What happens when a school district can't pay the bills?

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What happens when a school district can't pay the bills?

Post by 19delta on Thu Jun 01, 2017 1:10 am

http://www.mycarrollcountynews.com/opinion/article_379fd8cc-26a1-11e7-a120-0ba6a1dcb202.html

http://www.prairieadvocate.com/2017/03/20/public-to-west-carroll-board-let-us-help-you-help-our-school-survive/ada73gz/

I know that there are quite a few districts in similar dire financial straits around the state. My question is, what is going to happen if the money actually runs out and these districts can't pay the bills? What would the actual process look like? Would the school board simply vote to dissolve the district? Would surrounding school districts be forced to take the students from the closing district?

Is there any precedent for something like this happening?
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Re: What happens when a school district can't pay the bills?

Post by mc140 on Thu Jun 01, 2017 1:36 pm

I think the state steps in and takes over.

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Re: What happens when a school district can't pay the bills?

Post by Teetime on Thu Jun 01, 2017 3:24 pm

The State?

Isn't that the source of the problem?

I think it would be a forced consolidation with a nearby district or districts. That district(s) would also inherit the tax base.

For West Carroll, it sounds like the tax base might be a big part of the problem.

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Re: What happens when a school district can't pay the bills?

Post by 19delta on Fri Jun 02, 2017 3:01 pm

Teetime wrote:The State?

Isn't that the source of the problem?

I think it would be a forced consolidation with a nearby district or districts. That district(s) would also inherit the tax base.

For West Carroll, it sounds like the tax base might be a big part of the problem.

That is what I was thinking. The state BOE would force adjoining districts to absorb West Carroll's students.

What would happen to West Carroll's debt? Would the districts that are forced to take West Carroll's students also have to take a share of West Carroll's debt? I live in a district that would certainly be affected if West Carroll is dissolved. We would get some of their students. But, our district is in good shape financially. It doesn't seem fair that districts that have managed their finances responsibly would have to absorb the debt of a district that hasn't. I also know that political decisions are seldom "fair".

Has this situation happened previously anywhere in Illinois? I know districts have been consolidated, but that is always (at least to my knowledge) a mutual decision between districts. Has there ever been a situation in which a public school district was in such bad shape financially that it simply could not continue to operate?

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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Fri Jun 02, 2017 5:36 pm

The debt would stay with the residents of the WC school district. It would not transfer over to the new district.

At least that was how it was described when Bement was in talks of deactivating their HS and sending them to CG.
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Re: What happens when a school district can't pay the bills?

Post by Teetime on Tue Jun 06, 2017 10:03 am

This article was 14 months ago and about CPS....


You've heard about the huge budget deficit Chicago Public Schools faces. What that means is Chicago Public Schools may not be able to open for classes this fall.

If the district can't overcome its $1.1 billion deficit, what could it do?

One option could be to seek protection in federal bankruptcy court. That would let the district open its 664 schools on time while it negotiated new terms with its teachers and everyone else who is owed money.

State law does not allow CPS and most other government bodies to file for bankruptcy. A bill introduced by Rep. Ron Sandack, R-Downers Grove, would open that door. His proposal remains a work in progress. Sandack tells us he will file more elaborate legislation to establish guidelines for how local governments in Illinois could seek federal bankruptcy court protection.

State law requires that CPS adopt a balanced budget. The district faces a sharp rise in payments to its teachers pension fund — and balanced its budget this year only by counting 14 months of revenue against 12 months of expenses. A coming decision from the Illinois Supreme Court could determine if the school system has any flexibility to restructure its pension obligations, but even the most favorable ruling wouldn't bring immediate relief.

If CPS could seek bankruptcy protection, what then?

First, CPS would have to prove to a federal bankruptcy judge that it was insolvent, that is, it could not pay its debts. It would have to show that it had negotiated with the teachers union, vendors and others in good faith but without reaching a financially sound conclusion. Those are huge hurdles, Douglas Baird, a bankruptcy expert at the University of Chicago Law School, tells us. "There's always a huge fracas at the start of these cases, just over the threshold of eligibility,'' Baird says. "It's not as if you can simply waltz into bankruptcy court, get rid of all your debts and creditors, and waltz out again."

CPS would propose a plan to spend the money it has and come up with a blueprint for a sustainable budget going forward. Some companies and people who are owed money likely wouldn't get paid in full. Chapter 9 bankruptcy isn't swift. Detroit spent about 17 months in bankruptcy. Stockton, Calif., which filed in 2012, only recently emerged.

