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State Treasurer: ‘Inaction is not an option’ on DPS

November 3, 2015

Article courtesy MIRS News Service

State Treasurer Nick KHOURI described the theme of his comments to a House panel Tuesday morning as “inaction is not an option” when it comes to the financial crisis facing Detroit Public Schools (DPS).

As lawmakers begin considering a request for $715 million over 10 years to help the struggling school district, Khouri said in an interview the longer they wait to take action, the worse the problem will be. 

Khouri and DPS Emergency Manager Darnell EARLEY gave a presentation and took questions from the House Appropriations School Aid Subcommittee for about 90 minutes Tuesday morning. 

The presentation continues the Gov. Rick SNYDER administration’s growing push for $715 million in state aid to help the district. Legislation on the topic may be introduced as soon as this week. 

Tuesday, Khouri and Earley focused on two main arguments. If the Legislature acts now, lawmakers will be giving students in DPS a better chance at success. And if the Legislature acts, lawmakers might be preventing major financial problems for the state tied to DPS down the line. 

Members of the School Aid Subcommittee seemed somewhat skeptical, however, focusing their questions on the details behind the $715 million number and on whether the state assistance would actually turn the school district around. 

Rep. Earl POLESKI (R-Jackson), an accountant by trade, described the plan at one point as “rearranging deck chairs on the Titanic.” 

The $715 million is meant to cover $515 million in legacy obligations and $200 million in start-up costs to help a new Detroit school district that is going to be set up under the Governor’s plan. 

As Poleski argued, despite that aid, the district would still face annual deficits because its expenditures are higher than its revenues. 

In the current financial year, DPS’ expenditures are expected to be about $70 million more than its revenues. 

And under Treasury estimates, DPS is expected to face a cash shortfall of about $45 million by June 2016. 

Khouri told the subcommittee that “whether it’s the spring or whether it’s the summer,” without legislative action, the district will soon be unable to service its current bills. 

The Treasurer made the argument that without legislative action, the fallout could be very bad for the state, as well. 

According to information provided by Treasury to lawmakers, the state must provide education for the 47,000 students who attend DPS. And if DPS pursues formal insolvency proceedings, the state could face major financial obligations. 

According to the information, the state faces “direct” risks of $196 million owed to the School Loan Revolving Fund by DPS and $1.3 billion in net pension liability tied to DPS. 

Another “potential” risk is $1.5 billion in long-term qualified bonds DPS has. 

In total, Treasury flagged $3.4 billion in outstanding liabilities, most of which are secured through a tax or state aid pledge. 

And unlike the city of Detroit, the Treasury document says, DPS wouldn’t benefit from a bankruptcy as it would predominately shift liabilities “onto other municipalities.” 

“Doing nothing will end up being more of a taxpayer transfer than taking the reins now and finding a solution,” Khouri told the subcommittee. 

Khouri and Earley also described how DPS got itself into the financial mess it’s in. They said it has much to do with plummeting school enrollment. 

Since 2005, DPS has lost between 6 percent and 23 percent of its students year over year each year. 

While those losses are starting to flatten out, the school district wasn’t able to cut back its spending quick enough to match its revenue losses. 

Those cuts have included a reduction of 12,400 positions over 10 years and the closure of 142 buildings. 

Still, however, the district is running deficits and has deferred payments to the state education retirement system, the Michigan Public School Employees Retirement System (MPSERS). 

DPS owes MPSERS about $157 million, which is part of the $715 million in aid that the Legislature is now considering. 

After the meeting Tuesday, School Aid Chair Tim KELLY (R-Saginaw) said the “crushing debt” that MSPERS puts on districts was his main takeaway from the meeting. 

“I think if you took care of MPSERS, you’d (go) a long way to taking care of Detroit and you’d fix a lot of other problems around the state,” Kelly argued. 

“Right now, if I had $715 million to spend, I’d spend it on buying down MPSERS not on Detroit,” Kelly said. 

When it was mentioned that the lawmakers enacted major reforms to MSPERS in 2012, Kelly responded that the state should still “take another look.” 

Asked about the need to reform MSPERS, Khouri also emphasized that lawmakers took action three years ago. While it may take a while, those reforms will improve the system, Khouri argued. 

During the meeting, Kelly questioned Earley on why the district continues to “spend money that you don’t have.” 

Khouri responded that it’s difficult for the district to respond quickly to major changes in enrollment. Education brings high fixed costs, and when enrollment is dropping by 10 percent or 15 percent each year, it’s hard to catch up, he said. 

Like Khouri, Earley also urged legislative action. 

The $715 million represents “an investment in the future of the Detroit public school system,” he said. 

It’s the only way, Earley added, that the district will be able to address the structural imbalances that exist and have existed for decades. 

“Without that, DPS faces a long road, and more importantly the children of DPS face a long road toward achieving educational stability,” he told the subcommittee. 

After Tuesday’s hearing, Kelly said, “This is the opening bell. Clearly there are some difficulties.” The Saginaw Republican described the governor’s proposal as a “big ask . . . I don’t see how you go forward.” He said that if the state helps the school reduce its deficit, “We start the debt clock over again.” 

Poleski, having not seen the specific bills, describes the package as “inadequate.” Rep. David PAGEL(R-Berrien Springs) said he does not have enough information to make a judgment on whether to vote for the assistance. 

After the session, Rep. Adam ZEMKE (D-Ann Arbor) expressed his concerns over the district’s plan to stay out of debt and move the students forward. He said he needs to see that, but so far Earley has not provided that. Zemke said he thinks if such a plan is shared, then lawmakers can hold DPS accountable on reaching it’s objectives, which may be part of the reason lawmakers have not seen a plan as of yet.

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