Ex-judge says without state money Detroit schools will close

By Karen Pierog

(Reuters) - Steven Rhodes, a former federal bankruptcy judge who is now running the Detroit Public Schools (DPS), said on Friday he is prepared to close the debt-laden district next month if the Michigan Legislature fails to throw it a financial lifeline.

Rhodes was appointed by Governor Rick Snyder last month as transition manager of the state's largest public school district. Lack of funding and mismanagement have left students to learn in cold and dirty classroom conditions.

Asked by Reuters in a telephone interview what he would do if there is no legislative fix, Rhodes was blunt: "Close the schools."

But he also said he had "the greatest confidence" that state lawmakers would take action over the next two weeks to prevent such an outcome. Rhodes cautioned there was no "Plan B" to avoid a shutdown once the district's money runs out on April 8.

"It would be a disaster for the kids. It would be a disaster for parents. It would be a disaster for the city. It would be a disaster for the state. It can't happen. So I don't believe it will happen," he said.

Rhodes oversaw the city of Detroit's historic bankruptcy before he retired from the bench last year.

He has said DPS, which operates 97 schools for about 47,000 students, has money to pay teachers and other staff only through April 8 and that he will not ask them to work for free.

DPS has $3.4 billion outstanding in debt and other obligations. Those include $1.5 billion of general obligation bonds issued through Michigan's school bond loan fund and a $1.3 billion unfunded pension liability to the Michigan Public Employee Retirement System.

Despite being under state oversight since 2009, the school district has a $515 million operating deficit.

Shutting down the schools presents its own problems, regardless of whether the district has any money left for operations.

The Detroit Federation of Teachers, which represents 3,800 educators, called an emergency meeting with school union representatives for March 14 to formulate an action plan that could include an April 12 march on the state capitol, according to Ivy Bailey, the union's interim president.

"This is kind of unprecedented," she said, referring to a possible shutdown. "We do have our legal department looking into it."

Ruby Newbold, president of the Detroit Association of Educational Office Employees, which represents 289 DPS workers, said the only way Rhodes could legally shut down the district without violating the union's contract would be to lay off staff.

But then DPS would have to cover those workers through unemployment insurance, she added.

COUNTDOWN

Not only is cash running short, but so is time for legislative action. State lawmakers go on break on March 25 and return on April 12.

So far the Republican-controlled House and Senate have only held hearings on bills to create two entities - the Detroit Community District to run the schools and the current DPS to retire debt.

The House and Senate bills are not identical, complicating passage.

Governor Snyder is seeking $72 million annually over 10 years to fund the plan, using money from Michigan's share of a nationwide settlement with U.S. tobacco companies. He has also asked lawmakers for an immediate $50 million to enable DPS to continue to pay employees and vendors.

Rhodes said DPS would not be helped by a Chapter 9 municipal bankruptcy filing, an extremely rare action for public school districts nationwide.

"There's secured debt and guaranteed debt by the state," he said. "There's only $50 million in vendor debt that's unsecured debt that a bankruptcy could logically deal with. It's not worth it for that."

In addition, Rhodes' contract with the state, which began on March 1 and could extend through Sept. 30, stipulates at his request that he would not take DPS to federal bankruptcy court.

"When I left the court, I really promised myself and my colleagues that I would not appear before them really ever," he said. "If they do want to pursue a bankruptcy, of course they are perfectly welcome to do that. They'll just find someone else to do it."

The former judge said he will leave his $18,750-a-month job as the district's transition manager once an appointed or elected school board takes control of DPS.

"I think we can trust the people of Detroit to elect strong and qualified and effective school board leaders who will make the decisions necessary to allow public education in Detroit to succeed and compete with (charter schools)."

(Reporting by Karen Pierog in Chicago; Editing by Daniel Bases and Matthew Lewis)

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