The Hard Balancing Choices in Public School Finance



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eBlog, 6/13/16

In this morning’s eBlog, we consider the unique state perspective on the challenges of public school finance—something which has bedeviled Kansas, but here we look at the unique political challenges for Michigan legislators to act to avoid letting the Detroit Public School System go into municipal bankruptcy: the challenge for Michigan Governor Ric Snyder is to somehow convince members of the state’s House and Senate to appropriate funds that might otherwise have gone to their own Districts to, instead, go to DPS. Then we turn to the fate of the House-passed bipartisan legislation to address Puerto Rico’s looming insolvency—and how and when the Senate will act with time running out. 

Learning about the Importance of Getting it Right. Daniel Howes, the very insightful editor from the Detroit News, in his column on Friday, “Bankruptcy for DPS threatens cascading risks,” wrote that “All it took was a few texts from Kevyn Orr…to confirm Gov. Rick Snyder’s worst fears: A chapter 9 bankruptcy of Detroit Public Schools risked establishing a precedent, the city’s former emergency manager told the Governor, that could expose taxpayers to billions of dollars in creditor and pension liabilities — and the possibility that a federal court could order the state to raise taxes to pay them.” The result, Gov. Snyder therefore warned state legislators, would be a financial and political cataclysm: absent sufficient votes to pass the $617 million rescue package for DPS, the Governor would, once again, have been forced – as he had years ago when he first appointed Mr. Orr to put Detroit into bankruptcy and then steer the city through the largest municipal bankruptcy in U.S. history. Moreover, the Governor warned legislators that the fiscal carnage or failure would not necessarily stop at Detroit’s city limits: “School districts across the state would be tempted to follow DPS’ path in an effort to shed liabilities on their books, effectively dumping them on Michigan taxpayers and creating a civic firestorm that would be difficult to control.”

The hard issue, after all, for state legislators, was to agree to spend more than $600 million in state revenues to go to Detroit’s schools—that is: a challenge more difficult, politically, because it meant asking House and Senate members to find a way to take state funds from their own districts to send to Detroit. Thus, the warning from Gov. Snyder that a failure to appropriate a significant aid package could risk putting the state on the hook for as much as $2 billion to $3.5 billion in liabilities—or the equivalent of a cut of $3,000 in state aid for every public school student. In addition, the Governor reminded his colleagues in the House and Senate that a new municipal bankruptcy in Detroit for its school system could hurt the state retirement system, because it includes Detroit teachers. He added, finally, that failure to act would jeopardize Michigan’s credit ratings. That is, such a filing would likely risk fiscal contagion: it could raise the cost of capital borrowing for virtually every city, county, and public school district in the state. Mr. Howes noted: “More precisely, Orr advised the governor that bankruptcy lawyers likely would advance a go-for-broke argument seeking to establish that states could be ordered to raise revenue to pay creditors and satisfy unfunded liabilities.”

Finally, Mr. Howes wrote what I found the most profound: “The city’s bankruptcy was neither easy nor free of confrontation. Memories dim. Chapter 9 was disruptive; it required sacrifice; it challenged labor and the municipal bureaucracy in ways they had never been challenged before; and it cost the city something in the neighborhood of $180 million in fees to shed $7 billion in liabilities, refinance another $3 billion more and renegotiate all of its union contracts.”

Oye! The U.S. Senate expects to take up the PROMESA Puerto Rico bill passed by the House and vote by the end of this month or in early July—an effort facilitated by House action last week to provide a procedure for Senate Majority Leader Mitch McConnell (R-Ky.) to bring the measure, S. 2328, up before the full Senate without having to go through committees. Moreover, with Senate Majority Whip Sen. John Cornyn (R-Tx.) advising his colleagues that the House-passed bill is the only alternative to what otherwise would become a large, taxpayer-funded bailout. Senate Finance Committee Chairman Orrin Hatch (R-Utah) said the Senate would have to support the bill if the House passed it, even though he said he does not “think it’s a very good bill in many ways.” Moreover, no Senator seems to have been able to come up with an alternative proposal which has garnered any interest or support: and all appear acutely aware that, as they use to say in Rome, tempus fugit: the Senate has quite simply run out of time to consider any significant alternatives between today and the July 1 deadline when Puerto Rico faces a nearly $2 billion debt payment deadline. If there is one fly in the ointment, it is Vermont’s Sen. Bernie Sanders (I-Vt.), who has threatened to filibuster the bill. Sen. Sanders introduced an alternate bill, The Puerto Rico Humanitarian Relief Act last Thursday in which he proposes to create a seven-member Reconstruction Finance Corporation of Puerto Rico and provide that U.S. territories be included under the Chapter 9 municipal bankruptcy title. The public corporation would be a restructuring agency with authority to lend to Puerto Rico and facilitate debt restructuring for the commonwealth. His bill would also appropriate $10.8 billion to the commonwealth over five years to help modernize infrastructure as well as extend Chapter 9 bankruptcy protections to the island. In introducing his bill and opposition to the House-passed bill, Sen. Sanders said: “The more we learn about the disastrous House bill to address the crisis in Puerto Rico, the worse it becomes. It is bad enough for Republicans in Congress (and apparently the Treasury, White House, and House Democrats) to take away the democratic rights of U.S. citizens living in Puerto Rico by setting up a neocolonial control board empowered with the authority to slash pensions, fire teachers, and close hospitals. But to ask Puerto Rican taxpayers to pay $370 million to create an unelected control board stacked with right-wing Republicans is beyond insulting. Mexico is not going to pay for Donald Trump’s unnecessary wall and, if I have anything to say about it, the people of Puerto Rico will not pay for this outrageous control board. This is just one more reason why I will do everything I can to defeat this legislation in the Senate and fight for an alternative bill that will allow Puerto Rico to grow its economy, create good jobs, expand its tax base and pay back its debt in a way that is fair and just.” Nonetheless, it seems most unlikely Sen. Sanders would be able to gain the requisite 41 votes he would need to block cloture in the Senate. And it comes in the wake of overwhelming, bipartisan action in the House. Puerto Rico’s own nonvoting Member of Congress, Commissioner Pedro Pierluisi noted to his colleagues that the House-passed bill accomplished the first step in dealing with an emergency: to stabilize the solution: “Without PROMESA, the Puerto Rico government is likely to collapse, participants in public pension plans will be terribly harmed, and many bondholders could lose their investments: PROMESA is in the interest of all stakeholders.”


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