DPS transition manager Steven Rhodes Said District Mishandled $30M in Federal Funding.

DALLAS-- Detroit Public Schools, under investigation for misuse of $30 million in federal funding intended for pension payments, said its prior administration's mishandling of the money won't add to the fiscal burden the state is being asked to cover as part of a restructuring.

The U.S. Department of Education and state are investigating the district's misuse of the funding that was supposed to go to Michigan's Public Employee Retirement System. The district never sent the funds, according to an April 15 overview of the district released by DPS' transition manager Steven Rhodes, the retired bankruptcy court judge who presided over Detroit's bankruptcy.

The $30 million is already included in DPS' $1.3 billion pension obligation figure that's part of the restructuring proposal.

"It is not an additional amount, it is already there, so there is no restatement," Rhodes said. "The total is the total." The federal funds were used for the payment of DPS expenses, according to information Rhodes received.

DPS is fully cooperating with the USDOE, the Michigan Department of Education, and the Michigan Department of Treasury, he added.

The USDOE has requested DPS outline "a set of controls to ensure that funds aren't mishandled again," said Rhodes. DPS is in the process of working with the state to formulate the proposed controls.

"We are committed to implement controls to assure that this is not repeated," said Rhodes. "DPS is negotiating a resolution of this matter, but no resolution has yet been reached."

Rhodes didn't say what the outcome of the mistake would be, or whether DPS faces any financial penalties.

"The implication of DPS keeping the federal aid those dollars to pay salaries and operating expenses instead of forwarding to pension system means the pension system was shorted," said Craig Thiel of the Citizens Research Council of Michigan.

DPS had gotten authorization from that state to forgo a certain amount of pension payments.

The latest revelation adds to questions over DPS' management under oversight by a state-appointed emergency manager and control going forward.

"This is a serious malfeasance which raises concerns for the state legislators who are committed to working to create policies that will lead to DPS's success," said Rep. Sherry Gay-Dagnogo, D-Detroit. "It further substantiates the need to have an audit of the district beginning 1999-present, to gain an accurate accounting of its debt, the proper structure to ensure transparency and accountability, and adequate funding to move the district forward."

DPS has been under emergency management for the last seven years. During that time its debt ballooned, threatening its solvency. The debt load for the school district, including operating debt, capital debt, unpaid pension and retirement obligations, and proposed transitional operating costs, totals nearly $4 billion.

The state recently signed off on $48.7 million in emergency funding to keep DPS schools open through the end of the current school year.

Michigan lawmakers are also expected to soon take up the next round of discussions on the proposed district's restructuring.

The proposal calls for the current Detroit Public Schools to be left intact only to levy taxes and repay its existing bond debts. A new school district, known as Detroit Community District, would own assets and operate the schools.

The bills propose $200 million in transition funds to form the new community district. An additional $515 million would be appropriated to fund the education needs and operation of the new community district.

The financial review commission that has overseen the finances of the city of Detroit since its 2014 bankruptcy exit would take on oversight of the new community district. Two additional members would be added to the financial review commission to have input on the school district only. Those two seats would be filled by the superintendent and school board president.

Strong fiscal oversight of additional state funding for Detroit Schools has been key in lawmaker discussions over reform.

On March 29, the U.S. Department of Justice filed indictments against 12 current or former DPS principals, an assistant superintendent and a vendor in an illegal bribery and kickback scheme.

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