Nick Krieger (@nckrieger):
It is generally believed that the Detroit Public Schools ("DPS") have about $515 million in current operating debt. Some put the number at $467 million, deducting from the total amount the $48 million emergency appropriation that was made earlier this spring. Regardless of which number you use, however, this amount represents the district's current deficit: sums that are due and owing, but have not been paid.
I have written a great deal about the nonfinancial components of the House and Senate plans, including their differing treatment of issues such as collective bargaining, merit pay, the use of noncertified/nonendorsed teachers, the return of a locally elected school board, and the need for a Detroit Education Commission.
But today, I want to focus exclusively on the financial components of the House and Senate plans. Stated simply, the financial differences between the plans really come down to two basic things: (1) the number of years of funding, and (2) the amount of loans for start-up costs.
NUMBER OF YEARS
The first major financial difference is the number of years that each plan would provide state dollars to satisfy the local portion of DPS's foundation allowance.
First, we need to understand that under either plan, DPS's current operating debt would be paid off in full -- not with state funds or any state money appropriated under the bills, but with the local revenue generated by the 18-mill school operating tax on non-homestead property in Detroit.
Every school district in Michigan receives a per-pupil dollar amount known as the "foundation allowance" or "foundation grant." A lot of people think that a district's per-pupil foundation allowance is 100% funded by the state with money from the School Aid Fund. But this isn't how it actually works. In reality, a district's per-pupil foundation allowance consists of two parts: one part funded by the state (the "state portion"), and another part funded by the local 18-mill non-homestead property tax (the "local portion"). In most Michigan districts, the state portion is calculated by subtracting the local portion from a total target amount that is set by statute every year.
Under both the House and Senate plans, the money generated by Detroit's 18-mill school operating tax would be shifted from its present use (funding the local portion) to a completely new use (repaying debt). Quite simply, the local 18-mill property tax revenue would be used to pay off the district's current operating debt rather than to fund the local portion of DPS's foundation allowance.
This, of course, would leave a void in the district's foundation allowance because there would no longer be any local property tax money to fund the local portion. That's where the state money comes in:
Given that the local, non-homestead property tax revenue would be used entirely to repay the debt, there would be no property-tax revenue to fund the local portion of the district's foundation allowance. The House and Senate plans would solve this problem in the same way: each plan would appropriate state funds to cover the local portion of Detroit's per-pupil allowance, using tobacco settlement dollars to fill the void caused by shifting the non-homestead tax revenue to debt repayment.
Currently, DPS's 18-mill property tax for school operating purposes generates about $72 million per year. Both plans would provide about $72 million per year from Michigan's share of the tobacco settlement to cover the loss of this local property-tax revenue. In this context, the only real difference between the two plans is the number of years that state dollars would be made available to the district.
The House plan, as it currently exists, would provide $72 million per year for about seven years (to be more precise, HB 5383, as amended, would provide $72 million per year, up to a total of $500 million -- so for about 7 years). The Senate plan, as it currently exists, would provide $72 million per year for as long as the Old DPS continues to levy the 18-mill school operating tax for debt repayment -- or about ten years (a total of approximately $720 million). In other words, as the legislation currently stands, it appears that the Senate plan would fund the local portion of Detroit's per-pupil allowance for about three more years than the House plan.
Why does this matter? Under either plan, the New DPS would not regain the ability to levy the 18-mill school operating tax until the current operating debt is paid in full. It is estimated that it would take the Old DPS about ten years (or perhaps a bit longer) to repay the current operating debt using the non-homestead property tax revenue. In other words, the New DPS would not regain the ability to levy the 18 mills for about ten years. This is why the number of years is so critical. Under the House plan, which would only fill the void in the local portion of the per-pupil allowance for about seven years, it is not entirely clear how the New DPS would survive during the period between the seventh year (when the state funding would run out) and the tenth year (when it would likely finally regain the ability to start levying its own school operating tax again).
LOANS FOR START-UP COSTS
The second major financial difference between the House and Senate plans is the amount of cash that the state would loan to the New DPS to cover start-up/transition expenses.
Under the House plan, the state would loan the district $33 million for start-up costs. Many observers argue that this isn't nearly enough, and that the New DPS would quickly run out of money under the House plan (I agree with them). Under the Senate plan, the state would be authorized to loan the district up to $300 million (the amount was initially $200 million, but was raised to $300 million in a later version of the bill) for start-up/transition costs.
While the Senate plan is much more generous with respect to the amount of money it would make available for transition costs, it's important to remember that this cash for start-up expenses would be loaned to the district -- meaning that it would have to be repaid in the same manner as the other $515 in current operating debt.