Detroit Public Schools Takes Out a Loan to Pay Off Another Loan

The depth of the Detroit school district’s financial troubles can be staggering.

As of last June, the district owes $238.2 million it borrowed to cover routine operating expenses, a burden that has received some media attention. Another $572 million owed by Detroit Public Schools to a state “authority” within the Michigan Department of Treasury has received less coverage. But some eyebrows were raised recently when DPS went back for another loan from that source on the same day it made payment on an earlier loan.

According to state Treasury records, a “Michigan Finance Authority” gave Detroit Public Schools a loan of $107.8 million in 2014. That loan had to be paid off by May 19, 2015. So DPS got another loan for $78.5 million on May 19, 2015 and used those proceeds to pay off the $107.8 million loan. DPS used a loan to pay off another loan.

"DPS is using a new MasterCard to make the minimum payments on their VISA balance, but there doesn't seem to be any credit limit here," said Gary Naeyaert, executive director of the Great Lakes Education Project. "It's just like when Wimpy tells Popeye 'I'll gladly pay you Tuesday for a hamburger today.' Unfortunately, Tuesday is coming and Michigan's taxpayers are going to be stuck with the bill."

Detroit Public Schools has been borrowing to cover operating expenses since at least the 2007-08 school year. The amount of the district's total "deficit" is $238.2 million. Note that this is not debt incurred to acquire or build long-lived assets like school buildings, on which the district owes hundreds of millions of more dollars.

Instead this is money borrowed to cover routine operational expenses. It’s like the difference between money owed on a 30 year home mortgage versus money owed on a credit card used to buy gas and groceries.

How DPS handles its debt matters, because some of its advocates are promoting a state taxpayer bailout. One group has pitched a Detroit schools reform plan that calls for as much as $153 million a year in annual taxpayer bailouts to pay off all that debt. Governor Rick Snyder favors something similar.

Currently, DPS has four MFA loans worth $572 million dating back to 2011, which are secured by future state school aid disbursements. Treasury Department Spokesman Terry Stanton said the district has never been late on a payment. Stanton says that it’s not uncommon for districts to have multiple loans.

“Many districts and/or local units of government have multiple debt instruments outstanding at any given time (similar to individuals who might have a mortgage, car payment, credit card payment, and perhaps a student loan payment),” Stanton said in an email. “There are districts that issue new debt simultaneously with the maturity of prior debt.”