Detroit Schools on the Brink Shrinking District Heads Toward Bankruptcy to Gain Control of Its Costs
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.
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.
“Am I optimistic that they can avoid it…? I am not,” says Ray Graves, a retired bankruptcy judge who has been advising Mr. Bobb in recent weeks.
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.
