As goes Detroit Public Schools, so goes…

Well, probably more school districts. From the Wall Street Journal (may be gated); this is a remarkable read:

DETROIT — Detroit’s public-school system, beset by massive deficits and widespread corruption, is on the brink of following local icons GM and Chrysler into bankruptcy court.

A decision on whether to file for protection under federal bankruptcy laws will be made by the end of summer, according to Robert Bobb, Detroit Public Schools’ emergency financial manager. Such a filing would be unprecedented in the U.S. Although a few major urban school districts have come close, none has gone through with a bankruptcy, according to legal and education experts.

Students of Detroit’s Guyton Elementary School ring the bell for entrance in April. Guyton is one of 29 Detroit schools slated to close.

But in Detroit — where U.S. Education Secretary Arne Duncan dubbed the school system a “national disgrace” this spring — lawmakers and bankruptcy experts see few alternatives, given the deep financial challenges confronting the district and the state.

In a corporate bankruptcy, equity holders (shareholders, including employees) are usually wiped out,jobs are lost, and creditors unpaid.  What happens in a school system bankruptcy?

As with General Motors Corp. and Chrysler LLC, bankruptcy may not be the worst thing for Detroit’s schools. A filing under Chapter 9 of the Bankruptcy Code, which covers public entities like school districts and municipalities, would allow the district to put major creditors such as textbook publishers, private bus operators and DTE Energy, the local gas-and-electric utility, in line for payment. It also would give Mr. Bobb broad latitude to tear up union contracts without protracted negotiations. But a filing also could hurt the district’s debt rating and ability to float bonds.

Some experts say the Detroit case could be the first in a string of Chapter 9 bankruptcies among school districts and other public entities battered by the economic crisis, and it could help shape that area of the law. “Given the state of public finance,” says Samuel Gerdano, executive director of the American Bankruptcy Institute, “I think the wave is coming.”

A lot of this is due to changing demographics; a lot to pension overhang and other poor management decisions, and yes some of that other stuff.

But DPS’s problems go beyond the type that sank GM and Chrysler. Wide-scale corruption has depleted district coffers, which held a $103.6 million surplus as recently as 2002. In June, Mr. Bobb’s new team of forensic accountants found DPS paychecks going to 257 “ghost” employees who have yet to be accounted for. A separate Federal Bureau of Investigation probe in May led to the indictment of a former payroll manager and another former employee on charges of bilking the district out of about $400,000 over four years.

It is a fearsome predicament, particularly since this article spends very little time on the impact on Detroit’s kids.

This entry was posted in District Performance, Fiscal & Economic. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s