The Michigan Chamber of Commerce continues to be a strong advocate for high standards of student achievement and accountability in K-12 education. We believe the recent decision by the State Superintendent of Public Instruction to delay implementation of the state's accreditation system was not in the best interest of students, parents or Michigan's job providers. The current accreditation system, in place since 1995, is based on seven different measures of school operations and student performance. This fair and reasonable system could and should have become operational in the spring of 2001 as originally planned.

We are also concerned that the State Board of Education effort now underway to put in place a new system that uses multiple measures to evaluate school buildings may be yet another attempt by some educators to delay and avoid accountability. Shifting the focus of the state's accreditation system away from a clear emphasis on quantifiable measures of student achievement and school operations to a multitude of more subjective factors is not acceptable.

Background

"A successful education system assists schools struggling to improve, rewards exemplary schools, and penalizes schools that persistently fail to educate their students." - Business Roundtable's Nine Essential Components for a Successful Education System.

Over the past decade, the Chamber has worked with the Michigan Department of Education in improving the system of accountability and accreditation.  Chamber action was guided by the Nine Essential Components for a Successful Education System, work with the Michigan Business Leaders for Education Excellence and the findings of Gap Analysis I, II and III. Using research from these documents, the Chamber adopted a policy in support of Action Steps for Education Quality in 1998. This policy included specific steps that we believe can improve Michigan's public schools and respond to a recognizable gap on the issue of school accountability.

In Gap Analysis III, we identified the following as a gap:

• Despite the statewide effort aimed at improving the quality of education for all students, several districts continue to fare poorly on state assessments and other measures of student, school, and district progress. Additionally, the lack of concrete sanctions for those districts provides no incentive for improvement.

In the most recent Gap Analysis Study, participants agreed that the status quo is not acceptable for failing schools. Some schools fail to provide a high quality education for their students that persistently score low on MEAP test and other measures. Such schools should be held accountable for failing to make progress toward achieving higher standards. State and local school officials must be ready to reward and support schools that take effective initiative and help those struggling to meet new standards.

Most study participants saw a role for the state in facilitating the process of school improvement. The state can provide focused technical assistance and other resources to the district without eroding public trust, a likely outcome of a state takeover. The state Department of Education's creation of a field services unit is a positive sign that this sort of help is available to struggling districts. Furthermore, the Plan for Expanded Technical Assistance and Intervention for Low Performing Schools would provide a clear direction and method for helping schools. 

The Michigan Legislature directed the Department of Education to develop the current system. The initiative was backed by the Governor and major education groups. It is aligned with previous activities around efforts to raise academic standards, improve assessment as well as school accountability. Despite establishing a low standard in academic performance for accreditation, the Michigan Chamber supported the effort. The Department worked with school districts for four years in bringing about this new accountability system and were scheduled to release the data in the spring of 2001. Unfortunately, the new State Superintendent of Public Instruction decided to stop the release of this report and to redesign the accreditation system because he viewed it as "flawed."

The Michigan Chamber of Commerce filed a Freedom of Information Request to obtain the data contained within the report. The Department complied with the request. A review of the document found that close to one third of the four thousand school buildings in Michigan would not have received accreditation status because of poor performance in academic subject areas, low participation in the assessment program or the lack of a school improvement plan which outlines school district efforts to increase attendance, reduce drop out rates and raise academic achievement.

The Superintendent of Public Instruction has established a new committee and given them the responsibility to redesign the accreditation system and put this new system in place by the end of the 2001 - 2002 school year.

The Michigan Chamber of Commerce supports repeal of Michigan's higher education Tuition Tax Credit Law, provided that any re-directed funding for higher education base appropriations is used for tuition relief and incorporates the following principles and commitments:

• that education for a productive workforce is one of the many key elements, including a solid public infrastructure, a competitive tax climate, and a fair regulatory environment, to maintaining a competitive business climate.
• that state universities focus on maintaining an ongoing and concerted effort to control costs and seek further operating efficiencies.
• that while offering the highest quality education should be a top priority, state universities should strive to make higher education affordable. 

Background

As of the summer legislative recess, the Michigan Legislature had not completed three remaining budget bills, one of which was the Higher Education Budget. Declining revenues have placed restrictions on most areas of the state budget. For fiscal year 2001-02, the higher education budget was only increased 1.5 percent, and while funding in the last decade has significantly increased and outpaced inflation, undergraduate tuition increased over 80 percent. Subsequent to the legislative recess and the budget bills left unfinished, Michigan's public universities announced tuition hikes between 6.9 and 19 percent.

