Many Districts Face Woes That Led One to Bankruptcy

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San Jose was the first California school district to vote to declare bankruptcy, but it is not the only one in the state facing severe financial problems that threaten to close schools. (See related story on page 1.)

At least five other districts have sought emergency loans from the California legislature to stay solvent for the rest of the school year. A bill providing one such loan, the first to be approved this year, was signed last week by Gov. George Deukmejian. The $600,000 loan went to the Emory Unified School District in northern California.

San Jose's proposed means of resolving its difficulties is regarded by officials in California and elsewhere as a highly unusual step, one almost without precedent.

The circumstances that impelled the San Jose board's proposal, however, include factors that are imposing similar restrictions on other California districts. Proposition 13, the state's 1978 property-tax-limitation measure, is frequently mentioned, as is the Serrano case, the long-running school-finance suit that sought to equalize funding for the state's 1,044 school districts. Another factor is the revenue-based state-funding formula that has been in place since 1972.

And other factors that affect California schools--most notably declining enrollment and inflation--are equally problematic for school districts elsewhere in the U.S.

In California, the cumulative effects of these factors have led in the past five years to an increase in the number of school districts seeking emergency loans. Since 1978, at least two or three districts have had to end their school year early, according to James L. Browne, the former chief consultant to the California Senate Education Committee, who is currently director of research for the usa Publishing Company Foundation.

Nationally, the problem of insol-vent school districts became more acute in the 1970's, according to Joseph Cronin, president of the Massachusetts Higher Education Assistance Corporation, who has conducted extensive research on the issue. Mr. Cronin noted that during the 1930's, many schools closed for lack of money.

More recently, the problem has reoccurred in several large cities--Chicago, Cleveland, and New York, for example--where, in some cases, broader municipal crises threatened the schools, according to Mr. Cronin.

Because the problem is relatively new and occurs sporadically, most states deal with it on an ad hoc basis, Mr. Cronin said. "There are very few general provisions," he noted, adding that some states may have old laws on the books allowing them to advance money to insolvent school systems.

Ohio, the scene of the greatest spate of recent closings, created an education emergency-finance board to handle the problem. Schools that seek help from that board work with the state to create a plan that will allow them to remain solvent and must submit to "severe fiscal discipline," Mr. Cronin said.

In California, school districts may receive emergency-loan advances from the legislature, which they may seek either through the state education department or through a local legislator. Five of the six districts that have done so--including San Jose--are still uncertain about whether they will receive that funding.

The extent to which San Jose's proposal to declare bankruptcy will influence other school systems in similar fiscal straits is uncertain, according to experts in the field. To date, bankruptcy has been rarely invoked by school systems.

Texas Bankruptcy Case

The San Jose district's attorney said his legal research turned up the case of one Texas district that had declared bankrupcy in the Dust Bowl era but no more recent instances of school systems using the procedure.

"I am familiar with no school district that has filed for bankruptcy," said Lorence Slutzky, a partner in the Chicago-based law firm of Robbins, Schwartz, Nicholas, Lifton, and Taylor, which represents about 250 districts and numerous educational organizations. Mr. Slutzky pointed out that there are specific provisions in the bankruptcy act that cover municipalities, but added that to his knowledge, no school district has made use of them.

"It has been contemplated but not been done, to our knowledge," he said. "If somebody pulls it off, you could see it all over the place. It would create a precedent."

Mr. Slutzky noted also that a school district that filed for bankruptcy would be likely to find its bonding authority "severely diminished."

"It's very hard for a government to go into bankruptcy," Mr. Cronin said, noting that such a decision is not analogous to a private company's decision to declare bankruptcy. A private firm can liquidate its assets and rebuild, if possible. "A school doesn't really have that option because everyone expects the services to be rendered. They can't say, 'Well, we'll come back and rebuild this in a couple of years."'

If the district does go ahead with its decision, Mr. Cronin said, "They won't get away with it scot free. It's a vital public service. If someone reaches in to help them, there'll be a price."

The "price" he suggested, might include not only a loss of control over many decisions affecting the district, but also a general drop in the public's regard for the system. "It's a real black eye. When a public agency does this, they don't get away with it. They'll want to sell bonds. Teachers will be wary. If they need to recruit math and science teachers, they're going to take a long, hard look at a system that toys with the idea of bankruptcy."

Collective Bargaining

The effect that San Jose's situation may have on collective-bargaining negotiations in other California districts also remains uncertain, according to officials of teachers' unions. They indicate, however, that the broader problems behind the impasse are already making negotiations difficult.

"It's much too soon to experience any immediate impact, but we've been experiencing the potential impact of that for well over two years,'' said Raoul T. Eilhet, president of the California Federation of Teachers, the American Federation of Teachers affiliate that represents 59,000 school employees in the state.

Negotiating multi-year agreements has also become harder in recent years, Mr. Eilhet said. School boards will "buy a multi-year agreement as long as you don't tie money down in the second or third year."

"Negotiatons have been very, very difficult for the last two years. There's a great deal of anxiety," Mr. Eilhet said. "This is just going to exacerbate the anxiety, in some instances, justifiably so. School systems are really hurting in California. They're not crying wolf this time."

School officials in California express that sentiment frequently. They suggest that, although the circumstances differ from system to system, the problems that led to San Jose's insolvency are common.

"I would have to say that San Jose is not atypical," said George C. Palmer, associate superintendent in the Bakersfield City School District and former president of the California Association of School Business Officials. "It is a school district that really got to the brink and had to do something. I am familiar enough with the situation across the state to know that it isn't fun and games. It's cut, cut, cut."

"While it may be more dramatic, it's not uncommon," said Russell Ribb, superintendent of schools in Hacienda La Puente and chairman of the Association of California School Administrators' finance committee. "There are many districts that are right on that verge," he said. "They have less than 1-percent reserves. Then somebody comes along and says, 'We're going to shortfund you on this program."'

Varied Status

Observers also point out, however, that not all districts are having problems. "There are 1,044 school districts in the state," said Jack Wilson, director of legislative affairs for the California School Boards Association. "Their financial status varies tremendously. There are districts that are okay.

"We're right in the middle of a budget situation, so the rhetoric is a little high about whether districts will close down," Mr. Wilson said.

The prospects for improvement hinge largely on the budget that emerges from the current legislative session--and the Governor's reaction to that budget. (See related story, this page.)

But the Governor, although described as "personally supportive of education" by one superintendent, has indicated that he is reluctant to spend more on education when the state is facing a $1-billion deficit. Moreover, he has said he would veto any bill that includes new taxes.

"If the Governor's budget prevails over the two bills, several dozen districts will have a decline in revenue of 15 percent," said Mr. Browne, the former Senate education consultant. "Up until this year, many districts had been working on a guarantee of at least 100 percent of previous year's funding. If the Governor's budget passes, it would remove the guarantee and go back to a straight average-daily-attendance formula. I call it the cliff effect. They've been standing up there on the cliff and all of a sudden they fall."

Whether the Governor will compromise won't be known until the legislature sends him a budget. Although some school officials are hopeful that the funding crunch will be alleviated, other observers are less sanguine. "I'm inclined to think he's not inclined to compromise," one said.

Vol. 02, Issue 36

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