Kary Moss, executive director of the Michigan ACLU, spoke at two Mackinac Center events in Michigan this fall. Her lectures were part of the Center’s High School Debate Workshops program.
From 2002 to 2005, Detroit Public Schools collected $259
million in unauthorized property taxes from nonhomestead owners. While it is not clear how the mistake was made or whether the district will have to repay the amount, the improper tax has negatively affected the district’s credit rating, thus making it more expensive to finance its growing debt.
An 18-mill school operating expense tax on commercial
property and rental housing was authorized in a November 1993 vote, and expired
on June 30, 2002. School officials continued collecting the tax over the
following three years.
It has not yet been determined how the district overlooked
the renewal. The 1993 millage election came at a time when school districts were
anticipating the transition to the new financing system created by Proposal A,
which was to be on the ballot on March 15, 1994, and which would peg future
state school aid to local property tax rates.
The error came to light in July of this year, just as the
district was preparing to market a $500 million debt restructuring bond. The
district was forced to amend the prospectus for new bonds with an addendum in
which the error was disclosed. At the same time, the district announced it would
seek reauthorization of the 18-mill tax, which subsequently passed by a 2-1
margin on the Nov. 8 ballot.
It is unknown if the district will be required to repay the
mistakenly collected taxes. A week after that first announcement, the district
appended a second "addendum" to a new bond disclosing that taxpayers had filed
two class action lawsuits seeking return of the unauthorized taxes: one in Wayne
County Circuit Court, and a second in the Michigan Tax Tribunal. The Tribunal
quickly threw out its suit, noting that it does not allow class actions. State
law says individual taxpayers must appeal disputed tax bills within 30 days of
receiving them. That 30-day deadline affected not just prior tax years – it had
also passed for any cases related to taxes billed in 2005. The circuit court
case is still proceeding, however, and it seems likely that more suits will be
If the district were forced to refund the improperly billed
taxes and was unable to service its debt, under Michigan law, the creditors
(meaning bond holders) could force a new "judgment levy" to be added to tax
bills without any popular vote or action by the district, according to the new
bond offering document. If this were to happen, there would be no aggregate tax
savings, only a partial shift in the tax burden from business and rental
property owners to homeowners.
While the $259 million is from 2002, 2003 and 2004, it is not
yet known how much, if any, of the 2005 taxes collected for the district this
summer were paid "under protest."
The effect on the district will be to raise its cost of
borrowing. Detroit Public Schools’ biggest problem currently is remedying its
deficit. In 2004, the district’s total revenue was $1.5 billion. State aid made
up $1.1 billion of the revenue. Federal sources provided $240 million, and $150
million came from local taxes, $79 million of which was the unauthorized
property tax. Expenditures were $1.6 billion, which created a $122 million
deficit. Over three years, the unauthorized tax comprised just 6.3 percent of
annual operating revenue.
Under state law, schools are not allowed to have a deficit;
school budget deficits trigger a requirement that the district adopt a
state-approved "deficit reduction plan," a measure Detroit put in place last
winter. In light of pre-existing demographic pressures — the number of children
attending Detroit schools is expected to fall from 150,000 in 2003 to 102,000 by
2009 — Detroit’s plan is rigorous. Over five years district spending will
decline from $1.6 billion to $1.2 billion, or 22.9 percent. Approximately 100
schools will be closed
To cover the immediate shortfall and cash flow needs, the
district took on $161 million in new short-term debt due next March, and
refinanced another $210 million short term loan to stretch it out over 15 years.
This new borrowing comes against a backdrop of $1.6 billion in outstanding debt,
or $1,817 for each of Detroit’s 900,863 residents. The school debt is equal to
19 percent of the taxable value of all the buildings, land and business
equipment in the city.
Because of the improperly collected taxes, financing the
district’s current debt has become more expensive. As a result of the taxes, the
major bond rating companies downgraded the school district’s debt to one mark
above junk bond status and placed it on "credit watch." Just as with
individuals, the interest rates paid by a governmental entity are determined by
its credit rating, so the district can expect to pay more. If the district drops
into noninvestment grade status, the problem is compounded because certain large
institutional investors can no longer lend to the district, reducing the pool
from which it is able to borrow.