Detroit Public School System Ponders Bankruptcy

Freep is reporting the Detroit Public School System May Wind Up In Bankruptcy.

The Detroit Public Schools may have no choice but to file for Chapter 9 bankruptcy, which would make it the first big-city school district to use bankruptcy court to avoid paying millions to vendors, employees and bondholders, experts said Thursday.

DPS Emergency Financial Manager Robert Bobb is continuing to consider the option and met Thursday with retired U.S. Bankruptcy Judge Ray Reynolds Graves.

Jim McTevia of McTevia & Associates of Bingham Farms, which works with companies with serious financial troubles, said DPS has three choices to solve its projected $259-million budget deficit: raise more money, cut costs or declare bankruptcy.

More revenues are extremely unlikely, given DPS's projected enrollment decline of 12,000 students and anticipated state funding cuts. McTevia estimated DPS would have to cut its costs as much as 50%, an almost impossible feat given that more than 80% of most school district costs are salaries and benefits mandated by contracts.

Bobb, a state appointee who took charge of the DPS budget in March, was not able to balance the 2009-10 budget, which totals about $1.2 billion and calls for $21.8 million in debt service payments on bonds sold to eliminate past deficits.

A bankruptcy filing could reduce the amount DPS will pay vendors and bondholders. It also could allow a judge to rule on DPS's requested changes to employment contracts, McTevia said.

Bankruptcy A Done Deal

This looks like a done deal to me. The employment contracts and pension plans are untenable, wage and benefit reductions of 50% outside of bankruptcy are virtually impossible, and there is no money to be found anywhere unless Obama comes to the rescue.

No large school district nationwide, has ever filed for bankruptcy according to the Washington-based Council of the Great City Schools, an association of 67 of the nation's largest school districts.

With that, the pension time bomb has finally gone off. And if the judge dramatically slashes wage contracts and pensions, which is what every taxpayer everywhere should be hoping, it will set a nice precedent for other over-burdened school districts to follow suit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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