While Detroit officials
may be looking toward a Chapter 9 filing to steer the Detroit Public
School System away from financial ruin, some feel that the move could
ultimately do more harm for the municipality than good.
In a recently published editorial
in The Detroit News, a financial expert named Lou Schimmel asserts that
the DPSS' credit rating and ability to float bonds for needed repairs
would be "devastated" if it pursued bankruptcy protection, or if the
city Detroit did, for that matter.
According to the editorial,
bond issuances are carried in Michigan through a state-guaranteed loan
fund. A DPSS bankruptcy filing could create a domino effect that would
not only "taint" its bond issues, but that of other Michigan
municipalities. The result: Floating these bonds for much-needed school
repairs will get more difficult.
In addition, while a Chapter 9
filing could allow the DPSS to effectively reject its costly union
contracts -- something that Vallejo, Calif., did on May 23, 2008, via
Chapter 9 which a bankruptcy judge upheld -- it could ultimately result in
the school board having to relinquish control over its finances to the
federal government through a U.S. trustee.
That might not be bad
thing. After all, considering some of sloppy bookkeeping and outright
fraud that has, in part, contributed to a funding gap approaching $300
million as a result of several years of overbudgeting (see previous post),
it makes one wonder whether a fight to keep the DPSS out of Chapter 9
is a battle worth waging. Bankruptcy does come with its own
disadvantages, but the DPSS certainly hasn't given any indication that
it can fix itself independent of bankruptcy protection. When an
irresponsible teenager crashes the family car, would it be logical for
a parent to keep giving the child the keys?
The credit ratings on
the DPSS' bonds may suffer in the short term as a result of a municipal
bankruptcy filing, but maybe that's what's needed to impose a hard
discipline on school administrators who haven't learned a lesson thus
far. - Carolyn Okomo
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