CHICAGO — A Chapter 9 filing by the Chicago Public Schools could push the distressed district into a financial "death spiral," the district's former chief executive said Tuesday.
The ensuing enrollment decline would deprive the system of much needed state aid, Paul Vallas said Tuesday during a Chicago City Club panel discussion that posed the question of whether municipal bankruptcy is inevitable for the junk-rated district.
Legal obstacles make bankruptcy a tough choice, even if the state puts such an option in place, Vallas said. While the state lacks a general Chapter 9 statute, Gov. Bruce Rauner has proposed adding one as part of larger legislation package that includes sweeping pension changes for the state and local governments including CPS. Rauner also has said CPS is a good candidate for such a filing.
The panel discussion came on the eve of the Chicago Board of Education's Wednesday vote on a $6.4 billion fiscal 2016 budget and $1 billion in borrowing.
"Who wants to send their kids to a bankrupt school district?" Vallas asked. The litigation and potential teacher strikes could "totally destabilize the system which means people would flock away from the system which means you would put the system in a financial death spiral," he said, citing the district's dependence on state aid that is based on enrollment and attendance.
"At the end of the day bankruptcy is literally the kiss of death .that would decimate the finances so it's simply not an option," Vallas said.
To help close a $1.1 billion deficit, the district's proposed budget relies on more than $300 million from one-time revenues and gambles heavily on the state coming through with $480 million in pension help. The Republican governor has endorsed providing some help but tied it to passage of collective bargaining curbs at the local government level that the General Assembly's Democratic majority opposes.
The board also is expected to approve about $1 billion in borrowing that includes plans to push off some near-term debt principal for budget relief. It would also help cover the cost of cancelling swap agreements now in default due to the board's credit rating deterioration.
The Chicago Civic Federation, a local government research organization, called on the board to reject the budget as it warned of the district's dire fiscal situation in a review published Tuesday.
"This budget is yet another financially risky, short-sighted proposal and fails to provide any reassurance that Chicago Public Schools has a plan for emerging from its perpetual financial crisis," said federation President Laurence Msall. "If stakeholders do not come together now to develop a multi-year plan, the Federation is deeply concerned that CPS could fail, with devastating consequences for the future of Chicago and Illinois."
The school district carries junk level ratings from Fitch Ratings, Moody's Investors Services, and Standard & Poor's. Kroll Bond Rating Agency rates the board BBB-plus but has it on watch for a downgrade.
Another panelist, Chicago Board of Education vice chair Jesse Ruiz, shot down the Chapter 9 option, in keeping with position struck by Chicago Mayor Rahm Emanuel, who appoints the board members.
Ruiz, an attorney, said he's not dealt with Chapter 9 in his practice and "as long as I'm on the school board I never will."
Ruiz repeated the district's pleas for state help on pensions and aid formulas. "That's the crux of the problem," he said. The district wants the state to cover about $200 million of its nearly $700 million teacher's fund contribution, similar to what the state provides for districts outside Chicago. It also wants to reamortize the payment schedule and phase in a shift in the district's coverage of 7% of the 9% teachers' contribution over to teachers.
The teachers union opposes the change without other compensation. Many of those proposals are included in legislation sponsored by Senate President John Cullerton, D-Chicago.
Ruiz also downplayed critics' contentions that the district's use of risky auction rate securities that ultimately required higher interest rate payments and interest-rate swaps are to blame.
"That's not the cause of this issue," he said. "That's a drop in the bucket." The district faces more than $200 million in swap termination fees.
While rejecting Chapter 9, Vallas does support state intervention that resembles the Chicago School Finance Authority put in place by the state after the system's near fiscal collapse in 1979 over a cash flow crisis. The district was seeking to issue notes to cover expiring notes. Its short-term rating dropped and banks refused initially to purchase the debt.
Vallas, a former city revenue and budget director, was tapped by former Mayor Richard Daley to lead the school district after the state handed back control to the city in 1995. During his tenure which lasted until 2001, the district saw its ratings rise sharply and it launched a massive capital program. Vallas boasted of flush billion dollar reserve levels and structurally balanced budgets.
A continuation of heightened borrowing levels, after Vallas' departure, especially debt that tapped into state aid for repayment, has contributed to the district's woes.
Vallas said he believes reinstating the state oversight authority would help solve the district's problems by providing greater transparency and accountability, but he also advocates for putting "fundamental protections" in place that would prevent future leaders from reverting back to poor debt or budgeting practices.
Vallas called the district's pension woes a political problem.
"The seeds to a compromise are there," he said, citing the Cullerton proposal. He also endorsed restoration of a property tax levy for pensions as proposed by Emanuel if the district wins the state help and wants to see various revenues from tax-increment financing and other sources earmarked for the teachers' fund, which is saddled with $9.4 billion of unfunded liabilities.
Panelist Charles Burbridge, who took over as executive director of the teachers' pension fund in March and was a deputy chief financial officer of Chicago schools during the 1990s, said Rauner's Chapter 9 proposal only serves as a means to delay dealing with the "core issue of education policy and education funding it's reprehensible that Illinois would consider bankruptcy."
Burbridge supports many provisions in legislation proposed by Cullerton but opposes a provision that would re-amortize the current payment schedule. "Kicking the can down the road .is not an option," he said, warning that such a maneuver only adds to the fund's underfunding woes and the need for more revenue in the long haul. He also advocates for making all contributions mandatory to achieve long term stability. The district shorted the fund on contributions when it was fully funded.
Standard & Poor's earlier this month became the latest rating agency to strip the district of its investment grade rating, socking it with a three notch downgrade.
Fitch in late July dropped the district to BB-plus, one notch below investment grade, and has it on negative watch. That followed Moody's move in May dropping it to Ba3, three levels below investment grade, with a negative outlook.