How Snyder’s plan to fix Detroit school debt impacts other districts

Gov. Rick Snyder has proposed splitting DPS into two entities – an “Old Co.” to pay off the debt and a “New Co.” to continue to educate students.

 

In 2007, Detroit voters approved a ballot measure to ask the state of Michigan to take responsibility for the Detroit Public Schools’ debt that grew while a appointed board was in charge of the district. At the time, the debt was $213 million.

That request, made through the school board, was unsuccessful, as have been subsequent efforts to get relief through years of state oversight.

Gov. Rick Snyder now estimates more than $700 million is needed to save Detroit’s public schools, as his team pushes a series of draft bills that reorganize the schools and eventually pay off the debt, with legislation expected within days.

Snyder wants new Detroit schools legislation approved by the end of the year so that it may put into action for next school year. Bills will likely be debated for weeks and what ‒ if anything ‒ will emerge is up to the state’s lawmakers.

For now, the proposal for fixing Detroit’s schools requires public school districts across Michigan to help pay off the spiraling debt in the state’s largest school system. Snyder warns that if the state does not fix the DPS debt load soon, the cost will continue to worsen.

“A collapse would greatly affect all Michigan school districts as the state is Constitutionally responsible to cover many debts and liabilities, a figure that could be billions of dollars,” according to the statement released from Snyder’s office last week.

Among options being discussed is a bill that, if school funding levels remain the same, would require each district across the state to forgo $50 per student to help erase Detroit’s debt. Snyder said he intends to present a budget for next year that will increase the state's funding for schools so that districts statewide would not be hit with the $50 per pupil cut. Of course, all of this will require legislative approval.

Lawmakers will also be asked to make Detroit an empowerment zone. Under this plan, public schools in the city and on the fringe with enrollment primarily made up of Detroit residents, including charter schools and the 15 schools in the state reform district (Education Achievement Authority), would be placed under the authority of one board to be appointed by the governor and mayor.

There is a growing acknowledgement among educators and legislators in Lansing that the state shares blame for DPS’ debt and ultimately must figure out what to do. Since 1999, the state has run DPS for all but three years. Four state-appointed emergency managers have not been able to fix the DPS deficit since 2009.

Of course, more money for Detroit will mean less money for other districts if Snyder is unable to sway legislators to increase school funding. What will that mean across Michigan? In districts the size of Plymouth-Canton, a $50 per pupil cut would be equivalent to 16 teachers' salaries, or about $875,000. Traverse City would miss out on roughly $488,000. And the 1,700-student Cheboygan Area Schools district would receive $89,000 less under the plan, about what it pays for athletics.

The DPS deficit is $238 million district records show. DPS also owes a $121 million one-year loan it took out this year. Snyder last week put the debt at $515 million and said an additional $200 million would be needed to keep the district afloat.

The depth of DPS’ budget hole means it’s not a matter of if the state will have to dig into state coffers to pay the DPS debt, but when, said the state superintendent and a host of officials who typically disagree on school governance.

“The state broke it, the state has to fix it,” LaMar Lemmons, a member of the DPS school board which has no authority over the budget, said during a packed town hall meeting in Detroit last month.

Dan Quisenberry, president of the Michigan Association of Public School Academies, a collaboration of charter schools which competes head-to-head with DPS for students and funding, echoed that.

“Yes, the state will have to solve the deficit problem for DPS,” he said. “Though the discussion on ‘how’ the state will pay the debt remains.”

Snyder said at a news conference in Detroit last week that all of Michigan benefits from the economic recovery happening in the state’s largest city ‒ and that recovery relies in part on a stable Detroit school system.

“There is no question that Detroit children need a solid education so they can compete in a global economy but also for their city to accelerate its revitalization,” Snyder said.

New Co., Old Co.

Snyder first proposed splitting DPS into two entities ‒ a so-called “Old Co.” and “New Co.” ‒ in April, similar to the General Motors bankruptcy of 2009. The “Old Co.” DPS would exist to pay off the debt and a “New Co.” DPS would continue to conduct the business of educating students. The legislature responded to Snyder’s “New Co., Old Co.” idea in June by earmarking $50 million in the school aid budget that could be used to help DPS.

