News Story

Detroit Public Schools Bankruptcy Could Cost the State $3.4 Billion

Treasury report outlines what Michigan taxpayers would be liable for

The Detroit Public Schools' $1.3 billion in pension obligations is the major roadblock to the school district filing for bankruptcy, according to a recent state of Michigan analysis.

That $1.3 billion is how much the district must pay into the pension system from 2016 to 2031, according to Kurt Weiss, spokesman for the state Treasury department.

“Our estimates are actually quite conservative,” Weiss said in an email.

Pension legacy costs for public school employees have skyrocketed statewide, not just in Detroit.

Required employer contributions to the statewide school pension system have increased by 92 percent from 2007 to 2014, increasing from $835 million to $1.6 billion.

Overall, the state projects that if Detroit Public Schools filed for bankruptcy today it would enter the process with $3.4 billion in outstanding liabilities, most of which are owed to the state.

While discussions have taken place over how to fix the troubled school district, some people ask why it just doesn’t file for bankruptcy like the city of Detroit did.

“Unlike the City of Detroit, DPS would not benefit from a bankruptcy as it would predominantly shift liabilities onto other municipalities,” the Oct. 27 report stated.

That’s because the state is ultimately on the hook for so much of the district’s debt that a default would mean less state resources available to back the loans of other school districts and local governments.

The state’s analysis broke down Detroit school debt into three categories — direct, potential direct and indirect.

“Direct” debts are those that immediately fall on the state or statewide municipalities. DPS owes $196 million to a school loan fund, on top of its $1.3 billion obligation to the state-run school pension fund.

“Potential direct” debts are ones for which the state could be liable depending on the details of a bankruptcy ruling. The analysis shows $1.5 billion in long-term bonds in this category.

“Indirect” debts would negatively affect other local and statewide market participants that in turn could default. That includes $464 million in short-term bond/notes and another $50 million in unpaid bills (accounts payable).

Various bailout plans are currently under discussion in Lansing as an alternative to entering federal bankruptcy court. One plan pitched by Gov. Rick Snyder comes with a $710 million price tag.

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.