State senator’s plan would burn DPS debt with tobacco revenue

LANSING – A Detroit-area state senator said he is working on legislation that could use tobacco revenue as a funding source to tackle Detroit Public Schools’ massive operating debt, similar to a budget proposal Gov. Rick Snyder introduced last week.

Sen. Hoon-Yung Hopgood, D-Taylor, said he initially considered using state tobacco tax revenue in a bill he is drafting to pay for an overhaul of the district that would split it in two to pay an estimated $515 million in debt.

But Hopgood said he is open to the idea of drawing money from Michigan’s share of a national tobacco settlement after Snyder proposed using $72 million a year for a decade to reform the struggling district.

“I think we’re onto the right path as far as that’s concerned,” Hopgood said, adding that the bill could be introduced as part of a broader DPS reform package.

Lawmakers appear to agree that urgent action is necessary if Detroit’s school system is to avoid defaulting on debt. Projections indicate the district will run out of cash by spring.

There has been no consensus on how to pay for it. Although Snyder has identified a funding source in his 2017 budget, he’ll still have to convince lawmakers.

“All of us agree that the financial piece has to get taken care of,” said Rep. Al Pscholka, R-Stevensville, chairman of the House appropriations committee.

Yet “there might be a better solution” than tobacco money, said Pscholka, adding that he is considering a way to fund the DPS fix without school or general fund money.

He would not offer details, saying he is still discussing ideas with Snyder.

Money running out

Since Snyder outlined the details of his reform plan last fall, he has faced pushback from Detroit lawmakers over local control and from outstate legislators concerned about using School Aid Fund dollars for Detroit at the expense of other districts.

He wants the legislature to adopt bills by this summer to address the district’s finances. Snyder has been careful not to say DPS could file for bankruptcy, but said if a creditor decides to take the district to court, a judge’s decision could yield more expensive consequences.

Most of the district’s debt is owed to the state, backed by the state or tied up in pensions, state Treasurer Nick Khouri said in a presentation last week to a Senate committee.

DPS pays about $50 million a year in debt service.

Its $515 million in debt has accumulated from long-term bonds, short-term borrowing to improve cash flow, unpaid payments into the state pension system and late payments to vendors, Khouri said.

“Bankruptcy is a terrible option for the district,” he wrote. “The bankruptcy process is always uncertain, but in the end, it will cost the state more than double the cost of the proposed legislation.”

Bankruptcy could disrupt the district for eight months to a year and cost $75 million to $100 million in fees, he wrote.

Snyder’s plan would use $720 million over 10 years from the state’s tobacco settlement to pay for the plan, which would split DPS into two districts. The existing district would be phased out once its debt is repaid, while a new Detroit Community School District would be created to educate the city’s roughly 47,000 students. He estimates the new district would need $200 million in startup funding.

DPS would continue to collect a local operating millage for debt repayment, while the new district would receive $72 million in annual payments from the state’s School Aid Fund as its operating funds. The tobacco money would reimburse the school fund to avoid cuts to other Michigan schools.

“So (lawmakers) can go tell their school districts, the parents in those school districts, that this money is not at the expense of money that would otherwise go to their school district,” Snyder told reporters last week.

Tobacco settlement particulars

Michigan, 45 other states and Washington, D.C., reached a settlement in 1998 with tobacco manufacturers that is due to drop roughly $284 million into the state’s general fund next year. About $193 million will remain after some restricted funds are taken off the top, state budget spokesman Kurt Weiss said.

More than $23 million of the tobacco funds earmarked for Detroit schools in a new Detroit Public Schools trust fund, however, is budgeted for some Medicaid programs in 2017, according to a House Fiscal Agency analysis. The remaining $49 million is available next year as one-time funds.

By 2018, Detroit would require about $47 million in tobacco funds from Medicaid, with the rest coming from a projected rise in the amount paid by tobacco manufacturers, according to the analysis.

Another $50 million is proposed for DPS in a budget amendment in the current fiscal year to support short-term daily operations.

Questions about how the new district would be governed – including the makeup of its board and creation of a proposed Detroit Education Commission, with oversight of city public and charter schools – have not been resolved.

