Judge Upholds San Jose Bankruptcy, But Schools To Open on Time

By Charles Hardy — September 07, 1983 4 min read
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Last week, the day after the San Jose Unified School District became the first school system in modern times to be declared bankrupt, its officials promised that schools in the 32,000-student system would open on time this week.

The district, located in the heart of Silicon Valley’s seemingly affluent electronics center, had filed for bankruptcy last May under Chapter 9 of the U.S. Bankruptcy Act, stating that it could not pay $10 million in salary raises it had agreed to in three-year contracts signed two years ago with its two employee unions. The act gives municipalities protection from creditors while they work out an arrangement to pay their debts.

Shortly after U.S. Bankruptcy Judge Seymour Abrahams ruled in the five-day trial that the district was insolvent and could cancel the salary provisions of the contracts, the San Jose Board of Education issued the following statement:

“We’re satisfied with the judge’s decision but disappointed that the bankruptcy proceeding was necessary. We intend to comply with the judge’s order and are prepared and have invited the associations to begin preparation for a new agreement. We expect school to open as planned.”

But union leaders said last week that school officials and parents can expect that teachers--who lost 13.6 percent in raises--will do as little as possible this fall.

During the trial, lawyers for the employee unions charged that the district was not really bankrupt and could pay the 6.1-percent and 6-percent raises scheduled for the second and third years of the contracts.

San Jose school officials contended, however, that the district was $1.7-million short this year and would be $8 million to $9 million short next year if the contracts’ terms were enforced.

The bankruptcy possibility had first arisen in the spring, after a state labor arbitrator ruled that the district had to pay the raises slated for the second year of the contract. The San Jose school board had voted to defer payment of the raises last year, to try to balance a $75-million budget, but the employees then turned to the state for a ruling on the legality of the deferment.

Arguing that they did not have the funds to pay the required raises, despite having made deep cuts in programs and staffing within the district over the past several years, officials began bankruptcy proceedings June 30. Judge Abrahams, saying the situation placed the school system in danger of “imminent collapse,” ruled that the salary provisions of the contracts could be discarded. The judge said in his ruling that the system had exhausted other means of paying its bills before filing for bankruptcy.

But the judge also ruled that all nonsalary provisions--such as class size and benefits--in the contracts would remain in effect. The decision means that teachers, aides, and clerical workers will continue to be paid at their 1981-82 salary levels. Under a reorganization plan that must be approved by the judge, the district’s debts could be repaid over a period of years. School attorneys have said in the past that they may propose paying the salary increases over a 10-year period, contingent on the sale of surplus school property.

But Belinda Hall, president of the San Jose Teachers Association, an affiliate of the National Education Association, questioned whether the district will choose to pay the raises in full. “We could get 100 percent on the dollar,” said Ms. Hall, “or some of it, or none of it.”

A creditors’ committee will be appointed by the court to decide whether the plan is acceptable. By law, 75 percent of the creditors must cast a majority vote for the plan to be approved. Most of the creditors are teachers and other employees.

Ms. Hall also said she believes the bankruptcy ruling has some ominous implications for all public employees. “We think this is a blow to the whole collective-bargaining process for public employees. This is setting a precedent now for other public employees. Other public agencies can now go to court when they are beginning to feel a pinch and have their collective-bargaining agreements thrown out.”

State School Superintendent Bill Honig also saw far-reaching implications in the ruling last week, but of a different sort. “For teachers’ unions, it means you cannot ever count on a very lucrative contract if it is going to hurt or jeopardize students,” said Mr. Honig. For school officials, Mr. Honig added, it means “you can’t just elevate employees’ salaries above and beyond all other situations.” Ms. Hall said her organization is considering filing an appeal but has not reached a decision yet.

Both school and union officials agreed on one point: The poor relationship between the two that originated with a bitter three-week strike in 1980 preceding the three-year agreement has been further harmed.

“It made it worse than ever,” Ms. Hall said of the relationship. “The district in the last month or so has practically turned over the running of its affairs to the bankruptcy attorneys. When they finish their job, they’re going back to San Diego and leave the school board with a lot of labor unrest, which is going to get worse.”

San Jose’s financial dilemma, observers say, represents the convergence of a number of factors pressuring many districts: principally, the effects of the state’s property-tax-limitation measure, Proposition 13, and changes in the school-finance system required by the California Supreme Court’s recent decision in Serrano v. Priest.

In addition, the once-rapidly-growing community has experienced a drop of more than 5,000 students in recent years. And a survey conducted last spring by the local parent-teachers’ group indicated little willingness among voters to support a tax increase to aid schools.

A version of this article appeared in the September 07, 1983 edition of Education Week as Judge Upholds San Jose Bankruptcy, But Schools To Open on Time


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