Two of the leading candidates for Governor, Dick Posthumus and James Blanchard, have both called for restraint in tuition increases.

The Presidents Council has recommended the alternative solution of repealing the generally unused Tuition Tax Credit Law and using these set-aside funds to boost base appropriations for higher education, coupled with a commitment to lower the tuition increases. The subsequent appropriation increase could net an extra $27 million. Repeal of the tax credit would also apply to independent colleges and community colleges. The Association of Independent Colleges and the Michigan Community Colleges Association support repeal of the tax credit. Governor Engler and some legislators also support the proposal.

In response to a request from state universities, the Michigan Chamber of Commerce supports efforts to repeal Michigan's higher education Tuition Tax Credit Law to offset the financial commitment, made by 14 of the 15 presidents and chancellors of Michigan's public universities, to reduce tuition increases.

The Michigan Chamber of Commerce has been a strong advocate for higher standards, stronger assessment strategies and a quality accountability system for Michigan schools. The Chamber reaffirms support for the implementation of an assessment system in Michigan schools that is aligned to rigorous standards and provides useful data. The data should be useful in helping schools identify specific areas that need technical assistance and improvement. The Michigan Chamber of Commerce supports the effort to create an assessment system that annually measurers student performance in grades 3 through 8 mathematics, English language arts and science. Additionally, we support a high school assessment that meets the following characteristics:

• Provide one criterion for high school graduation
• Provide one criterion for college admission
• Provide a system for identifying students eligible for awards or scholarships for high achievement
• Provide one criterion for employers to use in hiring decisions
• Provide an opportunity for college credit/placement options
• Provide a comprehensive measure of cumulative achievement for student and school accountability
• Help schools meet the requirements of the federal law, “No Child Left Behind”

Background

Over the past decade, the Michigan Chamber has worked with the Michigan Legislature, Department of Education and other policy makers to raise academic standards and expectations. Chamber action has been guided by the Nine Essential Components for a Successful Education System, work with the Michigan Business Leaders for Education Excellence (MBLEE) and the findings of the four Gap Analysis studies conducted by MBLEE. Using research from these documents, the Michigan Chamber adopted a policy in support of Action Steps for Education Quality in 1998. This policy included specific steps that we believe can improve Michigan’s public schools and respond to a recognizable gap on the issue of school accountability. Three of those principles are as follows:

Standards – A successful system expects high academic standards that prepare students for success in school, in the workplace, and in life.

Performance and assessment – A successful system focuses on results, measuring and reporting student and system performance so that students, teachers, parents and the public can understand and act on the information.

School Accountability – A successful system assists schools struggling to improve, rewards exemplary schools, and penalizes schools that persistently fail to educate their students.

The federal “No Child Left Behind Act of 2001”, requires State Departments of Education to use data in identifying schools failing to make progress toward achieving higher standards. State and local school officials must be ready to work with and support schools that take effective initiative and help those struggling to meet new standards.The Michigan Chamber of Commerce believes that information is power; testing and gathering independent data are the ways to get information into the hands of parents, educators and taxpayers.

• Under the federal No Child Left Behind Act, every state must set clear and high standards for what students in each grade should know and be able to do in the core academic subjects of reading, math and science.
• States will measure each student’s progress toward those standards with tests aligned with those higher standards.
• Testing is not new to education. Good teachers and excellent schools and districts have always used tests to provide objective and up-to-date information on how their students are performing.

Testing allows teachers, parents and principals to follow each child’s progress.

• Every student should make substantial academic progress every year in every class. Good instruction will help meet this goal.
• Annual testing tells parents and teachers how much progress students have made toward meeting the academic standards.
• Annual tests show principals exactly how much progress students at each grade level have made so that principals and teachers can make good decisions about teacher training and curriculum.
• Accountability systems gather specific, objective data through tests aligned to standards and use that data to identify strengths and weaknesses in the system.

The federal No Child Left Behind Act will test every child in grades 3 through 8 and give parents report cards for every school – highlighting success and shining a light on failure.

• The law requires that all schools be held accountable for making sure that every student learns.
• Test scores will be broken out by economic background, race and ethnicity, English proficiency and disability. That way parents and teachers will know the academic achievement of each group of students and can work to ensure that no child will be left behind.
• Testing tells parents, communities, educators and school boards which schools are doing well. If a school takes a challenging population and achieves great results, testing will show that. If a school is allowing certain groups to fall behind year after year, testing will expose that, too.