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Barry Visel
Mon, 02/15/2016 - 8:00am
Just curious, if existing smokers stop smoking (which I assume is the goal) will the settlement money still come?
Mon, 02/15/2016 - 8:03am
So a penalty assessed against the tobacco industry which was originally meant to be used for programs to prevent smoking has really been used by lawmakers to fund whatever they want. Meanwhile, tobacco related deaths continue at about 400,000 per year and no one really cares. I guess if you are the government doing the extortion it is not a crime.
Jim Not
Mon, 02/15/2016 - 8:53am
Rich I was curious about the original intent and purpose of the tobacco settlement funds, but you have addressed some of my concerns. In general if these funds were intended to address physical health issues or purposes, my assumption, then how can they ethically be used for education, debt retirement, and pay off of bonds? The Medicaid distribution seems like the only one which is legitimate use of these funds. Seems to me that we never learned our lesson from the misuse of federal level Social Security "TRUST FUNDS", but just grab money from wherever it is to use however we want, regardless of the intended use of those funds. Sad indeed! True, I am from Flint, but it seems to me that channeling tobacco funds to the health needs there is much more ethical and aligned with the intent of those funds as I understand it. What do others think?
Mikey T
Mon, 02/15/2016 - 8:58am
This magic tobacco money is truly a gift sent from Heaven. It's been used to fund education, scholarships, bonds, Medicaid, any manner of government spending that the legislature and governor-of-the-moment wish to fund. Now there is a proposal to fund a bankrupt DPS into solvency, while future funding of Medicaid I guess, (it's not really clear), gets reduced. I seem to recall that when Obamacare passed, and Michigan expanded Medicaid, there was a promise of subsidized funding for Medicaid from the Federal Government, for a period of years. Just as we get close to the end of those subsidies, we now take the magic tobacco money and move it somewhere else.
Bill Wood
Mon, 02/15/2016 - 11:38am
I have become terribly frustrated. Yes, by choice and addiction, I am a smoker. The tobacco companies have (and are paying) the State of Michigan; and cigarettes are highly taxed. If memory serves me, the original puirposes of the Tobacco Settlement monies were to defray the added expenses to the State of Michigan due to increased health costs in caring for smokers' illnesses -presumably caused by tobacco use. I do not see these monies being channeled to do this. Nor, do I see these monies being used to defray the smoker's penalty of higher differential costs in health insurance (public or private). With these large amounts of money, it would seem the State of Michigan should at minimum be subsidizing the higher insurance payments for health insurance paid by individual smokers; and, subsidize a greater amount of medical care.
Robert S
Mon, 02/15/2016 - 11:39am
This proposal is why you can never trust politicians with our money. They collect money for one purpose and spend it for another when it isconvenient or suits them. Same old, same old, both Washington DC and Lansing, MI.
Mon, 02/15/2016 - 12:59pm
Sorry, but why is anyone surprised that THIS legislature would take money intended for one purpose and spend it on something totally unrelated? All of the Republicans have taken a pledge not to increase taxes. They didn't sign a pledge to be smart or have common sense. Near as I can tell, they all long for the time when you can live on a farm, have 80 acres and "freedom". GERRYMANDERING, GERRYMANDERING, GERRYMANDERING is what got us into this mess, and until that's fixed we'll be dealing with 3 walnut shells,1 pea and trying to figure out where the money went.
William C. Plumpe
Mon, 02/15/2016 - 5:38pm
I am definitely concerned that the tobacco settlement money is not being used for its intended purpose. That for me may be a deal breaker but I am willing to entertain suggestions about how to deal with the DPS structural debt load. Is bankruptcy the only answer? I know it seems to have worked with the City of Detroit but I am so opposed to again paying attorneys and consultants outrageous amounts to fix things. Maybe make the funds a no interest loan to the district from the tobacco settlement fund to be paid back over 20 years. That would provide the funds to retire the debt and interest saved by DPS could be used to pay back the principal. Then after 20 years the funds are used to pay for smoking awareness and drug education classes in DPS. Seems that everybody wins.
jesse atwell
Mon, 02/15/2016 - 9:10pm
In what alternate universe does the legislature and the governor live? Detroit is bankrupt and we are supposed to save it ...AGAIN? Detroit got its self into this problem. Let them figure out how to get out of it...without my money being involved. Why am I held responsible for Detroit's corruption and mismanagement? As far as I can tell, the very same people that brought this problem on themselves are the very same people being left in charge AGAIN. Nothing has changed...and Detroit will never learn if we continue to jump in and save it from its own corrupt, stupid leaders and voters. Detroit is dead...break it up into small districts and towns and let them begin all over again.
Matt Tomasiewicz
Tue, 02/16/2016 - 5:22am
I agree with just about everyone's comments above, and especially like Mr. Plume's idea of a loan to DPS from the tobacco fund. That suggestion gives DPS the money to retire it's debt, yet at the same time protects the integrity of the settlement money, in the future, to be used for its original purpose. My question would be: when does the settlement money run out? And have we been filling one hole by digging another? Some would argue "All money is green, spend it where it does the most amount of good." The problem with that theory is because of term limits the use of the money changes. There's no consistency, and no long term planning. Other reasons for advancing Mr. Plume's idea.
Phil L.
Tue, 02/16/2016 - 12:44pm
Once again, Michigan legislators off-loading the costs of educating our own resident children with out-of-state money. I would have thought that paying our own way was one of the things we could be proud of.
Sun, 02/21/2016 - 6:16pm is a great report on how DPS got into the current mess. Often, people pick a single thing, like charters or teachers unions, but the problems go back further and the failed leadership has been chronic. Everyone interested in this issue and possible solutions should read this.