Biden Administration Sues a City Over “Rampant Overspending on Teacher Salaries”

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Biden SEC chairman Gary Gensler
Biden SEC chairman Gary Gensler

The Biden administration’s Securities and Exchange Commission is suing the city of Rochester, New York, contending that “rampant overspending on teacher salaries” plunged the Rochester school district into “extreme financial distress,” misleading investors who bought municipal bonds.

The legal action is unusual. Sure, the federal government’s interaction with K-12 education has often extended beyond the bounds of the U.S. Department of Education. The Department of Agriculture administers the school lunch program, and the Department of Defense operates schools serving military-connected children. Under George W. Bush, the Justice Department toyed with the idea of using antitrust law to support charter schools. And in the waning days of the Trump administration, President Trump issued an executive order authorizing “emergency learning scholarships” to be provided via the Secretary of Health and Human Services.

But, notwithstanding Bloomberg columnist Matt Levine’s theory that
“everything is securities fraud,” in practice, the K-12 education beat hasn’t intersected greatly with the fraud provisions of federal securities laws. At least until now.

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The securities laws don’t offer a technical definition of “overspending on teacher salaries,” much less “rampant overspending.” The SEC may claim that if the city is spending so much that market participants doubt the city’s capacity to meet its obligations, and bondholders lose value as a result of ratings downgrades, that’s overspending by common-sense definition. The city is contesting the SEC action, the Rochester Democrat & Chronicle reported; the paper quotes a statement from the city claiming, “the city does not have access to or authority over the finances of the Rochester City School District, and therefore cannot be responsible for the district withholding financial information.”

How much has Rochester been “overspending?” The website Seethroughny.com, a project of the Empire Center for Public Policy, lists 717 Rochester City School District Employees who earned more than $100,000 in 2019. The district has about 25,000 K-12 public school students, according to the state of New York. Spending runs about $20,000, a little below the statewide average. Whether that amounts to “overspending” probably depends on one’s view of how much the children are learning, and also one’s view of whether the students could learn more, and how much more, if more money were spent.

The teachers may point out that they earn less the SEC staff, who average more than $200,000 a year, according to the FederalPay.org, which tracks government pay. Though the SEC may counter that its lawyers can earn much more at corporate law firms, a consideration that may be less applicable to Rochester teachers.

In practice, the legal aspects of the case will probably turn more on considerations about disclosure to potential bond buyers than about the details of the spending on teacher salaries.

Even so, the mere mention of securities law and bondholders as potential tools to curb school district “overspending” is intriguing, especially when the action comes under a president who campaigned promising to increase school spending so as to pay teachers “competitive salaries.” For years, reformers have complained that teachers unions capture school boards and run school systems for the benefit of adults rather than children. Now a different set of influential adults—bondholders—is, in a way, asserting, via the SEC, its own claim that could be a countervailing force.

It’s intriguing, but also not fully satisfying. The union is there to represent the teachers. The SEC is there to represent the supposedly misled bondholders. The securities laws exist to protect bond-buyers. There’s not much by way of federal law, though, to protect parents or students when a child enrolls in a public school and then doesn’t get the education that was advertised. Absent as a result is a federal government agency with robust enforcement powers to stand up for students misled about the education they can expect.

Ira Stoll is managing editor of Education Next.

The post Biden Administration Sues a City Over “Rampant Overspending on Teacher Salaries” appeared first on Education Next.


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