By: Mark Glennon*
The Detroit Public School District, like Chicago’s, is struggling for its financial life. Michigan Governor Rick Snyder earlier this year proposed a plan roughly comparable to the restructuring of General Motors that created a “new GM” to replace the old one, which allowed the new one to shed unaffordable debts and contracts.
Under the plan proposed for Detroit schools, the “old school district” would be left in place to liquidate certain debt obligations of the Detroit Public Schools. A new Detroit school district would be created that would assume the educational duties. Some tax revenue would continue to fund the old entity but most new revenue would go to the new one, which would have a fresh start, a clean balance sheet and improved control.
Sound familiar? It’s exactly the approach we wrote about in some detail last month for Chicago Public Schools, just using different language. “Reconstitution” is the label we used. Folks familiar with financial reorganizations will also recognize it as a common approach in the private sector. It’s perfectly fair and effective if done properly.
In Chicago’s case, there might not be any need to fund the old school district at all. While the attraction of the approach may be obvious, getting it done depends on getting the numbers right and successful negotiation with stakeholders. In the case of public sector entities, political will to do it also has to be there.
The Detroit plan has run into obstacles. However, those obstacles are specific to Detroit and do not apply in Chicago.
First, Detroit’s teachers are part of a statewide pension for Michigan teachers, and that pension is also in trouble, having a $1.2 billion unfunded liability. The Detroit School system is way behind in payments owed to that statewide pension. Under the plan, that bill owed by the old district would be at risk of going unpaid if it went bankrupt (even though that’s not part of the plan), which would further cripple the statewide pension. That’s not the case for CPS, which has its own pension.
A primary purpose of reconstituting CPS would be to let its pension run dry or liquidate it and to replace it with a new plan that’s fair and affordable. The new plan could be a conventional pension, 401(k)-style, a hybrid, or whatever is decided. That new plan could also be used to at least partially compensate impaired pensioners in the old system.
Second, some opponents are saying the Michigan plan simply wouldn’t put enough money into the new school system. Maybe that’s true, but that’s just a matter of getting the numbers right and, ultimately, getting stakeholders to agree to new terms that fit with whatever funding is available, which can be done in or outside of a Chapter 9 bankruptcy. In that negotiation, bargaining power would shift to taxpayers and education.
The message to old claimants is basically, “You can either take what’s reasonably affordable in the new entity, or you can go chase your claim against the old, empty one, which we’ll put into bankruptcy if we need to.” The purpose, again, is to start putting tax dollars into a new entity free of some of the obligations of the old one, which means more dollars, efficiently spent, really going to education.
Finally, the plan for Detroit is getting the criticism you would expect the sources you would expect. Opponents of privatization, charter schools and vouchers fear it would open up those options. Unions want their power maintained and their contracts kept in place. Politicians in the city don’t want board control shifting to the outside. Well, yes, actually. Those should be seen as attractive options made available through reconstitution.
Michigan at least has the right idea — the right approach — even if its particular plan has issues. Chicago is paralyzed by inaction and simply by the absence of alternatives. Politically unfeasible as reconstitution seems for CPS right now, it’s probably inevitable. It would provide one of the few constitutional means available for Chicago schools to reduce its pension liability, which is essential. Constitutional issues, if there are any, unquestionably could be disposed of by a Chapter 9 for the old, abandoned CPS if it was reconstituted.
Today, the Chicago City Council’s Education Committee had a three hour session of hand wringing over its lack of ideas, which it left its chairman “thoroughly depressed.” Michigan’s approach for Detroit is a welcome precedent for it to consider, not a refutation of the feasibility of reconstitution.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.