Detroit Public Schools Debt Largely Not Supported By Additional Taxpayer Dollars

As Michigan legislators discuss a bailout of the Detroit Public Schools, some have argued that this makes obvious fiscal sense for the state since state taxpayers are ultimately responsible for DPS debt. Yet a look at the composition of the district’s debt shows very little taxpayer exposure.

According to the Department of Treasury’s report, the district carries $3.4 billion in debt, most of which contains some state involvement. Yet this involvement rarely comes in the form of a direct obligation to cover the district’s debt.

Consider what is listed as $1.3 billion in DPS’s share of the pension system’s unfunded liabilities. Since the school retirement system is a multiple-employer, cost-sharing plan, these liabilities are the direct responsibility of the other school districts in the state. This means that policymakers could remove this debt obligation from DPS altogether and spread its costs over the rest of the school districts in the state. Indeed, because contribution rates are assessed as a percentage of payroll and because DPS is smaller than it used to be, DPS has already offloaded much of its retirement liabilities onto other districts.

In other words, DPS’s share of the unfunded pension liabilities is not really debt that DPS owes the state; it’s debt that the state owes future pensioners. Bailing out or not bailing out DPS will change none of this. In fact, one thing policymakers might consider is allowing DPS to completely exit the state-run pension system and shed the enormous burden it levies on the district. State policymakers have full control over the pension system and how these payments are made.

The district also secures some of its bonds and notes with revenue from the state. Yet these state contributions do not require that the state make additional payments to bondholders if the district does not make its payments. Instead, it gives bondholders the right to take money directly from the state’s general aid to the district. This would give the district less money to operate, but it would not necessarily require additional state dollars.

There is one debt that may be the state’s responsibility — the money DPS borrowed through the state’s School Loan Revolving Fund. DPS has borrowed $196 million from the state through this fund, but the district is not likely to pay back the full amount. The state’s School Revolving Loan Fund has debtors of its own and any deficit it holds to those creditors due to DPS nonpayment may be an obligation of the state taxpayer.

If DPS creditors tap state payments to cover what DPS owes them, the district may not have enough money to operate. This is a serious concern, because it will limit the educational opportunities the district can offer current and future students. This may be something that lawmakers want to influence, but this is different from making the case to bailout DPS because the state is ultimately on the hook for the debt anyway.