Here's how it would work:

Currently, DPS uses more than $1,100 of the $7,434 it gets in state aid for each student, or $53 million a year, to pay off bonds ‒ money borrowed since 2011 to keep the district operating. The “Old Co.” would use the estimated $69 million in education property taxes collected from Detroit businesses and rental properties annually to pay down the debt over the next decade. The elected school board and emergency manager would be part of the “Old Co.” and oversee the debt payments and have nothing to do with operating schools. After the debt is paid, the Old Co. DPS would be dissolved.

To start the New Co. DPS with a clean slate and full funding, Snyder’s idea would require funds to replace the local education property tax money that would be siphoned off to pay off the debt. Over the next decade while the debt is being paid off, the new Detroit school system ‒ which would be called the Detroit Community School District ‒ would need about $70 million a year to be fully-funded. That money would come from the state school aid fund, which pays for the state’s public schools, higher education and school employee retirement . As a result, schools across Michigan would see a reduction of about $50 per student until the DPS debt is paid in full ‒ about a decade, according to Snyder’s plan.

In a larger district such as Livonia with 14,300 students, that $50 per pupil reduction would be a $715,000 cut per year. Due to the hypothetical nature of Snyder's plan (no bills have been introduced or voted on yet), school officials are reluctant to say what they would do to adjust if they lost $50 per pupil.

“We will reserve comment at this time on the specific effects a cut such as that would mean, but it would certainly not be 'good news' budget wise as we struggle with the same financial issues other districts across the state are facing,” said Stacy Jenkins, spokeswoman Livonia Public Schools.

If approved, the New Co./Old Co. plan still could hit a big problem. While the proposal suggests a 10-year process for using Detroit’s education property tax to pay off the DPS debt, that property tax is not guaranteed. Detroit residents must vote on whether they want to continue to pay it in 2022. If voters reject the tax ‒ called the schools operating millage ‒ the the governor’s repayment plan would run out of money four years before the DPS debt is expected to be paid off.

When asked by Bridge at the news conference if he is concerned that voters could reject the tax and the plan, Gov. Snyder did not comment. However, John Walsh, his director of strategy said, “We would hope - working with local officials - we could continue the millage support.”

Empowerment zone

Snyder’s plan would make the New Co. DPS an empowerment zone run by a chief education office and a seven-member school board. Four of the board members would be appointed by the governor, three by the mayor. Each would be gradually replaced by elected school board members by 2022. The City of Detroit’s current appointed financial review commission would oversee the new school system’s finances until the Old. Co. DPS debt is repaid.

The Detroit Education Commission would be created and appointed (three by governor, two by mayor) to hire a chief education officer who would govern accountability measures and openings/closures of Detroit’s traditional public and charter schools. Currently, each charter school has its own authorizer and school board that oversee those functions.

Draft bills discussed in Lansing over the past several weeks have also left open the possibility that the 15 former DPS schools now run by the state’s reform district, the Education Achievement Authority, would be absorbed and become part of the empowerment zone.

Snyder supported the creation of the EAA in 2011. Since it opened in 2012 by taking over 15 Detroit schools, the EAA has suffered declining enrollment and leadership changes. In recent weeks, the EAA was also beset with scandal after an FBI investigation uncovered suspected bribes and kickbacks to a popular former principal of Mumford High who resigned last year. Several other school officials also are under FBI scrutiny, the Detroit Free Press reported.

Snyder’s update to his Detroit schools plan came days after the FBI scandal was made public.

In effect, if an empowerment zone is created, Detroit’s disparate school systems ‒ DPS, charters and EAA - could be re-centralized to a degree. A Detroit chief education officer and a state- and mayor-appointed school board would determine facilities, academic and accountability plans for schools in the empowerment zone.

Draft legislation also has proposed that the empowerment zone go past the Detroit border to include any schools located within adjacent districts or charter schools whose student population is made up of a majority of students from Detroit. A number of charter schools in adjacent, inner-ring suburbs primarily enroll Detroit residents.

Dan Quisenberry, president of the Michigan Association of Public Schools Academies, said he is wary that new governance for all public schools in Detroit will put too much power in the hands of one appointee.

Quisenberry, president of the Michigan Association of Public Schools Academies, said he is wary that the empowerment zone structure puts too much power in the hands of one appointee. The move would mute the power of the colleges and universities that authorize charter schools, he said.

“This education manager is not the city taking back its schools; it’s a new entity taking them away from neighborhoods and community leaders,” he said. “All those functions under one person is an overreaction.”

What does it mean for schools outside the Detroit area?