The Michigan Chamber of Commerce continues to be a strong advocate for efficiency, accountability and effectiveness in state government departments and agencies. The Chamber supports efforts to restructure the leadership and general supervision of public education for the State of Michigan.

To this end, the Chamber supports an amendment to Article 8, Section 3 of the Michigan Constitution to eliminate the eight-member elected State Board of Education (SBOE) and to provide that the governor shall appoint a State Superintendent of Public Instruction with advice and consent of the Senate.

The Michigan Chamber also supports an amendment to Article 8, Sections 5 and 6 of the Michigan Constitution to include appointment by the Governor of all statewide elected governing boards for educational institutions in Michigan. This change would bring consistency to the appointment of governing boards of all of Michigan’s public colleges and universities; reduce the size and cost of elections; and reduce the partisan nature of these governing boards.

Background

At issue is how to best organize government and create opportunity for greater efficiency and accountability in Michigan’s public education system. The citizens of Michigan recognize the value of a quality education system and consistently rate it as a top priority.

The changes proposed would provide for greater accountability for quality results. The Governor would have appointive authority for members of the SBOE (Alternative A) or appointment of the Superintendent of Public Instruction (Alternative B). Realigning the governance structure for Michigan’s system of public education would create a consistent model of operations, which is found in other state departments that report directly to the Governor. It would also allow the Governor to appoint talented and experienced leaders who might not otherwise run for public office.

In most other departments and divisions of state government, the system of gubernatorial appointments with the advice and consent of the Senate has provided a high level of bi-partisanship, cooperation and accountability. Currently, only three public universities (Michigan, Michigan State and Wayne State) have governing board members elected on a statewide partisan ballot for eight-year terms. Governing boards at the other 12 public universities are appointed by the Governor for eight-year terms, with advice and consent of the Senate. This appointive process has generally served the universities, students and taxpayers well.

The Michigan Chamber reaffirms support for a state budget process focused on outcomes where each year there is debate in Lansing over setting the price and the priorities of government, along with the funding for each priority.

The K-16 Coalition’s plan to automatically increase annual state government spending on K-12 school districts, community colleges and state universities by the rate of inflation--regardless of outcomes or changing needs--would remove a large sum of public money from annual review and budgetary control, thus severely limiting the ability of the Legislature and Governor to set priorities. Therefore, the Michigan Chamber is strongly opposed to the K-16 proposal.

Background

The question of how to adequately fund education is an important part of the debate over the state budget. It is the responsibility of the Governor and the Legislature to ensure that available public money is allocated every year among many crucial and compelling needs. We know from experience that even in good times, responsible state government budgeting demands frequent reassessment of needs and resources and a good deal of compromise, hallmarks of the appropriations process. To achieve sound fiscal policy, decisions must be made in a framework of flexibility and open discussion. The Governor and Legislature need to actively evaluate, reassess, debate and balance governmental spending practices in light of budgetary circumstances and priorities.

In 1994, the Legislature, with encouragement and support from the Michigan Chamber, submitted Proposal A to the voters, a proposed constitutional amendment to provide for property tax relief and school finance reform. In addition to significantly reducing property taxes for school operating purposes, Proposal A raised the rate of the Sales and Use Tax from four percent to six percent to substantially increase funding for K-12 school districts. The new method of school finance established by Proposal A shifted the burden of funding from uneven local property taxes to statewide sales tax revenue, resulting in a dramatic increase in per pupil funding for school districts that were spending below the statewide average.

In July 2005, the nonpartisan and independent Michigan Senate Fiscal Agency (SFA) published an Issue Paper entitled, “The Michigan Economy and State Budget FY 1994-95 To FY 2003-04, Ten Years of Significant Changes.” This detailed and comprehensive SFA report is available over the Internet at www.senate.michigan.gov/sfa.

The introduction of the SFA report accurately and very succinctly summarizes recent trends relating to Michigan’s economy and the state budget: “Over the past ten years, the State of Michigan budget has undergone significant changes. The combination of major changes in the performance of the Michigan economy coupled with significant changes in tax policy resulted in two distinct phases of the state budget over the period fiscal year (FY) 1994-95 through FY 2003-04. The first six years of this period were marked by a growing state economy, surging tax collections, and robust growth in state appropriations. The last four years of this period were marked by a slumping state economy, falling tax collections, and restraint in the growth of state appropriations.”

