Commentary: Bankruptcy won't cure RCSD, but it could help 

The warning by state auditors that the Rochester City School District could run out of money by June and that its $40 million budget deficit is worse than previously thought has raised the specter of bankruptcy.

It is all very hush-hush right now. Few people outside the social media peanut gallery are talking about “the b-word” in earnest yet. But the prospect is looming.

Asked over the weekend via text about the potential for a bankruptcy filing, Willa Powell, head of the Board of Education’s audit committee and former chair of the finance committee, acknowledged that there may be no other choice if the state doesn’t meet the district’s request for a bailout.

“Chapter 9 hasn’t been raised, but it might be the only resort left if the governor refuses our spin-up request,” Powell replied, referring to the chapter of the federal bankruptcy code that covers municipal bankruptcies and using the lingo for an advance on future state aid.

Wouldn’t it be dreamy if the RCSD could just paper over its debt in one fell swoop? The idea is certainly intriguing. The district is close to insolvency. If the district were a corporation, it surely would have opened the United States Bankruptcy Code to Chapter 11 and dived in years ago.

But municipal bankruptcies are unusual, despite a spate of them in the early 2010s as local governments wrestled with the fallout from the Great Recession. There was Alabama’s Jefferson County; Harrisburg, the capital of Pennsylvania; the tiny Rhode Island city of Central Falls, and, of course, Detroit.

“In the 38 years that I was bankruptcy lawyer and judge, I never had any dealing with a Chapter 9,” said John Ninfo, a retired federal bankruptcy court judge in Rochester. “They’re pretty rare.”

There have been fewer than 700 municipal bankruptcies since Chapter 9 was enacted in 1937 amid the Great Depression, and most of them were small, special taxing districts and utilities. By contrast, corporate Chapter 11 bankruptcies hover around 10,000 annually.

Even more rare, though, is the school district that files for bankruptcy. Only four have ever done so, and two of their cases were dismissed without a recovery plan. The last filing was a small Missouri school district in 1992.

Why so few school districts file for bankruptcy likely hinges on school officials wisely recognizing what Chapter 9 can and cannot do for a district in the red.

“There are restrictions,” Ninfo said of a judge’s authority in a municipal bankruptcy. “The court doesn’t have the same kind of powers that it might have over corporations and so forth because you still have this interplay between the state and the whole concept of taxes.”

For constitutional reasons, Chapter 9 sharply limits the power of judges to intervene in local governance. So, while judges in Chapter 11 cases oversee significant changes in business operations, judges in Chapter 9 cases can’t interfere with the municipality’s property, or revenue, or governmental affairs.

In other words, the court is powerless to address administrative shortcomings, operations, and academics, each of which would be critical to any recovery plan for a school district. Chapter 9 is merely a debt adjustment, whereas the problems that ail a school district often run much deeper.

And, boy, do the problems run deep in Rochester.

Recall that a state Department of Education watchdog called for “a total reset” of the RCSD a couple of years ago. The reason the RCSD has a deficit is because its head bean counter either couldn’t figure out how much to budget for a variety of expenditures — including health and dental insurance, substitute teachers, transportation, and retirements — or didn’t care if his numbers were accurate.

Now the Securities and Exchange Commission is investigating whether the RCSD lied when seeking short-term financing. Toss in the barriers to learning — like poverty, trauma, and broken homes — confronting an overwhelming majority of Rochester students and you’ve got a maelstrom of systemic issues that no bankruptcy court can fix.

But Chapter 9 can do one thing: It can bring all the stakeholders together.
That happened in San Jose, California, in 1983, and in a tiny California district in 1991. Neither went through the bankruptcy process, but were able to resolve their debt when the filing forced stakeholders to address their problems.

In San Jose, the district used the bankruptcy court to renegotiate an unaffordable labor arbitration with teachers. In the other district, Richmond Unified, the bankruptcy filing prompted a $29 million rescue loan from the state.

“Somebody’s going to have to bail them out because the RCSD can’t work its way out of a $40 million deficit. They can’t lay off that many teachers,” Ninfo said.

“Maybe (bankruptcy court) would be a forum to get everyone together,” he said. “The creditors might say, ‘Wait a minute, this might be the only way out of this box.’ Sometimes bankruptcy courts can accomplish what no one else can accomplish because they can get everyone on the same page.”

David Andreatta is CITY's editor. He can be reached at [email protected].

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