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Rick Hess Straight Up

Education policy maven Rick Hess of the American Enterprise Institute think tank offers straight talk on matters of policy, politics, research, and reform.

Education Opinion

The Detroit Bankruptcy & K-12 Schooling

By Rick Hess — July 22, 2013 5 min read

So, while I was en route to Detroit on Thursday, I got word that the city had filed for bankruptcy. It was strange. While the story was all over the airport televisions and the hotel newspapers, I encountered barely any discussion of it from the folks I met. Anyway, lots one might say about the situation.

After all, in his letter announcing the decision, Governor Snyder noted that Detroiters wait an average of 58 minutes for police to respond (compared with a national average of 11 minutes); that 40% of the city’s street lights didn’t work in the first quarter of this year; and that roughly 78,000 city structures have been abandoned. If one were inclined, one could pen a treatise on municipal bankruptcy law, underfunded pensions, cost curves in health care obligations, and the missteps and corruption that brought Detroit to this pass. But it’s a summer day. I’m betting most of you don’t have the patience for any of that, and I’m definitely not prepared to expound on it.

So, we’ll set down the tomes and instead just touch on a couple thoughts that struck me in reflecting on the situation in Detroit.

First, as I discussed at length in Education Unbound, success tends to be a perilous thing. Organizations, cities, and so on that enjoy success get used to doing things a certain way, to certain comforts, and to certain routines. When the world changes, it can be hard to keep up. Even with lots of money, lots of smarts, and lots of reasons to figure it out, huge numbers of private ventures never get unstuck. Hard as they tried, Bethlehem Steel, TWA, Pan Am, Circuit City, Sears, etc. found themselves displaced by smaller and scrappier alternatives. These giants were premised on doing things a certain way and, when the world changed, it turned out to be really tough for them to meet new needs, tap new technologies, reengineer their models, or rethink their approach to talent.

That’s what we’re seeing in Detroit. A thriving city of two million, fueled by automobiles and music, couldn’t adjust as the auto industry evolved and residents started heading for the exits. The city was stuck with overbuilt services, oversized public agencies, burdensome benefit obligations, as well as a political system that was neither able nor willing to take the steps that might start to attract new business. This stuckness characterizes lots of school districts weighed down by rules, debt, and excessive staffing, but unable or unwilling to get a clean slate.

Second, once stuck, it’s desperately tough to get unstuck. That’s why room for new entrants is so vital. If it’s hard for TWA or Pan Am to change, the alternative is for new airlines to start over on a fresh sheet of paper. That’s much tougher to do, of course, with public services -- and nearly impossible to imagine when it comes to municipal governance. (It’s easier to envision if we’re talking about individual schools.) Normally, we don’t notice as this plays out. Old ventures go away, new names become familiar, and employees and the rest of us make choices or change jobs as individuals, usually without anyone thinking overmuch about it. When push comes to shove, old ventures eventually resort to bankruptcy in an attempt to get a fresh start from accumulated debt, contracts, and the rest. Sometimes it works, sometimes it doesn’t. That’s what we see in Detroit. Absent bankruptcy, it’s hard to envision how the city changes its trajectory.

Third, unless things change, most states and districts will devote a steadily increasing share of spending to retirees in the years ahead. Meanwhile, industrial era contracts and entrenched routines make it difficult to think fresh about how to use limited talent, funds, and technology to educate students in the 21st century. School boards and mayors are inclined to keep kicking the can down the road rather than tick off employees’ groups or retirees with skin in the game. This is made easier because benefits are largely invisible; not many journalists, civic leaders, parents, or voters have any clue how much money is being spent on benefits rather than instruction. It’s especially tough for even fearless mayors, school boards, or superintendents to step up, given that federal bankruptcy code requires state approval in order to file, and that evergreen provisions in statutes and collective bargaining agreements mean that many districts aren’t even legally able to let existing contracts expire.

Bankruptcy is a cudgel that can prod employee unions to negotiate givebacks, figuring that half a loaf is better than the alternative. The absence of a bankruptcy threat makes it easy for them to reject concessions. If one or more significant school districts declared bankruptcy in such a way that the benefits of retirees and veteran educators were at risk, union leaders in many systems would suddenly be more open to considering modifications and reforms. Despite the inevitable invective, this would provide an opportunity for strategic teacher union leaders who would like to recalibrate the balance of spending between benefits and salary, between retirees and practicing educators, and between more senior and less senior teachers. I’ve spoken with a number of union officials and local leaders who quietly acknowledge the challenge posed by expensive factory-style health and pension obligations for retirees, and who are intrigued by the chance to revisit existing arrangements.

Absent a bankruptcy threat, it’s professional suicide for even strategically-minded union heads to urge a benefit cut on teachers or retirees. After all, such a move would spark infighting between more senior and more junior teachers, and no union leader is inclined to sow dissension among their membership. It’s far easier for leaders to just demand more funding, lament penny-pinching pols, and then make their peace with existing arrangements. The power of bankruptcy is that it offers a chance at a reset, an opportunity for both labor and management to see what they would do if they were starting from scratch in 2013.

Of course, there are losers in such a scenario. It’d be dishonest to pretend otherwise. After all, bankruptcy is necessary because the status quo (with all its promises and perks) is no longer viable. Veteran teachers and even retirees might lose benefits to which they think they’re entitled. And they have a point. Promises were made and they operated accordingly. Unfortunately, the reality is that many of those promises were made by short-sighted pols and district leaders who wanted to keep folks happy, even if their commitments would prove unwise or unaffordable downstream. It’s not a question of right or wrong. Those who feel entitled have a point, as do those who feel trapped by yesterday’s bad decisions. Bankruptcy is a process for seeking to balance out the obligations of yesterday and the needs of tomorrow. Seems to me, K-12 could use a solid dose of just that.

The opinions expressed in Rick Hess Straight Up are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.

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