In reviewing Michigan’s appropriations over the past 10 years, the SFA report provides a wealth of information about government spending patterns, including two findings especially relevant to consideration of the K-16 proposal:

1. “Over the FY 1994-95 through the FY 2003-04 period, adjusted gross appropriations increased by 42.1% while Michigan personal income increased by 42.0% and the Detroit Consumer Price Index increased by 24.8%,” and
2. “The growth in the largest appropriation program areas of K-12 education and human services support was relatively similar to the overall appropriation growth. Appropriations for K-12 education increased by 42.9% and appropriations for human services programs increased by 49.7%. Large program areas that had significantly less growth than the overall budget included higher education programs, up 18.1% and revenue sharing programs, up 11.6%. These two budget programs were significantly affected by appropriation reductions in the last several years of the 10-year period that were necessary to ensure a balanced State budget.”

A recent analysis of public school funding since Proposal A, prepared for the Michigan Chamber by the Anderson Economic Group, resulted in similar findings: from FY 1994-2003, K-12 enrollment increased 5%, while during the same period GDP price inflation increased by 17%; K-12 school operating revenue jumped up by 54%; and K-12 school infrastructure revenue skyrocketed by 196%.

Although over the past 10 years state spending on K-12 education has increased 18.1% more that the rate of inflation, many local educators feel strongly that the restraint in growth over the past four years has been harmful to public schools. In higher education, community college and university officials have been even more outspoken about the need for additional state funding. In response to this situation, 11 education organizations came together in 2004 to form the “K-16 Coalition” to lobby for a major increase in state funding for K-12 school districts, community colleges and state universities. Despite the involvement of associations representing school boards, school administrators, and university presidents, it has become obvious over the past few months that the Michigan Education Association (MEA) is the driving force behind the K-16 coalition.

At the urging of the K-16 coalition, legislation was introduced early in 2005 in the State House and Michigan Senate to establish a minimum funding level for education. In brief, the appropriations bills (House Bill 4582 and Senate Bill 246) would amend the School Aid Act to provide that the total amount spent on K-12 education, community colleges, and state universities would automatically increase each year by the rate of inflation or five percent, whichever is less. The bills also increase the level of state funding for public school employee pensions and guarantee a minimum level of funding for school districts with declining enrollment. As introduced, the bills would be retroactive to 2002 and both bills require that any year the school aid fund does not have enough revenue to meet the increased spending commitment, the amount necessary to meet the shortfall would be automatically withdrawn from the State’s General Fund, thus triggering potentially large budget cuts to other areas such as State Police, Medicaid, or prisons.

The Michigan Senate Fiscal Agency has estimated that in FY 2005-06 the total cost of Senate Bill 246 (as introduced) would be $1.9 billion. Of this amount, $1.2 billion is the retroactive funding. It is also important to note that the legislation to carry out the K-16 plan contains no cost saving reform measures and fails to even mention the words “education quality” or “student achievement.”

Soon after Senate Bill 246 and House Bill 4582 were introduced, spokesmen for the MEA indicated to the news media that, if the Legislature did not soon act favorably on the bills, supporters would launch a petition drive to force action on their proposal. Early in August 2005, the MEA sent a message to its members announcing that the K-16 coalition was launching a statewide petition drive and asking each union member to “circulate petitions to force the Legislature to vote on the proposal.” The petition drive is a statutory initiative, not a proposed amendment to the State Constitution, which means that the Legislature could be required to vote on this proposal sometime this fall or winter.

In response to questions raised by Senate Bill 246 and House Bill 4582, the K-16 Coalition modified their proposal and now describes the purpose of the petition’s education funding guarantee as follows:

• To provide annual education funding increases equal to inflation for K-12 schools, community colleges and universities.
• To reduce the per-pupil gap between the lowest spending and highest spending districts from $1,300 to $1,000 between 2007 and 2012.
• To cap retirement costs for districts at the current 14.87 percent of payroll.
• To fund school districts with declining enrollment based on the student enrollment average of the three prior fiscal years.

The revised K-16 proposal now being circulated across the state in petition form, still fails to mention education quality or student achievement and contains no cost-saving reform measures. While members of the K-16 coalition have refused to answer questions about how much the plan would cost or how to pay for it, Chamber staff has learned from a member of the State House that the non-partisan and independent House Fiscal Agency has estimated that the funding guarantee in its present form would cost approximately $1.1 billion above the FY 2005-06 Executive budget recommendation for spending on education. For comparison purposes, it is interesting to note that the current Single Business Tax generates about $1.1 billion per year.

