CHICAGO – Chicago’s chief financial officer says bankruptcy isn’t on the table for Chicago Public Schools and the city is prepared to work with the cash-strapped district if the state doesn’t come through with additional funding in the next fiscal year.
The city has a diverse revenue base that’s not dependent on the state but the historic budget impasse “has been disruptive and at most creates uncertainty for our school system,” Carole Brown said in a discussion that covered city finance developments, pension funding, CPS, and the state’s budget mess at The Bond Buyer’s Midwest municipal conference in Chicago last week.
“Bankruptcy is not something that anyone other than the governor is contemplating for CPS,” Brown said during the discussion with Chicago Civic Federation president Laurence Msall. “If Springfield spent time and energy to appropriately fund all districts” and then gave CPS pension parity “CPS would be ok.” Rauner has suggested if the state were to add a Chapter 9 provision -- it's not possible under current state law -- CPS is a top candidate to use it.
The school district and Mayor Rahm Emanuel’s administration have pressed the case that CPS educates 20% of the state’s school children but receives just 15% of total state aid. “It’s ridiculous,” Brown said.
The junk-rated district also wants more state pension help that’s provided to other districts. The district is responsible for $721 million of the $733 million payment that must be made by the end of the month, while the state covers most of what other districts owe. The state has defended the disparity as being due to a deal struck long ago that provided the district with more grant funding.
An overhaul of education funding formulas that would provide about $300 million more for CPS passed the General Assembly last month, but the Rauner administration labeled it a “CPS bailout” and threatened a veto. The House lacks the votes needed for an override to succeed. New funding would likely be part of a state budget package but such a deal, as Illinois approaches the two-year mark without a budget, is nowhere in sight.
Emanuel had pledged to help the district get through the fiscal year but the city and CPS settled on more short-term borrowing to keep schools open until the school year's scheduled end next week. The district recently announced it was in negotiations to finalize with JPMorgan a direct placement of nearly $400 million in notes backed by state grants owed the district.
Sources said the district received three bids. PNC Bank, which did not bid, stepped in to take out a portion of CPS tax anticipation notes held by JPMorgan that smoothed the way for its GAN bid. JPMorgan is the provider of TAN lines totaling $950 million that are due later this year.
Brown said the city and CPS are still banking on the state but “the mayor is not going to allow the academic progress CPS have experienced to decrease,” so “if the dysfunction in Springfield continues, I think the city will have to do what it can to work with CPS to ensure that there is certainty for the families of Chicago.”
Emanuel has said he doesn’t want to show his hand because education funding remains on the table at the state capital but new taxes on downtown businesses or high net worth individuals and freeing up more tax-increment financing funds have been floated as options.
Some local articles have questioned Emanuel’s engagement in the state gridlock and whether he should be doing more. While Emanuel may not be a physical presence at the state capital, Brown dismissed that notion.
“This is too important for us to just sit on the sidelines and hope the situation resolves and the mayor is not going to do that,” Brown said,
The current political environment, she said, is one where “the leader of the state…considers it a win when their largest municipality, their economic engine, the city that contributes more to the state than it receives back from the state….considers it a win when that city loses.”
While most city revenue streams are mostly insulated from the dysfunction, it does face some fallout.
Chicago’s recent revenue bond sales, like other deals from Illinois issuers, faced an additional penalty and its motor fuel credit has been downgraded to junk due to the need for a state appropriation to free up revenues. Funding fix legislation for two Chicago pension funds to save them from looming insolvency has passed but is being held back for “consideration” due to Rauner’s threatened veto.
Rauner has attacked the plan as one that kicks the can and hurts local taxpayers but he’s indicated he would sign if lawmakers pass other state reforms.
Brown said the city’s legislation is the best it can do given Illinois Supreme Court opinions that have voided any changes to pensions that cut benefits.
“We don’t think there’s any flexibility in that,” Brown said. “All four funds are on a ramp to ARC funding….we just need the governor to sign the legislation.” The plan for the city’s public safety funds is now law after lawmakers overrode a Rauner veto, but the one for the municipal and laborers’ funds is stalled as the GOP has pulled its support.
“The city has no intention on allowing either pension fund to reach insolvency,” Brown said but declined to elaborate on what actions the city could take should the legislation remain stalled. Too long a delay could hurt the stable rating outlooks assigned by several rating agencies after the fix was announced.
Brown reflected on the city’s gains from pension funding changes to trimming $600 million in costs over the last six years, moving to shed shoddy debt practices, and resolving a potential $2.2 billion liquidity crisis.
The liquidity crisis was sparked in May 2015 when Moody’s Investors Service dropped Chicago to junk over its pension strains. That triggered termination and default events on credit lines and swaps. The city eventually took out those lines, paid off the swaps, and shed floating-rate risk mostly at the expense of its long term debt load.
Brown said the city saw improvement in the spreads on general obligation credit line bids up for renewal that “really showed the progress we made.” The city has $510 million in lines with JPMorgan Chase, Bank of China, and BMO Harris Bank each providing $170 million.