CHICAGO – Turnover at the top of junk-rated Chicago Public Schools due to an ethics scandal doesn’t pose an immediate threat to the district’s fiscal gains, market participants said.

Chief Executive Officer Forrest Claypool announced on Friday he would step down at the end of the year after being accused by the district’s inspector general in a report earlier in the week of lying and engaging in a cover-up of an ethics probe of a top aide. The aide was being investigated for ethics violations tied to a legal contract he oversaw involving a firm that was making severance payments to him.

Chicago Public Schools chief executive officer Forrest Claypool on Aug. 11, 2017
Chicago Public Schools Chief Executive Officer Forrest Claypool is stepping down at the end of the year. Yvette Shields

Chief Education Officer Janice Jackson will serve as interim CEO.

“Overall he was perceived as a positive force that the market seemed to appreciate,” said Richard Ciccarone, president of Merritt Research Services. Claypool’s downfall appears to be “a case of bad judgment that had little to do with the financial standing or future standing of CPS” and that limits the impact of his resignation.

If the scandal were linked to finances, especially something material, the district could suffer a setback with the market. “This moves the risk meter for the district a little backwards due to the uncertainty” in the future leadership but doesn’t heighten financial pressures, Ciccarone said.

“It is unlikely to have much of an impact, although it is too early to tell. It is certainly tough to believe that this expands CPS’s universe of investors given that most of those who are avoiding CPS’s debt are doing so based primarily on the scale of financial challenges that will remain for Mr. Claypool’s successor to deal with,” said Tom Schuette, co-head of investment research and strategy at Gurtin Municipal Bond Management. “This is still a name that we believe is incongruent with high quality municipals given that CPS is operating with no credit cushion, limited control over its own destiny, and any management team in the universe will have its hands full with the obstacles that remain.”

Mayor Rahm Emanuel tapped Claypool – then his chief of staff – to take the helm of the beleaguered district in mid-2015. The previous CEO Barbara Byrd-Bennett had resigned that May over a contracting scandal that led to federal charges and a prison sentence.

Claypool took over as the district grappled with a more than $1 billion deficit, struggled with market access with rates nearly hitting a 9% state cap and as the district was described a good candidate for Chapter 9 bankruptcy by Gov. Bruce Rauner. He leaves with a state funding victory in hand and a series of academic gains.

Claypool, a former Cook County board commissioner, enjoyed a reputation as a turnaround specialist, first at the Chicago Park District under former Mayor Richard Daley and then at the Chicago Transit Authority under Emanuel. He also served as a Daley chief of staff.

“Wherever he has worked he has left an incredible and indelible mark on every endeavor,” Emanuel said at a news conference Friday. The two men are longtime friends. “I can say he can walk out with his head high, because he did a job well.”

Claypool said he had made “stupid mistakes” and hoped he would be remembered for his full record.

While far from stable as the district remains deep in junk rating territory and still relies on short term note borrowing to operate and faces growing expenses, the state approved $300 million more in annual funding in late summer and a tax levy hike of about $130 million. The city is also contributing $80 million to the district this year to cover security costs.

The district was rewarded by investors with narrowing spreads in its general obligation and capital improvement tax-backed issue last month. GO spreads were trimmed to about 220 to 250 basis points from about 480bp on a July sale.

With the new funding in hand, Fitch Ratings raised its rating by one notch to BB-minus and assigned a stable outlook. Kroll Bond Rating Agency revised its outlook to stable on its BBB and BBB-minus ratings of the district. S&P Global Ratings shifted its outlook to stable from negative on its B rating. Moody’s Investors Service rates the district at B3 and revised its outlook to stable from negative.

"The revenue infusion will not restore fiscal health, but it will prevent the district's financial position from worsening this fiscal year," Moody's analyst David Levett said in a November report. Analysts did not return calls to comment Monday.

Claypool’s resignation was welcomed by the Chicago Teachers Union and other critics including some educational groups and some city council members.

“Ninety-nine percent of our members voted 'no confidence' in him last year because his decisions have pushed thousands of students out of Chicago Public Schools, he’s cut our schools’ funding to the bone and he’s populated his administration with cronies and political insiders while running roughshod over the voices of parents and teachers,” CTU vice president Jesse Sharkey said in a statement.

The CTU is pressing for an elected school board. Legislation that would strip Emanuel of his power to appoint the board and allow voters to decide is pending before state lawmakers.

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