NCPA - National Center for Policy Analysis


July 22, 2009

Detroit's public-school system, beset by massive deficits and widespread corruption, is on the brink of entering bankruptcy court.  A decision on whether to file for protection under federal bankruptcy laws will be made by the end of summer.  Such a filing would be unprecedented in the United States, says the Wall Street Journal.

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.

As with General Motors Corp. and Chrysler LLC, bankruptcy may not be the worst thing for Detroit's schools, says the Journal:

  • 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 the local gas-and-electric utility in line for payment.
  • It also would give Robert Bobb, Detroit Public Schools' emergency financial manager, broad latitude to tear up union contracts without protracted negotiations.
  • However, a filing also could also hurt the district's debt rating and ability to float bonds.

Some experts say the Detroit case could be the first in a string of Chapter 9 bankruptcies among school districts and other public entities battered by the economic crisis, and it could help shape that area of the law, reports Kellogg.  "Given the state of public finance," says Samuel Gerdano, executive director of the American Bankruptcy Institute, "I think the wave is coming." 

Source: Alex P. Kellogg, "Detroit Schools on the Brink: Shrinking District Heads Toward Bankruptcy to Gain Control of its Costs," Wall Street Journal, July 21, 2009.

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