Record Number of California School Districts Face Bankruptcy

A record number of California school districts face bankruptcy, state schools’ chief Tom Torlakson announced Monday. The Los Angeles Times reported this week that 12 school districts, mostly in northern California, are currently on the verge of financial failure, while an additional 176 school districts are at risk. And the problem could worsen if Gov. Brown’s tax initiative fails in November. Only 53 of the state’s school districts are in sound financial health.

California Poised to Take Over Dozens of Insolvent School Districts

Huck/Konopacki Labor Cartoons

110 California school districts are at risk of insolvency, compared with 37 five years ago, according to the Bay Citizen. Ironically, the distressed districts, which face expensive state takeovers, are distressed precisely because the state has slashed $21 billion from public education funding over the last three years (combined with declining revenue from property taxes and increasing costs).

As federal stimulus funding dries up at the end of this school year, the number of districts going belly up is likely to grow. According to the Bay Citizen, many districts are draining their strategic reserve funds to survive another school year, which puts them at risk of going belly up the following year.

Almost 50% of California's most desperate school districts are in the San Francisco Bay Area, which has some of the highest property values in the state. The Bay Citizen looked at financial reports from the 2010-11 school year and found that 13 CA school districts received negative certifications from the state and were not expected to meet all of their financial obligations. Six of these districts were in the Bay Area. 97 other school districts were identified as at risk of failing to meet their financial obligations.

Under California law, school districts cannot file for bankruptcy. Rather, the state must take them over and appoint administrators to bolster their finances. Since the state has already made it clear that it has no desire to fund schools sufficiently, the only way to shore up struggling school districts is by cutting costs. This will likely cause massive layoffs, exacerbating the state’s already high unemployment rate of nearly 12%, or lead to furloughs and shortened school years, which will dramatically reduce teachers’ already low incomes. It could also lead to increased class sizes, reduced course offerings, school closures and other cuts that will negatively impact student safety and wellbeing.

Much of this nightmare scenario has been playing out for the last few years in school districts that were already on the state’s watch list prior to the financial meltdown. Hayward Unified School District, for example, slashed around $26 million from its operating costs by firing staff, increasing class sizes and cutting music programs for fifth graders. Teachers who weren’t fired will be forced to take three to seven furlough days this year. Despite these “sacrifices,” the district is still considered at-risk and is being watched by the state.

Teachers’ Pensions Threatened in California

The California teachers’ pension fund, CalSTRS, has been placed on the state’s high-risk list by State Auditor Elaine Howle, according to a recent article, “State Auditor calls CalSTRS a high risk,” by John Fensterwald - Educated Guess.

The move was largely a capitulation to slash and burn bosses and millionaires who want to preserve their historically low tax rates, business subsidies and lavish lifestyles by imposing austerity on the rest of us. CalSTRS is actually reasonably healthy and able to make payouts to retirees for many years. It is NOT facing an impending catastrophe. In fact, it is not projected to become insolvent until 2042, leaving plenty of time to deal with its unfunded liabilities. Even CalSTRS CEO Jack Ehnes criticized the Little Hoover Commission’s recommendations to slash CalSTRS and called many of its suggestions naïve or impractical. He also pointed out that many of its premises are wrong.

However, this fabricated crisis (or exaggerated problem) is being used to justify benefits cuts for retirees and increased contributions by current employees (equivalent to pay cuts, since they would decrease take-home pay), slashing living standards for both groups. At the same time, these “reforms” would increase income to the state and decrease pressure to increase taxes, something that benefits the wealthy far more than the rest of us.

It is true that there are large unfunded liabilities. However, it is important to understand why and address these fundamental causes, not only to close the gap but to prevent it from growing or returning again later. None of the causes, by the way, has anything to do with teacher greed or luxury. In fact, most teachers receive only $3,000 per month, which is barely enough to live on in most parts of California without other supplemental income.

One major cause was the financial collapse, which resulted in a 30% drop in the value of the CalSTRS portfolio, Fensterwald wrote in his piece. This was an unnatural disaster caused by the greed and, in many cases, criminal behavior of bankers, insurance giants and finance capitalists who, instead of being punished and forced to pay restitution, have received generous taxpayer funded bailouts that have enabled them to grow even wealthier. One obvious solution to any pension woes is to have the rich or, more specifically, bankers and financial giants, pay greater taxes and use the increase revenue to help bail states out of all their financial problems, including their unfunded public employee pensions.

Another major cause of the unfunded liabilities has been states’ refusals to make the required payments on time. Unfortunately, none of the states are in any position right now to pay for their past mistakes (they can’t afford to pay for their current ones). Their biggest mistake was to buy into the anti-tax orgy and allow their own budgets to be decimated through declining corporate and marginal rate personal income taxes.

When we hear pundits demand that the state learn to live within its means, they are implying cuts, and nothing but cuts. However, the metaphor is meant to appeal to working families who must budget according to their incomes. Obviously, when one has a low wage job, one must make many sacrifices at home in order to make ends meet. However, with higher wages or investment income (as is common among the wealthy), one can spend more lavishly and carelessly. The state does not have to slash social programs and job creating spending in order to live within it means. It could (indeed, it must) increase its income, not just to live within its means, but to solve its myriad problems, like funding its pensions, paying decent wages to its employees, improving its schools, caring for its children, elders and infirm.

Pension Reform: A Union-Busting Trojan Horse

Attacking teachers’ pensions is a Trojan horse in the war against teachers unions. Any attack on pensions takes time and energy away from other important battles, of course. However, the attacks also serve to divide and conquer teachers as they generally offer existing and/or veteran teachers a more generous benefit than younger teachers and future hires.

An example of this is SB 27 , which would eliminate spiking – the practice of bolstering employees’ pay in their final year in order to increase their annual pensions. This is generally done by getting a promotion and pay increase or taking on additional work for extra pay. It would also stop double dipping—the practice of coming back to work as a contractor (e.g., substitute teaching) while still collecting a pension.

The bill has passed the Senate, but is being opposed by roughly a dozen public employee groups, including the CalSTRS board and the CTA. They argue that the bill would take away benefits already promised to and earned by existing employees. Proponents say that applying the “reforms” to all employees, current and future, is the only way to get the house back in order. The alternative, which they would probably accept, and CTA would likely concede, would be to apply the new rules only to future employees, effectively creating a two-tiered benefits package in which younger teachers get a much worse stake than their veteran colleagues. This would exacerbate generational tensions that already exist within the union and significantly reduce the chances for effective organizing and mobilization around other important issues.