DALLAS -- Michigan Gov. Rick Snyder on Monday officially placed retired bankruptcy judge Steven Rhodes in charge of steering the proposed Detroit Public Schools restructuring, giving him the new title of "transition manager."
DPS has been under emergency management since 2009 and Darnell Earley, DPS' fourth emergency manager, leaves the position at the end of Monday, Feb. 29, four months earlier than anticipated.
His tenure was marred by teacher sickouts over poor school conditions and questions over his management of Flint during his stint as emergency manager there.
Rhodes, who presided over Detroit's historic Chapter 9 bankruptcy, will oversee the school district's finances and operations but will name an interim superintendent to oversee academics. Rhodes anticipates his tenure would end on July 1 under the current legislation.
"Legislative action is essential to help Detroit Public Schools address the challenges that are holding the district and its students back," Snyder said in a statement. "Judge Rhodes was a natural choice. He is highly respected in the city and was invaluable in leading Detroit out of bankruptcy.
"Detroit needs strong public schools for the city's economic comeback to continue through its neighborhoods," the governor said.
"The naming of Judge Rhodes is … intended/hoped to break the abysmal record of emergency manager failures in DPS — with Mr. Earley, the fourth to depart early because, according to him, he 'had completed his goals ahead of schedule,'" said Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, in a blog post Monday. "Such a statement would lead a reasonable person to question just what his goals were."
While some may worry that Rhodes' involvement "signals that the Detroit playbook is back in use," Municipal Market Analytics says in its weekly outlook those concerns are offset by the state's increasingly vocal position that it is responsible for much of the district's debt, which undermines any perceived relief available under Chapter 9.
Many bondholder advocates believed bond debt got the shortest end of the stick in Detroit's Chapter 9.
"Judge Rhodes' relationships with Michigan's leadership, his media‐revered handling of the Detroit bankruptcy, and his intimate knowledge of Detroit's plight and vested interest in seeing the city succeed uniquely position him to help broker a resolution that will bridge the differences between the various stakeholders," MMA wrote. "And the veiled threat in his appointment will likely be a helpful motivator in negotiations."
Under emergency management, the district has racked up about $515 million in operating debt, and is spending approximately $1,100 per student on debt service annually.
The district'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.
Judge Rhodes has been a consultant for Snyder's administration on the Detroit schools in recent months as lawmakers consider the future of the school district.
More specifically he has served 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.
He was widely praised by legal observers for how he handled the Detroit bankruptcy case in 2013, the largest municipal bankruptcy in U.S. history.
Rhodes served as a bankruptcy judge for the Eastern District of Michigan and on the Bankruptcy Appellate Panel for the Sixth Circuit.
He formerly served as a law clerk for District Judge John Feikens, as an assistant U.S. attorney, and as a U.S. magistrate. He also taught at University of Michigan Law School from 1992-2002.
"Judge Rhodes has been working with the Legislature over the past several months and having discussions with lawmakers about how Detroit Public Schools debt can be restructured to avoid bankruptcy," said Anna Heaton, Snyder's deputy press secretary. "He can provide valuable insight as legislation that potentially changes the structure of the district moves through the legislative process.
Lawmakers are weighing Senate Bills 710 and 711, sponsored by state Sen. Goeff Hansen, R-Hart.
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.
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.
The Senate bills propose that an appointed school board to take over DPS and keep the schools running until a board elected in November can take over next Jan. 1.
MMA says the legislative developments send a positive signal and set the stage for negotiations on a final plan but some skepticism must remain.
"Recent legislative activity that supports the restructuring of Detroit Public Schools, along with Michigan's stepped up rhetoric regarding its obligation on the district's debt, implies that DPS investors' fate is more likely to resemble the par recovery of the city's distributable‐state aid‐wrapped bondholders as opposed to that of the city's regular GO unlimited tax general obligations" that took a steep haircut, MMA wrote.
"More importantly, these developments reduce the risk of neutering the benefit of Michigan's school bond enhancement program that supports approximately $13 billion of Michigan school district debt. However, the adversarial tone and positions promoted by the state towards investors in Detroit's bankruptcy cannot be overlooked," MMA wrote.