Bills drafted and discussed around Lansing for weeks also have proposed that other school districts around the state could be made into empowerment zones, too, according to a House Democratic Policy Staff analysis of draft legislation dated Sept. 22.

Under this idea, the state superintendent or the state school reform office could create an empowerment zone if a school is not financially viable and is unable to educate pupils in the school district; a district school board could adopt a resolution designating itself as a an empowered district or residents could approve an empowerment district.

Gerald Peregord, director of the School Equity Caucus, which includes about 200 districts across Michigan, said agreed that the state needs to resolve DPS’ debt. But, he said, the proposed fixes do not address two problems ‒ Detroiters’ disenchantment with the lack of an elected, empowered school board that answers to the public, and declining enrollment in the city, which leads to less money and more deficits. DPS has lost more than 100,000 students and the state aid each brings over the past decade.

There’s no guarantee a “New Co.” DPS will be solvent; it may need even more funds at the expense of others schools in the future, Peregord said.

“They have not addressed the core problems. We could end up right back here,” he said.

Retire retirement costs

Detroit’s retirement costs have been a significant part of the discussion. Draft legislation has left open the possibility that the new Detroit school system could hire a private management company to provide a superintendent and teachers, the House Democratic Analysis contends. That could lead the district’s employees to be removed from the union as well as the Michigan Public School Employee Retirement System, which handles pensions.

There is precedence for this structure. In Michigan, most charter schools contract with management companies that in turn hire school staff. Those educators are employees of the companies, not the school, and most are not part of the state pension system.

Currently, DPS is behind on pension payments and owes $99 million, state records show.

But if DPS’ 6,200 workers were removed from the pension system, the remaining school districts and workers in the state would have to make up for the loss of payments those workers brought in so that the pension system wouldn’t be underfunded.

“While there would certainly be a negative funding impact to the system resulting from loss of those payments, it is difficult to comment or predict on what may or could happen,” said Kurt Weiss, spokesman from the Department of Technology, Management and Budget, which includes MPSERS.

“Detroit’s net pension liability as of Sept. 30, 2014 is $872,735,996, so this is the amount the other schools would need to make up over the remaining amortization period,” of 23 years, he said.

Removing Detroit educators from the pension system has been discussed but appears for now to be a long shot ‒ the governor denies that the pension system will be impacted, by his DPS fix.

David Crim, a spokesman for the Michigan Education Association, the state’s largest teacher union, said any plan that affects the pension system will hurt the city’s chances to retain teachers and will cost schools across Michigan that are struggling to pay pension costs.

“This is not an improvement,” he said. “In fact, it is going to hurt the kids and teachers, not just in Detroit but across the state because what happens in Detroit affects the rest of the state. The legislature will understand how it’s going to hurt out-state districts as (the plan) gets put down on paper.”

To be sure, the new DPS fix could take months to sort out. And the clock is ticking – interest on DPS loans continue to accrue and the fiscal year for the 2016-17 school year effectively begins July 1.

Fixing the fix

Regardless of what residents and legislators around Michigan feel about spending state money to fix the Detroit schools debt, this much is true: a decade of state intervention has seen the district’s deficit snowball out of control. And math and reading achievement on the National Assessment of Educational Progress test, known as the Nation’s Report Card, has been the worst in the nation.

State Superintendent Brian Whiston says it’s not a matter of “if,” but “when” the state will approve a plan to pay off DPS’ debt.

 

The resolution of Detroit’s bankruptcy case last year did not provide a road map for resolving the city’s education debts. The state is on the hook for school debt payments so a bankruptcy for DPS is unlikely.The state constitution Article 9 Section 16 says, if for any reason any school district will be or is unable to pay the principal and interest on its qualified bonds when due, then the state shall lend it to the district.

If DPS were to declare bankruptcy, the process would take the DPS decision-making process out of the hands of the state, which Snyder does not want.

“The state would be responsible for the debt. And, in bankruptcy, a judge would make decisions about how or when the debt is repaid,” said David Murray, a spokesman for Snyder. “Those are decisions that we want to make as we take into account academics as well as finances.”

Brian Whiston, the state schools superintendent, said he hopes the governor and legislature will minimize impact on schools statewide by taking some of the money DPS needs out of the state’s general fund and not the state school aid fund.

And a fix needs to happen sooner, rather than later, he said.

“The bottomline is we have to pay off the debt. That’s a big pill to swallow,” said Whiston. “If we don’t do it today and we wait … it will be a much larger pill to swallow.”