Under the bankruptcy court's protection, CPS would continue to educate its students. But it could be overseen by an "emergency manager" empowered by the court to take control of the district's finances and deal with a raft of creditors. In Detroit, the emergency manager, Kevyn Orr, had immense power to rewrite contracts and liquidate city assets to pay debts.

One major question in a bankruptcy filing: What about those big-gulp pension payments? Rulings in Detroit and Stockton, Calif., bankruptcy cases don't predict what a federal judge would do in Chicago. But they do offer a strong hint of the possible:

Union and pension officials in those cases figured that pension cuts were off the table, outside the range of the court's options. But the judges in both cases said that public pensions could, in fact, be trimmed in a bankruptcy case. Christopher Klein, the federal judge in the Stockton case, scolded California's massive public pension system, CalPERS, for insisting its pensions were sacrosanct: "The bully (CalPERS) may have an iron fist, but it also turns out to have a glass jaw."

One note for Illinois union officials: Stockton didn't even ask to freeze its pension plans. But the judge nevertheless volunteered that such a request was allowed. In the end, Detroit retirees accepted modest cuts to their pensions and other benefits; Stockton did not touch its retirees' pensions but scaled back retirees' health benefits.

Pensions wouldn't be the only CPS costs scrutinized by the bankruptcy court. Every expenditure, including the district's labor arrangements with its teachers and other staffers, would come under the microscope.

So would the egregious interest rate swaps in which CPS gambled on a risky bond market. Those turned out to be lousy bets. The district says it is negotiating with banks to avoid millions of dollars in payments.

What would be fair for everyone involved — students, educators, taxpayers, bondholders? That's for a federal judge to decide.

For now, the door to bankruptcy court remains closed. If it stays closed, will we see a dramatic property tax increase? Or draconian spending cuts? Who knows?

But CPS has huge bills to pay. It doesn't have enough money. Its options are limited, and its time to find that $1.1 billion to balance its next budget grows short. If the district isn't preparing to build a case for bankruptcy, it ought to be.

Copyright © 2017, Chicago Tribune
This article is related to: Editorials


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Re: What happens when a school district can't pay the bills?

Post by 19delta on Tue Jun 06, 2017 11:12 am

Head Skin wrote:The debt would stay with the residents of the WC school district.  It would not transfer over to the new district.

At least that was how it was described when Bement was in talks of deactivating their HS and sending them to CG.

What did Bement eventually do?
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Re: What happens when a school district can't pay the bills?

Post by 19delta on Tue Jun 06, 2017 11:16 am

Teetime wrote:This article was 14 months ago and about CPS....


You've heard about the huge budget deficit Chicago Public Schools faces. What that means is Chicago Public Schools may not be able to open for classes this fall.

If the district can't overcome its $1.1 billion deficit, what could it do?

One option could be to seek protection in federal bankruptcy court. That would let the district open its 664 schools on time while it negotiated new terms with its teachers and everyone else who is owed money.

State law does not allow CPS and most other government bodies to file for bankruptcy. A bill introduced by Rep. Ron Sandack, R-Downers Grove, would open that door. His proposal remains a work in progress. Sandack tells us he will file more elaborate legislation to establish guidelines for how local governments in Illinois could seek federal bankruptcy court protection.

State law requires that CPS adopt a balanced budget. The district faces a sharp rise in payments to its teachers pension fund — and balanced its budget this year only by counting 14 months of revenue against 12 months of expenses. A coming decision from the Illinois Supreme Court could determine if the school system has any flexibility to restructure its pension obligations, but even the most favorable ruling wouldn't bring immediate relief.

If CPS could seek bankruptcy protection, what then?

First, CPS would have to prove to a federal bankruptcy judge that it was insolvent, that is, it could not pay its debts. It would have to show that it had negotiated with the teachers union, vendors and others in good faith but without reaching a financially sound conclusion. Those are huge hurdles, Douglas Baird, a bankruptcy expert at the University of Chicago Law School, tells us. "There's always a huge fracas at the start of these cases, just over the threshold of eligibility,'' Baird says. "It's not as if you can simply waltz into bankruptcy court, get rid of all your debts and creditors, and waltz out again."

CPS would propose a plan to spend the money it has and come up with a blueprint for a sustainable budget going forward. Some companies and people who are owed money likely wouldn't get paid in full. Chapter 9 bankruptcy isn't swift. Detroit spent about 17 months in bankruptcy. Stockton, Calif., which filed in 2012, only recently emerged.

