Schooling on Municipal Solvency

February 16, 2016. Share on Twitter

Schooled on Solvency. Marios, Demetrio the Detroit Public School (DPS) System’s deputy superintendent of finance and operations yesterday, in testimony before the Detroit City Council, warned that a “desperate” DPS is running out of cash, is unable to borrow, and urgently needs the state to approve legislation to provide financial relief. With a growing recognition by state and local leaders that a DPS insolvency could have harsh repercussions for Detroit’s nascent recovery from the nation’s largest municipal bankruptcy, the City Council hearing came in the wake of its approval of a resolution opposing legislation being debated by state lawmakers to reform DPS. But time is wasting: DPS guesstimates it could be insolvent by April. Mr. Demetrio warned the school system will need a cash infusion of $126 million by August “in order for us to survive,” adding DPS “is running out of cash. It can’t borrow anymore. We are desperate and need help right now…That is the urgency of why this legislation was introduced. It needs to pass.” Detroit Council member Raquel Castaneda-Lopez, who had requested the hearing, told her colleagues she had requested the presentation in part over concern for DPS’ parents and students, many of whom are unaware of the “pending crisis” this spring. Although DPS is currently under state control under a resigning emergency manager appointed by Gov. Rick Snyder, the Council clearly recognizes the growing implications to the city’s property tax base that a DPS default and bankruptcy would create. DPS confronts some $515 million in debt, and DPS has warned it may be unable to make payroll by April. For his part, Gov. Snyder has asked the state legislature for a $715 million package to pay off that debt and provide startup costs for a new Detroit school district—a proposal currently under discussion and debate.

The looming default creates hard governance issues and questions. Detroit’s City Council, in a resolution adopted last month, urged the Legislature to immediately restore an elected school board and “remove the remains of emergency management that has done so much to undermine the success of the city’s school system.” Gov. Snyder has asked the legislature to appropriate $72 million in his FY2017 budget and for the next nine years as part of his 10-year plan to pay down the school debt and restructure DPS—with the funds coming from the Tobacco Settlement Fund; he has also proposed a $50 million appropriation to keep DPS operating while state legislators debate the legislation to overhaul DPS. Under the Governor’s plan, funds from Michigan’s tobacco settlement would be dedicated towards DPS reforms to repay an estimated $515 million in operating debt: the state anticipates receipt of $284 million in FY2017—with the plan to allocate those funds ($193 million would be left after credits are paid to tobacco manufacturers and the state makes securitization payments related to bonds issued in 2006 and 2007 that helped Michigan through lean budget years): $17.5 million would go into the state’s Budget Stabilization Fund, or reserves, as reimbursement for Michigan’s contribution to the “grand bargain” deal as part of the approved plan of debt adjustment that secured Detroit’s successful exit from municipal bankruptcy (a payment which will be made over 20 years); $75 million is paid into Michigan’s 21st Century Jobs Fund; $72 million is proposed annually for a decade to pay for DPS reform—with the funds coming from a nearly $49 million fund balance in the tobacco settlement and money that previously paid for other programs. There does appear to be a bipartisan consensus in the legislature that urgent state action will be necessary if Detroit’s school system is to avoid defaulting on its debt and potential municipal bankruptcy—or, as Rep. Al Pscholka (R-Stevensville), Chair of the House Appropriations committee noted: “All of us agree that the financial piece has to get taken care of,” adding that he is considering a way to fund the DPS fix without school or general fund money—and that: “Bankruptcy is a terrible option for the district…The bankruptcy process is always uncertain, but in the end, it will cost the state more than double the cost of the proposed legislation.” DPS currently is paying about $50 million a year in debt service on some $515 million in debt it has accumulated from long-term municipal bonds, short-term borrowing to improve cash flow, unpaid payments into the state pension system, and late payments to vendors.

Here Come Da Judge. In a related development, Gov. Snyder has asked now retired U.S. Bankruptcy Judge Steven Rhodes, who masterfully oversaw Detroit’s bankruptcy trial, to play a key leadership role in helping DPS avoid bankruptcy and get back on its feet—asking Judge Rhodes to help guide Detroit Public Schools reform legislation through the state Legislature and then implement any new law’s changes to DPS—that is, a transitional role, steering a revised DPS until it can return to local control under an elected school board and superintendent, albeit details of the arrangement have yet to be finalized, except it appears unlikely Judge Rhodes would be designated as an Emergency Manager. Judge Rhodes has made clear that a strong school system is key to Detroit’s long-term success. In an interview around the time of the city’s one-year anniversary after leaving bankruptcy protection, designating DPS as one of the two or three remaining concerns, he had, with regard to the future of Detroit after its departure from federal bankruptcy court, noted: “I think it’s fair to conclude that families will only move back into the city after the schools are fixed,” in an interview last fall with the Detroit Free Press. DPS has been run by governor-appointed emergency managers since 2009. Despite state intervention, its financial problems have only worsened: the system which once had a peak of nearly 300,000 students is widely considered today the nation’s worst-performing urban school district in terms of academics.

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