Mayor Overhauls Top Brass at Chicago Schools

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CHICAGO — Chicago Mayor Rahm Emanuel rolled out a new leadership team for the fiscally beleaguered Chicago Public Schools that will be led by his chief of staff, Forrest Claypool.

Claypool takes the helm of the district as it grapples with how to erase a $1.1 billion deficit in a fiscal 2016 budget that has yet to be released, fund a nearly $700 million teachers' pension fund contribution in the new fiscal year, and manage its more than $6 billion debt load, while avoiding classroom spending cuts. The district also faces a battle over a teachers' contract that recently expired.

Emanuel and Claypool both dismissed bankruptcy as an option as Emanuel announced the changes Thursday.

"Bankruptcy is not the answer," Claypool said when asked directly whether Chapter 9 is an option as Gov. Bruce Rauner has suggested, even though the state has no such provision on its books.

"Everybody has to give a little so nobody has to give too much," Claypool said in support of a proposal by Emanuel that calls for state help in covering pension payments, teachers to cover a greater share of their contributions, and a property tax increase to help stabilize the system.

On the bankruptcy option, Emanuel said without changes to the state school aid and pension funding structure the foundation of the district's fiscal woes would remain at the end of a Chapter 9 route, and "you'd be right back there" with respect to deficits.

Emanuel said Claypool brings a unique "skill set" to the job and with other new appointments, he believes a leadership team is in place to ensure the district's "financial challenges don't undermine" education goals or academic gains.

Claypool takes over on July 27 as chief executive officer, filling a void that followed the recent resignation of Barbara Byrd-Bennett over a contract scandal. The board of education will vote on his appointment next week. With the appointment, Emanuel returns to the practice of his predecessor, Mayor Richard M. Daley, who turned on many occasions to managers who lacked education experience to lead the district. Emanuel's first two CEOs brought education experience with them to their positions.

Claypool has a reputation as a no-nonsense fixer with good political instincts who's willing to anger unions. He served as chief of staff to former Mayor Richard Daley and was tapped by him to turn around the finances at the Chicago Park District. Emanuel turned to Claypool, a former Cook County board member, to lead the CTA and later named him chief of staff.

Chicago Board of Education vice chair Jesse Ruiz, who had been acting as interim CEO, will return to his board post. Frank Clark will take over as board chairman, replacing David Vitale, who held the post throughout Emanuel's first term beginning in 2011. Clark is chairman of the executive committee of the Chicago Community Trust. He had led ComEd before his 2012 retirement.

Vitale, a former corporate banking executive and head of the Chicago Board of Trade, began providing advice to CPS on a pro-bono basis in 2003 and then became chief administrative officer. CPS critics have blamed Vitale for the district taking on such risker debt structures as auction rate securities and other floating-rate products.

Janice Jackson was named the new Chief Education Officer and Denise Little was named senior advisor to Claypool.

CPS officials on Monday disclosed that the new budget will bank on $500 million in state pension help. If that elusive help doesn't arrive, deeper cuts and more borrowing will be needed.

The district recently announced $200 million in cuts as part of its effort to shed $1.1 billion of red ink, after efforts to delay a $634 million fiscal 2015 teachers' pension fund contribution due late last month fell apart. The district tapped its credit lines to cover the payment.

The district's budgetary and pension ills have dragged down its ratings. Standard & Poor's rates the district BBB on CreditWatch negative. Moody's Investors Service in May stripped the Chicago Public Schools of its investment grade rating, lowering it three notches into junk territory at Ba3 with a negative outlook.

Fitch Ratings assigns the Chicago schools its lowest investment grade rating of BBB-minus with a negative outlook. Kroll Bond Rating Agency assigns a BBB-plus rating on watch negative.

In a special commentary published this week, Gurtin Fixed Income Management LLC warned of the district's dire fiscal strains. Gurtin shed its CPS holdings back in 2011 as it saw signs of looming credit stress.

The report highlights the depth of CPS' distress, citing a plunge in its general fund cash position from $1 billion in 2013 to $100 million last year, after the expiration of a state-approved partial pension holiday.

Gurtin concludes that the district's previous fund balance only masked its true fiscal condition. That's attributed to the district's reliance on non-recurring revenues such as federal stimulus funding, the early receipt of property tax revenues in 2012, and debt restructuring which papered over the extent of CPS' growing woes.

"As difficult as prior budgets have been, the district's immediate future will likely be worse," lead author and senior credit analyst John Humphrey said. "The era of one time solutions is beginning to run into the immutable wall of reality."

CPS' situation is all the more precarious because of a lack of flexibility to raise revenue due to tax caps and its dependence on state aid. At the same time, Chicago and the state are struggling with their own deficits and pension woes, making a solution all the more difficult.

Other solutions offer their own complications. Some have suggested a fix lies in putting the district under state control, similar to what occurred in 1979 when a fiscal collapse led to the establishment of the School Finance Authority.

"Control boards however can sometimes be viewed unfavorably by the public at large which has at times seen them as being undemocratically imposed on an electorate which did not vote for those in charge," Gurtin said. As alarming as talk of Chapter 9 is, the option faces significant political roadblocks.

"Whatever the method CPS ultimately adopts in an attempt to navigate the rough waters it finds itself in, we expect it will be fractious, and exert painful choices on all involved," the report said.

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