Cuesta Community College May Face
Further Financial Pressure
Cuesta Community College Board of Trustees, in a meeting on April 4, met to deal with ongoing shortfalls in state revenues by slashing another $3 million from the institution’s already skimpy budget. The College, which unfortunately is in danger of losing its accreditation, eliminated 26 positions, sent pink slips to 16 people and reduced course offerings by 75 class sections, according to an April 19 – April 26 edition of the New Times. See, www.newtimesslo.com.
And now a bill being discussed in the State Senate Education Committee would reshape the entire California community College system by mandating assessment tests for incoming students, limiting state financial assistance and holding students to a strict student success plan that would more effectively move them through the system. “This fundamentally puts to question the historic mission of the community college system,” according to Henry A.J. Ramos who sites on the Board of Governors (BOG), a 17-member advisory board that helps formulate policy for California’s community colleges.
Low income students may now qualify for a BOG waiver allowing them to choose as many transferrable courses as they wish without paying unit fees. If Senate Bill 1456 passes as expected, restrictions would be imposed on the BOG waiver that would require students to pay full price after 110 units and for any classes they are required to retake more than three times.
In addition, the new law would require community colleges to use results from assessment tests to draft a Student Education Plan (SEP) that must include an individualized course plan, recommendations for support services and tutoring in areas of any deficiency. Students deviating from their SEPs would lose registration priority.
The proposed changes were recommended by the Student Success Task Force, a 21-member group of faculty and college presidents, business leaders and students that was formed in 2011 to solve declining statewide rates of educational acheivement. Cuesta College President Gil Stork believes that such overbearing regulations could thwart the traditional community college philosophy of “come as you are,” repress student freedoms and discourage experimentation. Moreover, he worries that the college “will not have the staff it takes to provide those services.”
State Senator Alan Lowenthal is the chairperson for the Senate Education Committee. He told the New Times that the new rules wouldn’t limit student access to community colleges. On the contrary, he argued they would improve the system’s efficiency by ensuring that students are able to obtain the necessary skills and certificates they need to achieve their goals.
The Bankruptcy Option
What happens when a “municipality” — a political subdivision, public agency or instrumentality of the State (see, 11 U.S.C. §101(40)) experiences economic stress so great that bankruptcy protection may be required?
By referencing “bankruptcy” in this article, I do not mean in any way to suggest that Cuesta College is in that position but with federal and state resources stretched to the breaking point by arguably the worst recession since the great depression, many such entities may be reviewing their options under Chapter 9 of the Bankruptcy Code.
State Control of the Process
One of the unique and interesting limitations in Chapter 9 is that the bankruptcy code “. . . does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise, but- –
(1) a State law prescribing a method of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition; and
(2) a judgment entered under such a law may not bind a creditor that does not consent to such composition.” 11 U.S.C. §903.
Thus, State law must specifically authorize a municipality to file bankruptcy under Chapter 9—an involuntary Chapter 9 cannot be commenced. In re Mount Carbon Metropolitan Dist., 242 B.R. 18 (Bankr.D.Colo. 1999).
Eligibility for Chapter 9
To be eligible under Chapter 9, an entity must be:
1) a municipality (i.e., a political subdivision, public agency or instrumentality of the State) (§109(c));
2) specifically authorized by state law to be a debtor under Chapter 9, or by a governmental officer or organization empowered by state law to authorize such entity to be a Chapter 9 debtor (§109(c)(2));
3) insolvent (§109(c)(3)); and
4) desirous of effecting a plan to adjust or resolve its debts (§109(c)(4)); and
(a) has obtained the majority agreement of creditors in each impaired class of claims (§109(c)(5)(A));
(b) has negotiated in good faith but failed to obtain the majority agreement of creditors in each impaired class of claims (§109(c)(5)(B));
(c) negotiation with creditors is impracticable (§109(c)(5)(C)); or
(d) reasonably believes that a creditor may attempt to acquire a transfer that is avoidable under the preference provision of §547 (§109(c)(5)(D)).
“Insolvency” requires that a municipality is not generally paying its debts as they become due, unless such debts are in bona fide dispute (§101(32)(c)). Whether debts are not being paid as they come due is determined from a retrospective point of view. Thus, a municipality can file Chapter 9 before it is actually not paying its bills with the reference point being the date the bankruptcy petition is filed. In re City of Bridgeport, 129 B.R. 332 (Bankr.D.Conn.1991). Moreover, the debtor’s solvency or insolvency is analyzed on the basis of cash flow, not budget deficiency. Ibid. The point to all this is that a municipality isn’t forced to wait until it runs out of cash in order to file bankruptcy—it has to demonstrate that it will run out of money in the near future and be unable to pay its debts as they come due. Ibid.
Large City Eligibility
Ephriam K. Liebowitz, in his treatise titled, “Municipal Bankruptcy Under the Code,” argues that Bankruptcy Code provisions make it possible for large cities to become eligible to file a Chapter 9petition because they can legally claim an inability to negotiate with creditors on the ground of impracticability. He contrasts present Code provisions with those of the earlier 1898 Act requiring that 51% of the debtor’s creditors must accept a plan with no provision for the “impracticality” of creditor negotiations.
According to Liebowitz, the 1898 provision presented a problem for large municipalities, such as New York City whose bonds were primarily in bearer form at the time of that city’s fiscal crisis. Accordingly, it would have been difficult for the city to locate the requisite number of bondholders and negotiate with them. Further, the very size of the bondholder group might make it impossible for a large city to negotiate a plan. See, Liebowitz, Municipal Bankruptcy Under the Code (187 New York LJ No. 116, p. 1, June 17, 1982)