CHICAGO – Bondholders banking on the Chicago Public Schools’ ability to stabilize its rocky finances lost ground this week as the district’s labor woes intensified and lawmakers advanced an attack on its governance structure.

Dual blows came Thursday.

The first was delivered by the Illinois House, which overwhelmingly approved a bill to shift control of the junk-rated district from the city’s mayor to voters by making the school board elected.

Investors have a favorable view of the city’s support, so the perceived threat, even though it faces an uncertain fate, could further fuel already heightened worries over the district’s ability to return to solvency.

Just a couple hours after the House vote, which was cheered by the Chicago Teacher’s Union, CPS chief executive officer Forrest Claypool abruptly announced three furlough days for employees in the coming months.

The Chicago Teachers Union responded that the furloughs, on top of the district’s decision to end its practice of covering 7% of the teachers’ 9% pension contribution, “all but assures teachers will walk on April 1st.”

“The news for bondholders is negative as it affirms the dysfunction at the state and local level,” said Brian Battle, director of trading at Performance Trust Capital Partners. The district has more than $6 billion of outstanding debt.

“Bondholders and ratings agencies are looking for long-term, durable structural reforms that will ensure efficient and sustainable operations at CPS along with sustainable and durable revenue allocations,” Battle said.

The furloughs will save $30 million.

“It’s never easy to furlough employees, but our priority was to preserve instructional time for our students while preserving year-end cash and continuing to chip away at our budget gap,” Claypool said in a statement.

The district faces a $1.1 billion deficit in the coming school year and its cash flow position it tenuous because its budget relies on a request for $480 million of new state money that has gone nowhere with leaders in Springfield locked in an impasse that has left Illinois without a budget for the current year.

Short-term credit lines and the district's $725 million bond sale, which paid a steep 8.5% yield, will allow the district to stay afloat through the fiscal year, but it needs to line up fiscal 2017 credit lines. Gov. Bruce Rauner last week warned the district that the state could block future borrowing if a state board of education review finds it to be in “financial difficulty.”

That could also impact the district’s ability to set up new credit lines based on the tax anticipation note structure it has been using. The district has dismissed the threat saying it’s exempt from the laws cited by Rauner under the state’s school code. Rauner wants legislation allowing for a state takeover and potential bankruptcy, neither of which is permitted by existing statutes.

The furlough savings come on top of other cuts announced by the district that would save $182 million this year and $335 million on an annual basis.

They include about $170 million from the elimination of the pension pick-up with $65 million saved this year, $120 million in local school budget cuts, and $45 million in administrative reductions. The district is relying on city and state legislative support for a special pension property tax levy, which is also uncertain amid to the state political quagmire.

CTU President Karen Lewis said the furlough announcement “only strengthens our resolve to shut down the school district on April 1st.”

The district and CTU are at odds over the potential timing of a strike. The district believes labor rules don’t allow the CTU to strike before late May based on the status of talks on a new contract, while CTU believes the district’s latest actions permit it to act sooner.

The CTU earlier was in a more upbeat mood earlier on Thursday after the bipartisan House passage on 110-4 vote of House Bill 557, which would install an elected, 21-member school board beginning in 2018. The bill was sponsored by Rep. Robert Martwick, D-Chicago.

The current seven-member board is appointed by Emanuel. The bill moves to the Senate where its fate is unclear. Senate President John Cullerton, D-Chicago, is an ally of Emanuel. Cullerton’s office said the bill was under review. Rauner’s office did not comment but he’s previously said he doesn’t support overturning the 1995 state handover of the schools to mayoral control.

Pressed by then Mayor Richard Daley, the state gave the mayor full control over appointments to a five-member board and the district’s chief executive officer in 1995. The board expanded to seven in 1999.

The House also approved in a bipartisan vote of 98-14 a bill that establishes a property tax levy at the rate of 0.26% with collections going directly to the teachers’ pension fund to cover a portion of the district’s annual payment. It won’t result in a levy increase because the district’s general educational levy would see a corresponding drop.

The city and CPS opposed the legislation. Emanuel backs a levy increase to generate between $170 million and $200 million of new revenue to help cover pension payments.

The district’s unfunded liabilities have grown to $9.5 billion and its annual contributions have skyrocketed to nearly $700 million this year from $15.8 million in fiscal 2006. In years leading up to 2006, state statutes allowed the district to forgo payments because the funded ratio was above 90%. The fund is now about 51.5% funded.

Supporters believe the direct pension levy which would go straight to the pension fund offers more assurance that the district won’t try to skip required payments. The district had sought and won state approval in 2010 for a three-year partial holiday.

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