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VOL. 123 | NO. 155 | Friday, August 8, 2008

Plenty Beneath Surface of MCS Funding Dispute

By Andy Meek

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NEGOTIATOR: Attorney Allan Wade  provided the opening for a compromise between MCS and the City Council. – PHOTO BY BILL DRIES

The Memphis City Schools funding dispute has played out in full view of the public and a lawsuit over the issue remains pending in Shelby County Chancery Court.

But that doesn’t mean things have always been what they seem.

Just ask Allan Wade, the attorney for the Memphis City Council. Wade filed a countersuit on behalf of the city last month in the midst of the larger legal fight over funding for the city school district.

And that countersuit is what made possible a short-term compromise to the problem announced at Tuesday’s City Council meeting.

‘Quid pro quo’

Earlier this summer, the City Council voted to scale down the city’s subsidy to MCS by almost $70 million. The school district responded by filing a lawsuit and preparing for a drawn-out court fight. Wade last month filed a countersuit arguing that MCS still owes the city $152 million because of bond-related funding the city loaned to the school district.

In front of news cameras, Wade was emphatic about the reasons for the countersuit.

“Had they not filed the lawsuit, the city would have gone about its business,” he told The Daily News. “But you sue us, we dig for everything you owe us too. It works both ways.”

It became clear this week, however, that the countersuit’s main purpose was not necessarily recovering the money the city loaned to MCS. Instead, the countersuit was intended to provide the legal room for state education officials to finally sign off on a funding compromise to the MCS matter that was first proposed several weeks ago.

The original idea behind the compromise was for MCS to dip into its reserves and transfer a certain amount to the city. The city would then turn around and give that money right back to the school district to make up for the council’s funding cut. And it was hoped that such a maneuver would satisfy the state, which requires local governments to provide the same amount of school funding from one year to the next.

But the state said no to that plan.

“The problem before was that it was a quid pro quo transaction,” said Van Turner, associate general counsel for MCS. “We give you that money for the sole purpose of you turning right back around and giving it back to us.”

‘Crazy’ as a fox

But the countersuit now seems to have provided a reason the state can accept for allowing MCS to dip into its reserves to give money to the city and satisfy the state’s school funding laws.

MCS’ outstanding debt is the pretext. That means the school district now can put new money on the table – albeit new money that comes out of the school district’s reserves –and tell the city it’s for the MCS debt.

The city, after basically wiping MCS’ slate clean, can then push that money back across the table and tell the school district to use it to make up the balance of the funding the City Council voted to cut.

Turner said Wade likely had that scenario in mind from the moment he filed the countersuit, which is still pending in court and will remain pending until official action is taken by MCS and the City Council.

“I think he did. He had to,” Turner said about Wade. “I think he conceived of this with the mindset of having a vehicle where they could get money and then return that money to us.”

Wade agreed he had that in mind when he filed the countersuit.

“Did you think I was just beating my chest? I know everybody thought I was crazy. But I’m not crazy.”
– Allan Wade
City Council attorney

“Did you think I was just beating my chest?” Wade said, with a laugh, in response this week to his motivations for the countersuit. “I know everybody thought I was crazy. But I’m not crazy.”

The art of compromise

Tennessee education commissioner Dr. Tim Webb did not mention the countersuit in an Aug. 5 letter to MCS general counsel Dorsey Hopson in which Webb acknowledged the state is tentatively accepting the funding compromise brokered by MCS and city officials. That letter was what prompted City Council member Harold Collins to announce that a compromise was reached at Tuesday’s council meeting.

“At this time, the proposal submitted appears to satisfy the maintenance of local funding requirement set forth in (state law),” Webb wrote. “Therefore, the department grants preliminary approval of such proposal pending submission of budget documents and formal action of MCS.”

The compromise does not resolve a larger issue that’s part of the school funding fight and is a major part of the Chancery Court lawsuit. That issue is whether the city of Memphis is required to provide any money to the district at all.

But the benefit of the compromise, should the state follow through on accepting it, is that it removes any immediacy from the need for the court to settle the matter. Closing arguments in the case, originally set to occur Monday, appear likely to be postponed, but a new date had not been set by press time.

“The plan is the courts will rule, and if the courts rule the city of Memphis is responsible (to fund MCS), then the citizens know they’ve got to get ready for a tax increase,” Collins told The Daily News. “If the court rules that the city of Memphis is not responsible, then Memphis City Schools has got to figure out how to redo their budget.”

Unfinished business

Terms of the compromise – which includes settling the $152 million countersuit from the city over loans to MCS – still have not been finished. That’s one important question mark that remains, because even if MCS doesn’t like how the city decides it wants to handle settling the outstanding debt, the pressure is now on to finalize a compromise deal that appears to have the state’s blessing.

“This (compromise) basically takes an issue off the table that shouldn’t have been on the table in the first place,” Wade said. “They’ve been putting this issue out there that, ‘We’re going to lose the state money. We’re going to lose the state money.’ Presenting that to the court for why we need an injunction (they said), ‘We’re going to be irreparably harmed.’

“That issue is no longer in the equation. But still the issue remains as to whether we have an obligation to fund them – whether we need to levy a tax this year to give them $66 million. So we have a real controversy that still needs to be resolved.”

By way of underscoring the urgency of that controversy, Hopson released a statement late Wednesday evening that capped a barrage of developments this week in the MCS funding dilemma. Hopson called the council’s declaration that a compromise had been reached “misleading and inaccurate” and that “it appears to be extremely one-sided.”

“It’s one-sided because the City Council’s not putting any money on the table,” Turner said. “That’s all our money. It would be a different thing if they were bringing half their reserves and we were bringing half our reserves to the table.”

Yet Hopson’s comments seem difficult to reconcile with a letter he sent to Webb spelling out the very compromise both sides wanted to pursue.

“Under the terms of the agreement, we would recommend that the parties agree to settle the city’s countersuit against MCS,” Hopson wrote. “Once the countersuit is resolved, the city will transfer $57,460,947.00 from its general operating fund to MCS. … Hopefully this compromise will ensure that the 2008-2009 school year will not be disrupted by a loss of state funding.”

Wade reiterated that Hopson’s comments from Wednesday seem to conflict with the letter written by Hopson.

“He wrote the letter,” Wade said. “(Commissioner Webb) said, ‘We want a joint proposal.’ I sent Dorsey an e-mail back and said, ‘Sign my name to it – I’m good.’ He sent it up there. The commissioner came back with some questions. I answered the questions. The commissioner then took the answers and came back with a letter that said we’re good to go.”

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