DALLAS – The retired judge who presided over the city of Detroit's Chapter 9 bankruptcy case has been called upon to play a key role in the restructuring of Detroit Public Schools.
Darnell Earley, who was the emergency manager overseeing Flint when the choices were made that contaminated its water system, is set to leave his post Monday.
It is unclear if Steven Rhodes, the former bankruptcy judge, will assume the formal title of emergency manager but reports this week indicate that he will guide a state-initiated restructuring and manage the troubled district. Rhodes met with district teachers and principals this week to discuss the restructuring.
"Judge Rhodes has been a consultant for the administration and in recent months has been working on the Detroit Public Schools issue – especially serving as a resource for lawmakers who have questions about the effect bankruptcy could have on the district and the state as a whole, and how a legislative solution is the best way to address the district's fiscal challenges," said Anna Heaton, deputy press secretary for Michigan Gov. Rick Snyder.
As Rhodes moved into his new role with the Detroit schools, the district said its red ink isn't quite as bad at previously expected, although it remains on a course toward insolvency.
Earley has amended the district's fiscal year 2016 budget to reduce the annual deficit expected when the budget was adopted last June 30 by $35.7 million, to $61.2 million.
Cash flows have been calculated based on actual cash coming in the district and cash used to pay actual bills, according to DPS spokeswoman Michelle Zdrodowski.
"This budget amendment is further proof that the restructuring reforms put into place at DPS over the last year are continuing to show real results," Earley said in a press release Friday. "Although there are serious financial challenges that still exist, it is clear that fiscal 2016 is trending toward further improvement and that the course has been set for DPS to achieve long-term financial sustainability. As we continue to stabilize enrollment, I believe we will be able to operate the same as any school district in the state of Michigan."
While the reduction offers some positive news, it won't save the district from looming insolvency this April. That warning from the district is still in play, according Zdrodowski.
DPS saw its expenses rise $26 million monthly beginning this month as it began repaying cash flow notes issued to paper over operations. That amount is equal to about one-third of the district's monthly expenses, Moody's said. In fiscal 2016, the district owes $140 million on debt issued to finance operations.
Senate Bills 710 and 711, sponsored by state Sen. Goeff Hansen, R-Hart, are currently being heard by lawmakers. The bills propose to split Detroit Public Schools into two entities. Under the plan, the current school district -- Detroit Public Schools -- would be left intact only to levy taxes and repay all of the district's existing bond debts. A new school district, known as Detroit Community Schools, would own assets and operate the schools.
Earley said the deficit reduction should serve as a clear indicator that the district is not only ready to receive the financial investment necessary to stand it up on its own as a "New Co," but will be able to operate in a sustainable way as the new district.
DPS's debt includes $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from the state's School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues, rather than a dedicated debt service levy. Unpaid pension and retirement obligation as well as proposed transitional operating costs, not to exceed 3% of the taxable value of district, would also go to the old district, according to Sen. Hansen. He said that totals about $200 million.
The debt financing proposal is only partially covered by Senate Bill 710. The bills earmark $250 million from the general fund for the plan and $72 million in annual tobacco settlement proceeds would be applied to pay down DPS operating debt.
Dividing the district in two would provide a fresh start for Detroit schools because it returns the district's balance sheet to zero from day one.
There's been a lot of opposition to initial proposals for managing the new district. The bills propose that in the beginning the district would be governed by a nine-member board appointed by Snyder and Detroit Mayor Mike Duggan, before eventually returning to an elected board.
Critics point to the fact that much of DPS's debt was incurred under state-appointed emergency managers, arguing that proves state control of local schools doesn't work. DPS has been under emergency management since 2009.
Heaton added that no final decision has been made on leadership during the transitional period as the Legislature works on the restructuring proposal bills.
Duggan, who also opposes the state appointed leadership of the new district, wants a local elected school board that establishes local control of the district, immediately.
Duggan who testified during the first day of hearings on the Senate bills, said that he still thinks creating a single standard of performance for all public schools in Detroit, via the Detroit Education Commission, would bring order to the opening and closings and to promote the expansion of quality schools. The DEC had is not included in the proposed legislation.
