CHICAGO – Bankruptcy is the “worst” option to cure junk-rated Chicago Public Schools’ fiscal ills, schools chief Forrest Claypool said Tuesday.

The question about whether CPS should file bankruptcy if the state were to put a Chapter 9 provision on the books was posed by an audience member after Claypool delivered prepared remarks at a Chicago City Club luncheon.

Chicago Public Schools chief Forrest Claypool
Chicago Public Schools chief Forrest Claypool sounded off against state funding woes.

“Filing for bankruptcy doesn’t change anything,” Claypool said. “It doesn’t change the fact that the district is being short-changed by over $500 million a year by a racially discriminatory, illegal funding system.”

“This is an issue of fair funding. It’s not an issue of the solvency of the district…the threat to the solvency of the district is driven by this system,” he added. “Bankruptcy would be the worst of all worlds” because it would set back academic gains, destabilize the schools and drive parents away, Claypool said. “It would be a disaster.”

Gov. Bruce Rauner has said the Chapter 9 option should be available to some struggling local governments and districts and has specifically cited CPS as good candidate. The timing of past comments on the subject were widely viewed as contributing to higher interest rates demanded by investors which drove its top yield up to 8.5% on a general obligation sale last year, just under a 9% state cap.

Claypool, the former head of the Chicago Transit Authority and a mayoral chief of staff who was tapped by Mayor Rahm Emanuel to fill the chief executive officer’s position in 2015, hit Rauner hard during his address for vetoing $215 million in pension funding aid.

“The stress and disruption caused by the governor’s mid-year veto, combined with the district’s junk credit rating and weak cash position, has harmed our schools and caused teachers, parents and principals to question whether CPS can ever right its fiscal ship,” Claypool said of the December action.

Claypool also raised the rhetoric on the district’s position that the state funding system discriminates against its students, calling it a “cancer.”

“While Forrest gives speeches at the City Club, the governor and his team are in Springfield working to find a solution to our state’s budget crisis. More tired finger-pointing without concrete solutions does nothing to help CPS’ students and teachers,” said Rauner spokeswoman Eleni Demertzis.

The district earlier this year filed a lawsuit against Rauner and other officials accusing them of doling out state aid based on factors that discriminated against its mostly minority student population.

The district warned that without court intervention or renewed state help, it might have to shut schools early. A Cook County Circuit Court judge tossed the lawsuit in late April although the district was allowed to amend it and refile it.

The city and CPS then announced schools would remain open while they explored financial options for meeting CPS’ obligations, including a more than $700 million teachers’ pension payment owed before the fiscal year ends June 30. In the meantime, the district said delayed state grant block payments also threatened operations.

The city and CPS announced on May 19 district plans to borrow $389 million against $467 million in state grant funds it’s owed this fiscal year, a financing officials say will allow the district to meet its fiscal 2017 obligations without closing schools early and canceling some summer school.

Claypool's speech Tuesday came as a solution to the state’s historic, two-year-old budget impasse remained elusive with the current spring session scheduled to adjourn Wednesday.

Several pending bills provide CPS with $215 million in one-time pension funding help or long-term annual support. CPS also would benefit from pending bills that overhaul the school funding formulas, but Democrats and the GOP remain at odds on those bills as well as a larger budget solution.

Without a budget in place, some schools have warned they might not open in the fall. Last year, a stopgap authorization funded schools. “We will open the schools in the fall” doing whatever is necessary to ensure it, Claypool said. The Emanuel administration is reportedly ways the city could help through new taxes or tax-increment financing funds.

Looking past the fall, Claypool painted a bleak picture absent more state help. He portrayed additional aid as putting the Chicago district on par with others and not a bailout because the district educates 20% of the state’s students but receives 15% of aid when all forms are counted.

The Rauner administration and fellow GOP lawmakers have countered that CPS receives a special $250 million poverty grant block to offset the difference, but CPS said that extra revenue still falls $500 million short of achieving parity with other districts.

“The math is absolutely unsustainable. No amount of budget cuts, no amount of management efficiencies, no amount of tax hikes can make up the difference for long,” Claypool warned.

Past leaders turned to one-shots, draining reserves, partial pension payment holidays, and shifting how property taxes are counted. The one-time fixes also relied on scoop-and-toss debt restructuring and the district now remains afloat with the help of short-term borrowing. It will end the fiscal year June 30 with $950 million outstanding.

“For all practical purposes, borrowing as a means of coping is over,” Claypool warned. “Despite all our efforts to minimize the pain in classrooms, budget cuts are creeping ever closer.” While the district may no longer try to restructure debt service, the board did approve long term new money and refunding bonds totaling $500 million last week.

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