DPS could be insolvent by spring, state treasurer warns

Chad Livengood
Detroit News Lansing Bureau

Lansing — Gov. Rick Snyder’s state treasurer and Detroit Public Schools’ emergency manager painted a dire picture of the district’s finances Tuesday during the first legislative hearing on the governor’s plan to rescue debt-ridden DPS.

State Treasurer Nick Khouri said Michigan’s largest school district faces “insolvency” as early as the spring if the Legislature doesn’t approve a plan to assume $515 million in DPS debt. Even a debt-free school district will face challenges stabilizing enrollment, paying its pension bills and containing costs, Khouri said.

“We’ll never get there if you don’t take care of the legacy costs,” Khouri told a House subcommittee that sets K-12 school spending.

Snyder is asking lawmakers for a 10-year, $715 million aid package to create a new, debt-free school district and pay off operating debts owed by DPS for everything from unpaid pension bills to past-due vendor invoices and loans dating back a decade.

“My predecessors were consumed with this debt issue. ... I can’t do it without the Legislature,” said DPS Emergency Manager Darnell Earley, who is the district’s fourth state-appointed leader since 2009. “If we don’t get some relief from that debt, we won’t be successful either.”

The $515 million Snyder is requesting for DPS includes about $266 million in past operating debts, $157 million in payments the district owes the state’s school employee pension fund and $47 million in vendor bills that are more than 90 days past due, Khouri said.

DPS also faces a $45 million cash shortfall for this school year, Khouri said, which would be worse if the district had been making regular pension payments.

“Literally the district has not been making timely payments (to vendors),” the state treasurer said. “It’s not by choice. There’s no cash.”

Rep. Tim Kelly, chair of the House subcommittee, is no fan of the governor’s proposal to assume DPS debt and said he was “flabbergasted” to learn that the district was not making payments to the state’s pension fund.

Kelly, R-Saginaw Township, said he’s more interested in overhauling the Michigan Public School Employees Retirement System for all schools than just “taking care of Detroit.”

“If I had $715 million to spend, I’d spend it on buying down MPSERS, not Detroit,” Kelly told reporters after the hearing.

DPS resumed regular payments this month to avoid having its state aid withheld.

Costs could balloon

In addition to $515 million for paying off DPS operating debt, Snyder said last week he needs an extra $200 million to pay start-up costs for a new debt-free Detroit Community School District and to account for continued declining enrollment.

Khouri used his presentation to the committee to detail how the state’s cost could balloon if DPS falters on debt payments or is dissolved, as some lawmakers have suggested.

The state is on the hook for $196 million in school revolving loan funds to DPS, plus $1.3 billion in long-term pension payments, Khouri said.

It’s unclear whether the state would have cover the cost of $1.5 billion in capital improvement bonds if DPS were to be dissolved or taken through a Chapter 9 bankruptcy, Khouri said.

The $715 million aid package, Earley said, “is the only way we will be able to address the structural imbalance that has existed for decades.”

“There is no possible way to cut our way out of the structural issues that have plagued DPS for decades,” he told lawmakers Tuesday. “The rest of the challenges are manageable.”

Rep. Earl Poleski, R-Jackson, was skeptical of the district’s routine practice of borrowing against its future state aid payments to stay afloat.

“It’s kind of like paying off this week’s payday loans so we can keep operating next week,” Poleski said.

‘Transformation’ touted

During Earley’s presentation to the committee, he emphasized the district is undergoing a management “transformation” by downsizing a once expansive DPS central office.

The DPS central office has shed 605 positions over the last five years to a projected 309 positions this year, Earley said.

But the data Earley presented to the committee conflicts with central office position data in the district’s 2014 annual financial report, which shows 204 positions in a category of “officials, administrators, managers.”

That same report shows there were more administrators in 2014 than there were in 2005, when the district had 100,000 more students and 200 employees in the central office.

Rep. Sarah Roberts, D-St. Clair Shores, recalled hearing former DPS emergency manager Robert Bobb testify before a House committee in 2010 about his plan for turning around one of the worst academically performing school systems in the country.

“A lot of what he said is very similar to what you said — we’re going to restructure debt, we’re going to focus on student outcomes, we want to right-size the district,” Roberts said. “What do you think have been the challenges in the previous emergency managers not being able to obtain those goals?”

Earley said Bobb was hampered by a weaker emergency manager law and legal battles with the Detroit Board of Education.

After the Legislature passed the latest version of the emergency manager law in December 2012, former managers Roy Roberts and Jack Martin were restricted to just 18 months each to make changes, Earley said.

Earley, who has said he hopes to be the last emergency manager of DPS, contended his predecessors did make the 47,000-student school district more efficient, despite the persistent problems with paying off long-term debt.

“They handed the baton to me to carry it across the finish line,” Earley said.

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DPS debt by the numbers

Gov. Rick Snyder’s plan for creating a new debt-free Detroit school district requires the Legislature to assume $515 million in debt and unpaid bills at Detroit Public Schools. Here’s how that breaks down:

Long- and short-term operating debt: $266 million

Pension payments: $157 million

Vendor bills more than 90 days past due: $47 million

2015-16 school year cash shortfall: $45 million

Note: All figures are estimates of costs through June 30.

Source: Michigan Department of Treasury