In September 2002, the Chamber’s board of directors approved a policy statement in opposition to a proposed amendment (Proposal 4 of 2002) to the State Constitution that would have earmarked tobacco settlement revenue for health care related programs and projects. At that time, the Board took a strong position that additional earmarking of funds restricts the ability of the Legislature to make necessary decisions about the proper allocation of the state’s financial resources in response to changes in the economy and the various needs of Michigan’s citizens. It is interesting to note the many of the same individuals and groups from the education community that now support the K-16 proposal were very vocal in their opposition to Proposal 4. While early public opinion polling showed a majority of voters favored Proposal 4, it was defeated in November 2002 by a vote of 66% “No” to 34% “Yes.” The K-16 proposal is similar to Proposal 4 of 2002 whereby an interest group attempts to bypass the appropriations process involving the executive and legislative branches of state government and lessens accountability.

On August 26, 2005 the Michigan Townships Association (MTA) announced that its Board of Directors took action to oppose the K-16 proposal “due to concerns about budget pressures the school funding guarantee would place on all other areas of the budget; jeopardizing revenue sharing, PILT (payment in lieu of taxes) funding, fire protection grants and many state programs relevant to townships.”

The Michigan Chamber of Commerce supports revisions to the Local Government Fiscal Responsibility Act, Public Act 72 of 1990, to deal with the threat of insolvency for some Michigan municipalities and school districts.

The state should avoid the creation of a “bailout option.” If direct state assistance, such as loans or cash payments, were required, the consequences should be similar to those faced by corporations that file for bankruptcy protection. The alternative – allowing a “bailout option” without such consequences – would signal to those in charge of school districts and municipalities that they can postpone or avoid the management changes that are necessary, and simply await a bailout.

Remedial legislation needs to address three fundamental categories:

I. Prevention of insolvency

P.A. 72 needs to provide for an advance prevention mechanism that could identify financially distressed governmental units before they face a crisis insolvency situation.

Recommendation:

Provide a more thorough review of comprehensive annual financial reports (CAFRs) for fiscal conditions that could eventually “trigger” imposition of P.A. 72. This should include the requirement to calculate and submit to the State Treasurer (municipalities) or State Superintendent of Public Instruction (school districts) a “fiscal health score” based upon at least five key areas:

— General Fund Balance
— General fund tax revenue on downward trend
— Other general fund revenue on downward trend
— Capital expenditures as a percent of general fund budget
— Ratio of pension benefits and required contributions to current pay and benefits

The State would be required to intervene early whenever a local governmental unit’s “fiscal health score” exceeded a certain score.

II. Reforms in Governmental Units under P.A. 72

Recommendations:

The Emergency Financial Manager (EFM) should become an employee of the Michigan Department of Treasury. Costs would be borne by the state (not the insolvent local unit); this would provide the EFM with access to the legal staff of the attorney general and make the issue of indemnification moot (currently the EFM can be sued personally in harassing lawsuits filed by affected persons).

EFM should have the authority to replace mayor/city council or superintendent/school board. EFMs have been periodically harassed by elected mayor and council members who remain on site. EFM must be able to temporarily waive charter and ordinance provisions, and be able to submit charter revisions to the voters.

EFM should have legal authority to set aside bargaining unit contracts and should not be thwarted in the ability to contract out services to the private sector or other governmental units prevented by current contracts.

III. Post-Act 72 Reforms

Recommendations:

Require the EFM to submit a plan to achieve and maintain financial stability to the Treasury Department (municipality) or Education Department (school district) for approval.

If the EFM determines that consolidation is the only solution to achieve financial stability, the EFM will have the authority to negotiate with other units of government to achieve consolidation.

Upon achieving fiscal stability (elimination of deficits, providing positive cash flow, eliminating the underlying “triggers” that caused Act 72 to be imposed)—short of consolidation—an elected council, mayor, or school board would be reinstituted with full powers and the EFM exits.