Under the bankruptcy court's protection, CPS would continue to educate its students. But it could be overseen by an "emergency manager" empowered by the court to take control of the district's finances and deal with a raft of creditors. In Detroit, the emergency manager, Kevyn Orr, had immense power to rewrite contracts and liquidate city assets to pay debts.

One major question in a bankruptcy filing: What about those big-gulp pension payments? Rulings in Detroit and Stockton, Calif., bankruptcy cases don't predict what a federal judge would do in Chicago. But they do offer a strong hint of the possible:

Union and pension officials in those cases figured that pension cuts were off the table, outside the range of the court's options. But the judges in both cases said that public pensions could, in fact, be trimmed in a bankruptcy case. Christopher Klein, the federal judge in the Stockton case, scolded California's massive public pension system, CalPERS, for insisting its pensions were sacrosanct: "The bully (CalPERS) may have an iron fist, but it also turns out to have a glass jaw."

One note for Illinois union officials: Stockton didn't even ask to freeze its pension plans. But the judge nevertheless volunteered that such a request was allowed. In the end, Detroit retirees accepted modest cuts to their pensions and other benefits; Stockton did not touch its retirees' pensions but scaled back retirees' health benefits.

Pensions wouldn't be the only CPS costs scrutinized by the bankruptcy court. Every expenditure, including the district's labor arrangements with its teachers and other staffers, would come under the microscope.

So would the egregious interest rate swaps in which CPS gambled on a risky bond market. Those turned out to be lousy bets. The district says it is negotiating with banks to avoid millions of dollars in payments.

What would be fair for everyone involved — students, educators, taxpayers, bondholders? That's for a federal judge to decide.

For now, the door to bankruptcy court remains closed. If it stays closed, will we see a dramatic property tax increase? Or draconian spending cuts? Who knows?

But CPS has huge bills to pay. It doesn't have enough money. Its options are limited, and its time to find that $1.1 billion to balance its next budget grows short. If the district isn't preparing to build a case for bankruptcy, it ought to be.

Copyright © 2017, Chicago Tribune
This article is related to:  Editorials


Wow. That is pretty incredible.
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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Tue Jun 06, 2017 12:49 pm

19delta wrote:
Head Skin wrote:The debt would stay with the residents of the WC school district.  It would not transfer over to the new district.

At least that was how it was described when Bement was in talks of deactivating their HS and sending them to CG.

What did Bement eventually do?
Take out more loans and stayed open. They borrowed 600k the year that study was done.
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Re: What happens when a school district can't pay the bills?

Post by 19delta on Thu Jun 08, 2017 2:42 pm

Head Skin wrote:
19delta wrote:
Head Skin wrote:The debt would stay with the residents of the WC school district.  It would not transfer over to the new district.

At least that was how it was described when Bement was in talks of deactivating their HS and sending them to CG.

What did Bement eventually do?
Take out more loans and stayed open.  They borrowed 600k the year that study was done.

And I don't get that, either.

Who keeps loaning these school districts money?
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Re: What happens when a school district can't pay the bills?

Post by Teetime on Thu Jun 08, 2017 2:54 pm

I would loan them money.

Maybe not the CPS, but if a downstate SD was having cash flow problems due to the State's slow pay, I would feel really good about the fact that their debts would be paid in full eventually. I would charge a high rate of interest because I'm taking risk by making that loan....but if I were a lender, that's the business I'm in.

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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Thu Jun 08, 2017 3:20 pm

19delta wrote:
Head Skin wrote:
19delta wrote:
Head Skin wrote:The debt would stay with the residents of the WC school district.  It would not transfer over to the new district.

At least that was how it was described when Bement was in talks of deactivating their HS and sending them to CG.

What did Bement eventually do?
Take out more loans and stayed open.  They borrowed 600k the year that study was done.

And I don't get that, either.

Who keeps loaning these school districts money?
Whoever buys their bonds.
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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Thu Jun 08, 2017 3:23 pm

Teetime wrote:I would loan them money.

Maybe not the CPS, but if a downstate SD was having cash flow problems due to the State's slow pay, I would feel really good about the fact that their debts would be paid in full eventually. I would charge a high rate of interest because I'm taking risk by making that loan....but if I were a lender, that's the business I'm in.
If the state were interested in keeping those districts open, it would be a sound investment. They aren't. The debt problems from schools isn't entirely because of the budget. The state has been cutting funding for smaller down state schools for years. It's their way of eliminating so many school districts in Illinois.

