CHICAGO – Chicago Public Schools has entered negotiations with JPMorgan for a direct purchase of $396.5 million of state grant anticipation notes needed to keep the cash-strapped district afloat through the current fiscal year.
The junk-rated board of education had issued a request for bids on a direct purchase of the GANs with responses due by June 2.
“CPS has evaluated the responses …and based upon that evaluation, has awarded JP Morgan as purchaser. The award is contingent upon final negotiation,” the one-page notice said.
The district will borrow against $467 million it’s owed by the state for its share of block grants for fiscal 2017, which ends June 30.
The state government, more than $14 billion behind on its payment obligations after almost two years without a budget, isn't expected to make the grant payments before then.
The district has relied heavily on expensive short-term borrowing to manage its precarious cash flow and JPMorgan has been the district’s top provider of credit lines structured as tax anticipation note issues. Three outstanding lines with JPMorgan totaling $950 million mature in December. It also entered into a private placement for $150 million of GO debt in July at a 7.25% rate.
The district has paid in the 4% range for its TAN lines. It will seek to renew existing authority of $1.55 billion for the coming fiscal year.
CPS did not provide additional information on possible terms which are under negotiation including the rate and maturity or when negotiations will be finalized or how many banks submitted responses. The district needs to pay about $470 million toward its $733 million teachers’ pension contribution by the end of the month.
The board late last month approved the GAN bidding and $215 million of general obligation refunding bonds. The $215 million bolsters existing authority of $285 million on the books, allowing the district to issue up to $500 million of GOs in fiscal 2018. The board’s yield on its last publicly offered GO sale topped out at 8.5%.
Chicago’s chief financial officer, Carole Brown, recently announced the GAN issue as the solution to the district’s immediate cash flow crisis that stems from Gov. Bruce Rauner’s veto of $215 million in pension help and state grant delays.
The state has made only one of its quarterly payments and might not make another before the fiscal year ends.
The district had warned that without court intervention or state help schools might close early in June due to the veto and a court decision tossing its lawsuit against state funding formulas.
The district whittled down a $1.1 billion deficit with cuts last year and received a boost in the form of a $250 million tax levy to help with pension payment and a one-time infusion of state operating aid, but it needs hundreds of millions to balance next year’s budget. An education funding overhaul that passed the General Assembly would provide $300 million more but Rauner has threatened to veto it.
Chicago Mayor Rahm Emanuel has said he's not ready to show his hand on how the city might help CPS – options include new or increased taxes and fees or tax-increment financing revenue -- if state financial support falls short.