News Story

Coalition Wants $153 Million a Year Debt Forgiveness for Detroit Public Schools

Co-chair says children are 'penalized for all the retired teachers'

A coalition hoping to restructure the Detroit Public School district is asking the state to absolve the district of as much as $153 million in annual pension and debt payments.

John Rakolta, CEO of Walbridge construction company, is a co-chair of Coalition for the Future of Detroit Schoolchildren, and laid out to Michigan Capitol Confidential how the group came up with their calculations.

The coalition’s report states: “The state of Michigan should take responsibility for past operating debt that occurred on its watch: $53 million a year."

In addition, the group wants the state to let Detroit schools off the hook for its share of the annual costs run up by the state-run school employees’ retirement system. Detroit's share is estimated between $82 million to $100 million, because “the state failed to sufficiently save to support the secure retirement of these teachers and staff and today’s student population is too small to carry the expense.”

The coalition holds the state responsible for Detroit’s financial woes going back to 1999. Co-chair Tonya Allen, president and CEO of Skillman Foundation, said that was when Gov. John Engler signed legislation transferring control of Detroit schools to the Detroit mayor. It was the mayor who then appointed people to a reform board that would replace Detroit’s elected public school board.

Rakolta said the first $53 million in the group's request is the annual debt service Detroit Public Schools pays on $450 million in loans it took in 2010 and 2012 that were backed by the state. He notes that this debt was incurred just to cover current operating expenses, not build or improve schools. The outstanding principal is now $250 million.

Rakolta said the coalition also wants Detroit Public Schools to be relieved of rising yearly payments to the state run school employee retirement system that are approaching $100 million. School districts pay assessments equal to 25.52 percent of their payrolls to cover a share of the system's costs, but that number has been trending upward over the past decade. For Detroit the cost is estimated at $82 million in 2014.

“It’s a lot of money,” he said. “It’s about how the kids today are paying for the mistakes of the system made 10, 20, 30, 40 years ago.”

Rakolta said that there was pressure on the coalition not to include pension cost relief in its ask because of controversy surrounding the statewide system's escalating costs. He calls defined-benefit retirement plans “a budget killer.”

“It’s a society killer,” he said. “Society can’t afford them anymore. Who gets penalized? Kids. … These kids are being penalized for all the retired teachers. This is on a state-wide basis, not just Detroit.”

Michigan Capitol Confidential asked why the coalition did not consider closing the current defined-benefit plan to new employees, instead offering them a defined-contribution 401(k) type plan.

“We had 100 days. That’s as far as we could go in 100 days,” he said. “There are so many other bigger issues.”

Rakolta said he was willing to speak before the Legislature to get the coalition’s plan rolling.

“But I’m a big believer in that before anyone asks for more money, the system has to get fixed,” he said.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.