The budget BS is just further expediting their job for them.
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Re: What happens when a school district can't pay the bills?

Post by 19delta on Thu Jun 08, 2017 3:48 pm

Head Skin wrote:
19delta wrote:
Head Skin wrote:
19delta wrote:
Head Skin wrote:The debt would stay with the residents of the WC school district.  It would not transfer over to the new district.

At least that was how it was described when Bement was in talks of deactivating their HS and sending them to CG.

What did Bement eventually do?
Take out more loans and stayed open.  They borrowed 600k the year that study was done.

And I don't get that, either.

Who keeps loaning these school districts money?
Whoever buys their bonds.

It was more of a rhetorical question...I should have made that more clear. My point was that I just can't believe that investors still are willing to buy bonds from public entities that have shown a history of financial trouble.

I understand Teetime's point...charge a high rate of interest to a risky borrower. But what would lead an investor to believe that the slow payments coming from the state are going to speed up? What is there to suggest that there is light at the end of the tunnel?

In Bement's case, are they paying back on that $600,000 loan? I'm wondering what the terms were. If they eventually pay back that $600,000, how much will it have cost them in real dollars? And at what point would a default result in those investors losing their money?

I'm assuming that when Detroit and Stockton defaulted, investors who had purchased municipal bonds were basically S.O.L. It probably isn't much different with a school district, I would imagine.
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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Thu Jun 08, 2017 4:21 pm

The way it was presented in the study for the schools to come together, if Bement can't pay back their bonds as a school district it then falls on the people of the community to pay them back. People keep buying the bonds because they know they'll get paid one way or another.
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Re: What happens when a school district can't pay the bills?

Post by 19delta on Thu Jun 08, 2017 4:57 pm

Head Skin wrote:The way it was presented in the study for the schools to come together, if Bement can't pay back their bonds as a school district it then falls on the people of the community to pay them back.  People keep buying the bonds because they know they'll get paid one way or another.

And that is just crazy. I can't believe that a community would agree to that. But communities do it all the time, apparently.

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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Thu Jun 08, 2017 6:34 pm

You don't have to agree to it. I mean, you vote on them being able to issue bonds, but...

I honestly don't know if all bond issues have to be put up to a public vote. I know they usually are, but man I don't recall the bement ones being voted on. I know the school board approved them, but I don't remember a referendum.
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Re: What happens when a school district can't pay the bills?

Post by Teetime on Thu Jun 08, 2017 10:28 pm

Some bonds may be issued subject to a "back door" referendum which only requires a vote if 7.5% of the registered voters petition the school board within 30 days of the board's vote to issue.

I seem to remember that "health, life, safety" bonds don't require a vote because they are required for the student's safety (in the opinion of an architect or engineer)

The grid in the middle of this link describes the different types of bonds.

http://www.icemiller.com/MediaLibraries/icemiller.com/IceMiller/PDFs/publications/Financing-Options-Using-Bonds-for-Illinois-School-Districts.pdf

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Re: What happens when a school district can't pay the bills?

Post by 19delta on Fri Jun 09, 2017 10:07 am

Teetime wrote:Some bonds may be issued subject to a "back door" referendum which only requires a vote if 7.5% of the registered voters petition the school board within 30 days of the board's vote to issue.

I seem to remember that "health, life, safety" bonds don't require a vote because they are required for the student's safety (in the opinion of an architect or engineer)

The grid in the middle of this link describes the different types of bonds.

http://www.icemiller.com/MediaLibraries/icemiller.com/IceMiller/PDFs/publications/Financing-Options-Using-Bonds-for-Illinois-School-Districts.pdf

Thanks...that's very informative!
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Re: What happens when a school district can't pay the bills?

Post by Teetime on Mon Jun 12, 2017 11:17 pm

Head Skin wrote:
If the state were interested in keeping those districts open, it would be a sound investment.  They aren't.  The debt problems from schools isn't entirely because of the budget.  The state has been cutting funding for smaller down state schools for years.  It's their way of eliminating so many school districts in Illinois.

The budget BS is just further expediting their job for them.

https://www.illinoisreportcard.com/state.aspx?source=environment&source2=revenuepercentages&Stateid=IL


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Re: What happens when a school district can't pay the bills?

Post by Head Skin on Mon Jun 12, 2017 11:36 pm

Nearly all of each district's transportation budget comes from the state. Those haven't been funded sufficiently since the state said we needed fewer districts. Shocking coincidence.
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