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San Jose, Calif., Board Votes for Bankruptcy

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San Jose--Officials of the San Jose Unified School District have voted to proceed with plans to declare bankruptcy.

The board made the decision May 19 in light of an arbitrator's ruling that the district must pay its employees the 6.1-percent raise this year and 6-percent raise next year that it agreed to under a three-year contract.

Although the five-member board unanimously gave the district's administrators approval to explore the possibility of bankruptcy proceedings, it also ordered them to continue to negotiate with two employee unions in an effort to persuade them to give up the raises, at least temporarily. At the same time, the board directed the administration to seek an emergency appropriation from the state legislature.

But San Jose school officials last week said the emergency-appropriation route is closed to them because they would have to present a plan to the state for paying the money back with interest in five years.

In addition, the district would have to present a balanced budget for the next school year, which, officials said, it cannot do if the raises are paid.

Projected Deficit

On top of the district's current $3.5-million budget deficit--which officials say is due to this year's raises--they are projecting a $13-million deficit again in consequence of the salary increases. But as of the middle of last week, negotiations with the unions had stalled and union officials were asking for the raises immediately, ac-cording to a spokesman for the district.

Thomas M. Griffin, the district's attorney, said officials had decided to pay the raises and their other bills until they run out of money. And when that occurs, employees, along with some of the district's vendors, will be paid with registered warrants.

Mr. Griffin said the district will wait until the end of June to file for bankruptcy, continuing its attempt to negotiate with employee unions until that time.

"In bankruptcy [actions], you have to file a list of creditors," said Mr. Griffin, who previously was chief counsel for the California Department of Education. "But we won't know who the creditors will be until the end of [June]," he said.

A major concern of San Jose officials, he added, is that two of the vendors that may not be paid are the district's health-insurance companies. A default on payments by the district could lead the firms to terminate employees' health insurance during the summer. Mr. Griffin said the district is considering asking the vendors to accept registered warrants in lieu of payment and paying them before they pay other bills.

San Jose's 30,000 students make it California's eighth-largest district. It is the first in the state's history to declare bankruptcy, according to Mr. Griffin.

Process Unclear

Although the school-bankruptcy process is unclear, the district is likely to submit a plan to the federal bankruptcy court that can be contested by creditors, he said. The plan might call for the district to pay its debts over a 10-year period, or it might ask that the debts simply be written off.

If the debts are to be paid over a 10-year period, Mr. Griffin said, the district could seek additional funds from the sale of surplus school sites. The district has closed 10 schools in the last three years due to declining enrollment. An alternative would be to cut school programs to pay the bills, he added.

The budgets of the district's schools have already been cut drastically in recent years, with hundreds of teachers, administrators, and clerical workers laid off as well as all 52 district counselors, and the high-school instructional day reduced to five periods. This year, San Jose's budget is $72 million.

"The district still hopes to negotiate with the union if something happens before bankruptcy is filed," said Mr. Griffin. "That would be a better resolution than bankruptcy, but at this point it doesn't look as if there's any reasonable likelihood of that happening."

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