July 1, 2009 at 1:00 am

Bankruptcy not only option for DPS

Financial manager explores multi-year plan to end deficit

Detroit Public Schools officials said Tuesday that a Chapter 9 bankruptcy filing is just one of many options being considered to address its multi-year deficit, but questions remain on how much such a filing would cost and whether the district would reap adequate benefits.

Meanwhile, Michigan Department of Education officials said a Chapter 9 filing, which is available for municipalities, would be unprecedented in Michigan.

Robert Bobb, the district's emergency financial manager, floated the possibility during a budget presentation Monday, in which he said the district is facing a $259.5 million deficit.

Bobb called bankruptcy a "last resort," but said the district met with attorneys last week to explore the ramifications.

Under Chapter 9, a financially distressed municipality receives protection from creditors while it develops and negotiates a plan for adjusting debts, according to a primer on Chapter 9 from the U.S. Courts system. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Also, there is no provision for liquidating assets and distributing the proceeds to creditors.

Bobb is exploring a multi-year deficit reduction strategy and has talked to Mike Flanagan, state superintendent of public instruction, about his plans.

Michigan Department of Education officials confirmed the talks with Bobb.

"The department has and will continue to work with DPS as they move forward with their deficit reduction plan," said spokeswoman Jan Ellis.

While state officials said school districts are required by law to adopt balanced budgets, they have also said districts that are already in deficit can take several years to return to solvency once they have a state-approved deficit-elimination plan.

Keith Johnson, president of the Detroit Federation of Teachers, said the union's attorneys are reviewing how Chapter 9 would affect his members, but it's too soon to say.

"We want to be apprised of any impact to the union and membership," Johnson said.