The funding future of Detroit's public schools is playing out in a state court.
A Michigan Court of Claims judge on Wednesday denied the Detroit Public Schools Community District's request for a preliminary injunction, a setback for the district's attempt to use operating tax revenues to pay down bond and revolving fund debt.
"Plaintiffs have not established that this Court's involvement is essential to maintain the status quo pending a final decision in this case," Judge Christopher Yates wrote in his decision. "The irreparable harm plaintiffs fear appears to be the costs for which they contracted when they accepted the emergency loan from the state."
Yates acknowledged that the state currently fully funds the operating costs of DPSCD, and that, if a legacy emergency loan is repaid in full in 2025, as the district is now able to do, the state has said it will no longer fund DPSCD's operating costs.
Michigan's Treasury Department would like to see the more than $1 billion that the state would otherwise be on the hook for over the next eight years go to Michigan's general fund rather than to Detroit's public schools, an attorney representing Treasury said in court last week.
At issue in a lawsuit filed by the Detroit public school system is whether Detroit Public Schools, the old entity that carries the district's legacy debt, can keep levying an operating tax until 2033 to pay down all its debts, or whether it is required to pay bond and revolving fund debt only from a separate millage.
Also in question is whether Detroit's newer public school district would seek approval from voters in May for a new operating tax. The state would be relieved of the burden of fully funding the Detroit Public Schools Community District's operating costs once the legacy emergency loan is paid off, regardless of whether DPSCD goes to voters in May, according to legal filings.
If DPSCD is going to seek voter approval in May, it would need to take action by Feb. 10, the judge noted in the hearing last week.
The Detroit Public Schools Community District is the new district created by the legislature in 2016 out of the old Detroit Public Schools, an entity that currently remains intact for the sole purpose of paying down the more than $3 billion in outstanding debt that the district had at that time.
Detroit's public school system has a troubled history, although the district saw sharp increases in
There are now three pieces of DPS's legacy obligations: $1.3 billion of outstanding bond debt; $350 million of revolving fund debt; and a $150 million emergency loan, which is currently being paid off by revenue from the operating tax, according to the judge.
As property values have risen in Detroit, more money has poured in, so that DPS is now approaching paying off that emergency loan. The district wants to apply revenue from the operating tax to pay down the bonds and revolving fund debt, which are currently being serviced through a separate debt millage.
"Absent irreparable harm, there's really no basis at all for granting an injunction under Michigan law," Yates said at
"The complaint in this case is truly excellent… [but] I'm struggling a bit with the plaintiffs' claim of high risk of irreparable harm," he said.
"Injunctive relief should maintain the status quo," said Miller Canfield's Scott Eldridge, representing DPS, the plaintiffs. He noted that Inkster Schools underwent a similar experience in 2022. But once Inkster paid off its loan, Treasury allowed that district to continue levying its operating tax to pay off other debt.
"Treasury has done an about-face since Inkster, which was the status quo," Eldridge said, adding that Treasury had threatened to withhold trust fund and foundation money and, if the district depleted those, to require it to dip into the general fund.
He pointed to a section of the revised school code that governs what happens next after DPS retires the $150 million emergency loan paid off with revenue from the operating tax. Eldridge said the relevant statute defines the debt the district is required to pay with the operating tax revenues to mean "all borrowed money, loans and other indebtedness, including principal and interest… assumed in whole or in part by a municipality."
The DPS bonds are backed by the district's full faith and credit and a general fund pledge.
Fitch Ratings affirmed its AA-plus rating on the district in June; the outlook is stable. S&P Global Ratings rates the district's bonds AA with a stable outlook. Moody's Ratings
Any theoretical operating tax for the newer district could not be used to pay off DPS debt, Eldridge said — a position the defendants confirmed they share.
Representing Treasury, Assistant Attorney General David Thompson argued that Inkster was a different situation; and even if it wasn't, he said, Treasury got it wrong in the Inkster case and sees no reason to continue to get it wrong.
Thompson argued the Detroit school district should continue to make interest-only payments rather than paying down its debt.
"Insofar as they are insisting on paying this off now… it's a harm that they are inviting on themselves," he said, pointing to the state's school loan revolving fund program as a way to cover any shortfall from the district's debt millage.
"That's incurring more debt from the state," Eldridge said. "So that's not a realistic solution."
"The idea that the loss of money can't be irreparable harm rests upon the proposition that… money is fungible," Yates observed. What if, he wondered, the district can never get back the extra interest payments it would have to make if it did not pay down the debt early?
Treasury's position is that once the DPS operating tax ends, the new school district would need to get voter approval for a new operating tax. Treasury would then be relieved of the burden of funding the new district's operating costs, as it has been since 2016. The new operating tax and some state funding would instead pay those costs.
"We have a responsibility to approximately 900 other school districts. These would otherwise be general funds… There's any number of other purposes that we could put this money to," Thompson said. "If we expand the logic out to 2033, we're really looking at $1-plus billion that the state is on the hook for."
The judge voiced skepticism of both the defense's claim that all money is fungible and the plaintiffs' argument that all the debt was supporting school operations and therefore could be labeled operating funds. Yates noted his wife had served on a school board and "her head would explode" if she heard capital projects counted as operating expenses.
DPSCD Superintendent Nikolai Vitti told The Bond Buyer the district is abstaining from comment to respect the legal process. Treasury Department spokesman Ron Leix referred all questions to legal filings.
Eldridge declined to comment on the case. And the Michigan Department of the Attorney General referred questions to Treasury.
"The entire state has a vested interest in the Detroit Public School system being successful," Yates said at the hearing.
