CHICAGO – A compromise package to rescue Detroit Public Schools from looming insolvency at a cost of $617 million is headed to the state Senate.
The House narrowly approved the key bill in the package in a 55-53 vote late Thursday, and the Senate is expected to vote on it in the coming days. A handful of majority Republicans joined Democrats in voting against the legislation.
The package represents a compromise between House and Senate versions reached after negotiations among key Republican lawmakers and Gov. Rick Snyder's administration. A spokesman for Senate Majority Leader Arlan Meekhof, R-West Olive, called it a "realistic compromise between the House and Senate proposals."
Snyder, who launched the effort last year to stave off bankruptcy by reshaping the district, said Friday he continues to prefer the original Senate version but he praised the break in the legislative logjam over the differing versions.
"I believe it's positive that the House acted on the package. Now it's on to the Senate," he said when asked about the legislation while attending the Mackinac Policy Conference. "We really do need to get a package done," he said.
The district, under state emergency management for seven years, has warned it's running out of cash from state emergency aid to pay teacher salaries and other bills as debt payments come due.
Under the new House approved plan, the state would pay off $467 million of accumulated DPS operating debt. A new, debt-free school system would be established with an additional $150 million provided in transitional operating costs. It would be known as the Detroit Community District and would own assets and operate the schools.
The shell of the old district would remain intact to continue collecting taxes and repay outstanding bonds. The original House plan provided only $33 million in start-up costs.
An interim transition manager would run the district and elections would be held in November for a school board.
"This plan saves Detroit's school system and returns local control to the city, preventing a disastrous bankruptcy that would have affected every community in the state," Republican House Speaker Kevin Cotter of Mt. Pleasant said in a statement.
Oversight and funding issues remain.
DPS transition manager Steven Rhodes has told lawmakers that $200 million "is the minimum amount" the district needs to have a reasonable opportunity to launch the new school system. The Senate-approved version provided $200 million.
The establishment of the Detroit Education Commission, a citywide commission that would regulate where schools, both public and charter, can open and close in the city, has emerged as the most divisive point among lawmakers.
The House version of the DPS reform plan does not include the mayor-appointed commission, instead, turning the district over to a locally elected board in November and putting in place an advisory council to study school location and transportation.
The Senate version of the DPS reform, which passed with bipartisan support and the endorsement of Detroit leaders in March, gives Detroit's mayor authority to appoint the commission with the power to decide where to open and close schools. House Republicans who oppose the DEC worry that the commission would restrict charter schools.
Detroit Mayor Mike Duggan had harsh words for any plan without the DEC in place to oversee school opening and closings.
"They know DPS is going to fail and that $600 or $700 million is going to be blown," Duggan said. "They know it. The governor knows it. And they're trying to pass it anyway."
Criticism of the new package extended to the absence of several key elements repeatedly called for by Detroit legislators and local stakeholders, including an audit of the district to determine exactly where funding is being allocated.
The urgency for a fix was underscored by Moody's Investors Service in a May report that warned the junk-rated district was moving perilously closer to a possible default or Chapter 9 amid the legislative divide over restructuring. The district is expected to exhaust $50 million in state emergency funding at the end of June.
The legislature "now has less than two months to compromise on a reform package or the district's financial position will possibly force a bankruptcy filing," Moody's wrote. "Failure to implement a solution increases risks to all of the district's bondholders."
The district has $1.4 billion of general obligation unlimited tax bonds which are supported by the state's School Bond Qualification Program.
"The state's commitment to the program has never been tested under a Chapter 9 scenario," Moody's wrote.
Holders of the district's $259 million in long-term state aid revenue debt from unrated series in 2011, 2012, 2014, and 2015 face risky prospects "given the district's severely constrained reserves, despite a first claim on state aid," Moody's said.
"Without an infusion of a significant amount of additional cash beyond the district's existing short-term borrowing authority in fiscal 2017, it would be highly unlikely that the district would have resources to make payroll and debt service throughout the year," Moody's wrote.