Gongwer News Service
The question of whether Detroit Public Schools should be legally allowed to continue taxing residents to pay off legacy debt after a $150 million emergency loan is repaid was before the Court of Claims on Wednesday.
Judge Christopher Yates heard oral arguments in Detroit Public Schools Community v. Department of Treasury (COC Docket No. 24-000202) regarding motions for a preliminary injunction filed by the school district.
The lawsuit was filed late last year with emergency motions for a temporary restraining order and preliminary injunction. Yates said that although the case was still early in its development, the time has passed for the temporary restraining order and that the oral arguments heard Wednesday would focus squarely on the request for a preliminary injunction.
Yates said he was cognizant that the parties must have a resolution by February 10, and they would get an opinion on the matter within the coming week.
The oral argument session did not have any bearing on the parties’ dueling motions for summary disposition, however, it did give the school district and Treasury a chance to at least explore the merits of the case before Yates.
The lawsuit stems from the $3 billion in outstanding debt that the old Detroit Public Schools prior to a state-led reorganization of the district. In June 2016, the Legislature got involved and Detroit Public Schools were restructured to exist as a separate taxing entity. A new Detroit Public Schools Community District was born from those ashes, leaving the original Detroit Public Schools as a shell that owed the debt.
Detroit’s old school district has navigated that debt obligation since 2016. Once it pays off the debt, it will cease to exist and the new district will continue to control public education in the city.
The $150 million emergency loan it received during the maneuver was at the core of the case, as the old school district is, as Yates put it, within striking distance of paying it down. There is also a separate $1.3 billion obligation on outstanding bonds for school construction and infrastructure and a revolving loan with a balance of nearly $350 million, but the only thing being paid with revenue from the operating tax is the loan.
The right to collect that operating tax doesn’t expire for several years, and there is also a separate debt millage being used to service the obligations on the revolving debt and outstanding bonds.
The main financial obligations will remain even after the emergency loan is paid off.
Detroit Public Schools Community District sued Treasury as a way of getting a clear answer on what happens next with that loan, asking: Does the operating tax just stop, or can the new district also seek its own operating tax? That could cause legal issues because the city is, under Treasury’s argument, unable to tax voters and double dip.
The school district proposed a continuation of the revenue from the operating tax to apply the money to the additional obligations – keeping in mind that public schools in Detroit are also being funded by some money from a tobacco settlement and legislative appropriations.
An order from the court was requested to continue the operating tax at the end of the loan, helping the current district clean up its outstanding debt. As to the department’s insistence that it cannot make that decision, the district said that it was incumbent on Treasurer Rachael Eubanks to certify repayment of the loan and to say, clearly, that the tax must end or if statute allows for it to continue. Ending it outright could trigger consequences to the district’s funding allowance, the plaintiff argued.
Whether that determination came from Treasury or from the Department of Education, either way, a determination must be made.
Scott Eldridge, attorney for the district, said the operating tax is set to expire in the next decade, and if the court decides it can continue, the decision would allow a constant revenue stream to pay off outstanding debt for another eight years.
“(That would) avoid hundreds of millions of dollars in unnecessary interest payments, which, of course, we can never recoup,” Eldridge said. “This is not a case for money damages. As part of the irreparable harm … it’s irreparable because we have no adequate remedy at law in that regard.”
Eldridge said the statutory examination of the case was most critical for Yates to understand regarding why the district should likely prevail on the merits for the purpose of a preliminary injunction.
He clarified the district’s position on whether the School Code was silent, adding that it does detail guidance on the repayment of debts, including a broad catchall that appears to allow the continuance of the operating tax as a way to handle other debts.
“The Legislature felt compelled to define it, but they assigned kind of a reason for it, and it simply triggers a notice obligation on behalf of the state treasurer to notify the new district, once those operating obligations as defined there, are paid off, nothing more,” Eldridge said. “Noticeably absent … is any reference to the phrase ‘operating obligations.’”
Eldridge reiterated that by creating the notice requirement, the Legislature set in statute that Treasury is also required to continue the operating tax.
“Debt means debt. It’s not confusing,” he said. “The Legislature did not mince words, and … (told) you all the different ways you can define debt, as broadly as humanly possible, because (they wanted) to encompass all of it.”
Treasury disagreed with that analysis, asserting once the loan is repaid, that ends the district’s right to collect the operating tax. Treasury notified the district of its position in October 2024, a few months before the lawsuit was filed. It also said the School Code does not provide a direct answer.
That said, the question of whether the new district is authorized to seek voter approval for a new operating levy to support the new district’s operations has a simpler answer: Yes, because the School Code does not prevent the new district from doing so.
The risk of irreparable harm posed by the plaintiff seems to be lacking in support, Treasury posited, because the door is open for the new district to go out and seek approval for a new operating tax.
That could pose some issues for the new district, because the earliest it could get a ballot proposal together is for the May election and that would need to be submitted by February 10, hence the request for expedited relief from Yates.
Treasury also argued that the responsibility does not fall at its feet for a decision on whether the former operating tax just evaporates or can be continued to support the newer district. The department said that duty falls with the Legislature’s appropriation process.
Assistant Attorney General David Thompson, representing Treasury and Eubanks, said the operating levy is solely dedicated to the operating obligation, and that DPS cannot take the amount it was collecting from 18 mills and send it to other legacy debts as the new district.
Thompson reiterated Treasury’s argument, clarifying that its position wasn’t that DPS could redirect the revenue stream, but rather, if the district continued to make interest only payments, they’d be held harmless on the foundation grant that it receives.
“The notion of irreparable harm evaporates … because the status quo is to make the interest payments, and in the meantime, monies are appropriated through 2025,” Thompson said. “I have no reason to believe the Legislature wouldn’t make an
additional appropriation to cover 2026, as well. They would continue with their operating levy, they would continue getting the foundation grant and not only the allowance, but the backfill.”
Thompson added: “The notion that they can’t recoup this money, we know that that’s not irreparable harm just as a matter of law.”
On seeking a new millage, Yates questioned Eldridge about the inherit harm, noting that this could be a window of opportunity for the new district.
“I know there are hurdles along the way,” Yates said. “How long would it take, or how much money would be foregone if your client, the new district, had to go to the voters, get their approval and then essentially get that new operating tax up and running?”
Eldridge said the catch was, under Treasury’s theory, the new district would need to seek a new tax, and couldn’t consider it a replacement tax used to pay off the remaining debt, leaving the option unworkable.
“(Treasury has) taken the position that the operating tax can’t be used to pay off that debt, anyway, even if the new district could use it to pay the revolving fund and bond debt,” Eldridge said. “It’s going to take now that much longer to pay that off if they can’t use the operating tax as we say they can. … Treasury is not going to cut us a check at the end of the day to make that money up. They don’t have the authority to do that. You’d have to go get an appropriation, which, of course, nobody in this room has any control over.”
Yates asked Thompson if it was indeed Treasury’s position that a newly approved operating tax millage wouldn’t be transferable to retire the legacy debt.
“That’s absolutely correct. The operating millage is used for operating obligations, and whether it’s the new district or for the old district, that’s a question of law. That’s a categorical proposition,” Thompson said. “So, the notion that the voters wouldn’t have contemplated this for the new district, but they completely contemplated it for the old district, I think that violates common sense and violates the plain definitions that we have against it.”
Thompson said that was the reason why the district’s argument “makes our heads explode, too.”
“These are separate millages based on separate authorizations, paid by separate voting bases,” Thompson added. “If you have one voting base that’s responsible for one thing, would they be surprised to know that the money that they’re paying towards what they thought was for Purpose A is actually being used for Purpose B?”
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