Bankruptcy could be option for ailing DPS

Ingrid Jacques
The Detroit News

Each month the Legislature fails to act on Gov. Rick Snyder’s proposals for fixing Detroit Public Schools brings the district a step nearer to a Chapter 9 bankruptcy filing, which now even the governor is calling an option.

Snyder and his education team have worked closely with lawmakers since April on a handful of bills to address the district’s imploding debt and its academic shortcomings. They had hoped to get the process started this fall, but the Legislature this week left for the year without introducing the package.

Snyder is offering $715 million over 10 years to create a new Detroit school district. The state would assume $515 million in operating debt, as well as contribute $200 million in start-up costs for the restructured school system.


A debt-fee DPS would seem a great gift to the city.

But Snyder faces resistance on multiple fronts, including Detroit’s legislative delegation and backers of traditional and charters schools. The lack of action greatly increases the odds that DPS will follow the city’s path into bankruptcy. The governor’s team and others who have studied the district’s finances say it will not have the cash needed to open schools next fall without a resolution of the debt.

Several officials involved in the DPS restructuring plans have told me in recent weeks that to avoid a disruption of the start of school in 2016, there must be legislative action or a Chapter 9 filing by spring.

Bankruptcy is doomsday scenario on several levels. First, it would trigger the calling-in of more than $2 billion in capital and operational DPS debt. It’s possible the obligation would come due all at once, and since much of the debt can be tied to the state, it could sink the budget.

Snyder, of course, prefers the more orderly debt paydown his bills propose.

The governor also could lose the leverage he currently has to make substantial changes to how DPS is governed. He has a vision for an education commission with broad authority to open and close all city schools—including charter schools. Snyder would isolate the district’s growing debt from a new district that could start fresh and focus on academic achievement. The plan introduces several new layers of governance to ensure academic improvement and better coordination among all schools in the city.

Bankruptcy would address the financial shortfalls in the district, but would do nothing to fix the academic and organizational ones, which are equally important to the governor.

Snyder, in an interview with The Detroit News this week, maintained that bankruptcy is “a last resort,” and said he’s hopeful lawmakers will act on the legislation early next year. But the governor changed his position from last winter, when a spokeswoman said bankruptcy wasn’t a “feasible option” for DPS given the unique concerns of a school district.

Now, even he says bankruptcy is a possibility.

“There are other options short of that,” Snyder said. “I don’t even want to go down the bankruptcy path, but I won’t take it off the table — ever — because that wouldn’t be prudent.”

Others are more fond of the idea, including members of his own staff, and leaders in Detroit. Detroit Mayor Mike Duggan said he’s supportive of taking the district into bankruptcy for a clean resolution. So is John Rakolta Jr., who examined the district’s books for the Coalition for the Future of Detroit Schoolchildren. The coalition in March came out with its own report for revamping the city’s schools.

Rakolta, CEO of Walbridge, spent a lot of time poring over DPS finances and understands how dire things are for the district. The coalition firmly believes the state is responsible for much of the district’s debt, one way or another.

“You only have two choices here,” Rakolta told me recently. “You either have a collapse or you’re going to have a workout. There’s no third choice. It can either collapse by bankruptcy, collapse under its own weight or you’re going to have a workout. These aren’t great options.”

Rakolta says in a bankruptcy the state would be on the hook immediately for $470 million in operating debt and more than $1.6 billion in capital debt. It would be up to a judge to determine how quickly the state would have to pay up.

For that reason, Rakolta predicts: “The state is not going to file for bankruptcy. We all wish they would. It would force a really unbelievable public debate.”

Yet without action by lawmakers who would rather do anything than pass another Detroit bailout in an election year, the state may not have a choice.