Detroit schools hit debt limit, risk being unable to pay bills

DETROIT / Bloomberg

Detroit’s public schools have reached their borrowing limit and won’t be able to take on more debt to pay bills when money runs out in April if Michigan lawmakers don’t restructure some of its $2 billion of obligations, state officials said.
Though the district has borrowed when it ran out of money before, it has reached the statutory limit of its ability to do that, said Terry Stanton, spokesman for Michigan’s Treasury Department.
This month the amount of state aid that’s siphoned off to service debt will jump to roughly what is spent on salaries and benefits, pressuring the district’s ability to pay its bills in April.
The district may have to stop paying workers if lawmakers fail to reach an agreement, said Peter Wills, chief of staff to state Senator Goeff Hansen, the Republican sponsor of restructuring legislation.
“We’re up against a very tight time frame,” said Wills. “The district doesn’t have money to pay its obligations.”
Detroit, which emerged from bankruptcy in 2014 after the long-running disappearance of automobile-industry jobs caused the biggest population decline ever seen in an American city, has been left partially vacant.

Teachers Strike
With fewer residents, enrollment in its schools has plunged 65 percent since 2006. While borrowing to pay its debts over the past decade, the quality of its buildings deteriorated. More than half the schools were closed at times in January after teachers called in sick in protest of the dilapidated conditions.
The city began inspecting the buildings last month after the teacher strikes began.
On Feb. 6, the district announced it was reallocating $300,000 from other spending to begin repairs to buildings. Mayor Mike Duggan and the district reached a consent agreement Feb. 19 to make hundreds of repairs to 26 schools.
The district is predicting it will run out of cash to operate in April, said Michelle Zdrodowski, district spokeswoman. She didn’t respond to requests for further comment.
Governor Rick Snyder, a Republican, worked with Hansen and the Senate to prepare the legislation, which would split the district into two — one to pay off debt with state assistance and another to run the schools.
Legislative Plan
House leaders introduced their own legislation, scheduled to be heard for the first time this week. Both plans the split the district, create new oversight and set dates for returning local control. The senate also includes a plan for funding repayment of debt and repairing buildings.
House officials say their plan has tougher academic standards and caps spending on administrative staff, creates merit pay for teachers and changes retirement plans and collective bargaining. The house plan also penalizes teachers for the “sick outs.” House leaders said the option of bankruptcy must remain on the table to restructure absent their proposed changes.
“The speaker’s position is that we can’t just write a check,” said Gideon D’Assandro, spokesman for House Speaker Kevin Cotter, a Republican. “If we don’t change anything we will be back further in the red again next year.”

No Bankruptcy
The Senate will likely work with the House to add some provisions to their legislation, said Wills, but may call for academic reforms statewide. Bankruptcy isn’t an option for Senate leaders, he said, because of how it might take away funding from all schools. The restructuring must be kept out of the court for the state to maintain control. The senate legislation goes to a fourth round of committee hearings this week.
“A judge would say the state is responsible for a certain amount of money, and we would have to pay,” said Wills. “We have to be smart about how we pay down the debt.”
The district has been run by a state-appointed emergency manager since 2009, a step aimed at keeping it out of bankruptcy. The governor’s office is working on a new structure to replace outgoing manager Darnell Earley, who announced plans to step down this month, said Dave Murray, Snyder’s spokesman. The governor’s office and some lawmakers have worked with former judge Steven Rhodes, who oversaw the city’s bankruptcy case while on the bench, but no decisions have been made about the next leader of the district, said Murray.
If lawmakers fail to pass a plan to restructure, Snyder has asked lawmakers for $50 million in supplemental funding to finish the school year, said Murray. Snyder also opposes bankruptcy, he said.