House last year and joined Snyder's staff in January. He since has worked closely on Detroit and urban education reform issues with Paul Pastorek, a former Louisiana schools chief credited with turning around the New Orleans school system after Hurricane Katrina in 2005.

Last summer, the Los Angeles-based Eli and Edythe Broad Foundation, which has invested heavily in the EAA schools, sent Pastorek to Michigan to assist Snyder's office in studying education reform in Detroit.

The 36-member coalition is exploring reforms that include common enrollment and the creation of a new commission that could have governance power over all DPS, EAA and charter schools. The group's work comes as the EAA's chancellor announced a plan this week to make its 15 schools autonomous.

Snyder included the $75 million for distressed districts in the School Aid budget to begin an "honest dialogue" about the financial hardships facing DPS and other urban schools, Walsh said.

"We need to work out that very delicate relationship between financial relief and proper … management of the system moving forward," he said. "They're absolutely linked."

The annual DPS debt service payments total $53 million, plus $3 million in interest on revolving loans the district takes out against future state aid payments to deal with cash-flow issues, Aldridge said.

DPS also has more than $1.54 billion in principal owed on bonds for capital improvements to schools. When interest is factored in, the district's long-term capital debt totals $2.6 billion, according its annual financial report.

To deal with the long-term DPS debt, coalition members are studying whether to require servicing the district's debt with the existing 18-mill property tax generated from businesses and second homes and creating a new school district free of the debt, Walsh said.

The Snyder administration used such a remedy in 2012 to rescue Highland Park and Muskegon Heights schools from financial ruin.

"It's our mind," Walsh said. "We've done it before with success," Walsh said. "It's in the mix, like everything else."

Walsh said the option could be deployed without turning the district into one large charter school, as happened in Highland Park and Muskegon Heights. "We would need to some legislation," he said.

The cost of sheering off the DPS debt with an old district varies based on the length of payment, Walsh said.

"On this debt issue, they're looking at a number of different options," Pastorek said of the coalition.

In his Feb. 11 budget presentation to lawmakers, Snyder called the $75 million a "reserve fund" to aid distressed districts.

"I don't view this as bailouts, this is only in circumstances where we're really solving problems for the long term and getting us on a foundation for long-term success," Snyder said.

But the $75 million request is getting a cool reception with some Republican lawmakers, who argue it deprives the state's 860 other districts and charter schools of more money.

Rep. Dave Pagel, R-Berrien Springs, said the $75 million for distressed schools represents 70 percent of the governor's $108 million recommended increase in base funding for schools. "That seems to be out of whack to me a little bit," Pagel said.

Rep. Tim Kelly, chairman of a House subcommittee that crafts the School Aid budget, echoed Pagel's concerns.

"I'm kind of concerned about throwing more money at financially distressed districts," said Kelly, R-Saginaw Township. "Let's try and keep them out of distress to begin with. I think once you're throwing a lifeline, they're already in the water."