Background

Two issues working in tandem are causing several local governments’ fiscal distress. These are limitations on the principal sources of property taxes (Headlee/Proposal A) and the unlimited increases in healthcare (both for active and retired employees) and pension costs. Retirees healthcare is particularly insidious as it allows current public officials to award employee benefits that will be paid a generation down the road. These have significant capabilities for impacting the fiscal health of a local governmental unit. Presently, healthcare costs continue to rise annually by 10 – 15% with property tax limitation tied largely to the annual CPI increases of less that 3%.

The powers of the state to declare a financial emergency, and take desired action to address that emergency, are codified in Public Act 72 of 1990. This Act applies to local units of government including school districts. P.A. 72 of 1990 replaced the older P.A. 101 of 1988, which did not apply to school districts.

The superintendent of public instruction is responsible for monitoring and reviewing the financial state of the school districts. The state treasurer does the same for municipalities. If either the state treasurer or state superintendent of public instruction determines that the unit has a serious financial problem the state officer shall notify the governor.

A review team will then be appointed, and will report its findings back to the governor. If the governor then determines that a school district or municipality is in financial emergency, the governor will appoint, with the consent of the Senate, an emergency financial manager for the unit of government. The emergency financial manager will take over all fiscal matters of the unit, and develop a written financial plan, providing for the operations of the district or municipality (unit) within the resources available, and the payment in full, of debt. In order to accomplish these tasks, he or she is given significant authority.

With control over all fiscal matters, the emergency financial manager is given significant authority in order to restore financial stability to the local governmental unit. He or she may examine the books and records, including payroll of the unit; enter into contracts on behalf of the unit, including labor agreements; receive and disburse federal, state or local funds; adopt or amend budgets; and make recommendations to the governor, state board and legislature concerning the unit’s financial situation. The emergency financial manager can also reduce expenditures in the unit’s budget; borrow money; approve or disapprove of the issuance of obligations of the unit; and sell district assets to meet current obligations.

The emergency financial manager may also order one or more millage elections, and can even authorize the unit to proceed under Chapter 9 of the United States Code, which governs the “adjustment of debt of a municipality.” However, the emergency financial manager’s powers are not always clearly defined in law as to the ability to repeal or expunge burdensome contracts.

When Ecorse became the first Michigan city to be placed under receivership, Louis Schimmel was appointed the emergency financial manager, and served in that role from 1986-1990. He replaced the elected mayor and city council members, privatized nearly all of the city’s services, including the Department of Public Works, renegotiated labor contracts, and sold city buildings so that they would be on the city’s property tax roll. By 1991, the city was operating with a surplus and paying back emergency loans to the State of Michigan.

In the early 2000s, the cities of Hamtramck and Highland Park also faced financial crises similar to that experienced by Ecorse. In both cases, the state took over the cities, appointing emergency financial managers to balance budgets. Louis Schimmel was the emergency financial manager in Hamtramck, and Ramona Pearson was the emergency financial manager for Highland Park.

In both cities, services were cut and outsourced, employees laid off, and the city councils were left with little power. Both cities avoided being dissolved, and entered into receivership.

In 1982, the Kalkaska school district announced that it would run out of funds before the end of the school year. The claim arose after voters refused to approve a millage increase that was intended to increase funding for teachers’ pay. At least two independent researchers attribute the “shutdown” plan to the teacher’s union in the State of Michigan.

Indeed, the school district held a widely-publicized shutdown in March of 1993, 10 weeks before the end of the school year. So orderly was the shutdown, that the district ensured that it had funds in the bank before “shutting down” for the fiscal year. The state appointed a review committee, which reported back after the shutdown had already occurred.

The Inkster school district also faced insolvency. The district subsequently hired Edison Schools to manage much of its operations. However, the district and Edison ended up in acrimonious debate about the terms of the contract and payment for services.

By the time a local governmental unit becomes insolvent, there are almost always warning signs, and those signs present opportunities for organizational changes that could prevent an insolvency. Such changes are, in most cases, painful and typically involve termination of some employees, closing under-utilized facilities, cutting the pay and benefits of poorly performing workers, laying off workers, outsourcing non-core activities and reassigning or terminating under-performing managers. Of course, rather than restructure their operations, those in charge of an insolvent organization would probably prefer a bailout by other parties.

Public sector managers should face negative consequences if their governmental unit becomes insolvent. Furthermore, the incentives to avoid insolvency should be shared by employees, especially those in a position to make demands on the unit for money; taxpayers and their representatives in state and local government; and major vendors.

In addition, once a governmental unit becomes insolvent, it should face strong incentives – including compulsion by law – to solve structural problems and deal fairly with the claims of other parties.