CPS To Borrow Nearly $400 Million to Make Massive Pension Payment
Updated at 6:25 p.m.
The debt-burdened Chicago Public Schools plans to borrow $389 million to pay a massive pension bill, a move critics say undermines CPS’ financial standing long term.
The borrowing plan leaves CPS alone dealing with its financial crisis — there is no city-financed rescue. There are no new taxes or other revenue outlined, and the loan will be through CPS, even though it’s junk credit rating means it likely will pay a high interest rate. Mayor Rahm Emanuel pledges to keep pressure on the state to come up with cash to help the school district.
Friday’s borrowing announcement comes three weeks after Emanuel promised to deliver a rescue plan for the school district. At the time, he assured parents he wouldn’t let schools close early to save money. But it turns out that big threat — closing schools early — has already been resolved.
CPS has made enough cuts over the last few months, and has enough available credit, to keep schools open through their scheduled end, said Emanuel’s chief financial officer, Carole Brown.
But CPS lacks enough cash to make the full $716 million pension payment because state grants are delayed. CPS says it’s owed $467 million by the state.
That’s what the loan is all about — covering delayed state payments, Brown said.
The loan, called a Grant Anticipation Loan, is not particularly risky because it is short term and is backed by a dedicated revenue source — the state money. The expectation is that the state will eventually make good on what it owes Chicago.
But Matt Fabian from Municipal Market Analytics said that any loan for Chicago Public Schools is risky. The district has junk credit rating.
“Every borrowing … whether it is regular bonds or grant anticipation notes … or frankly a car loan, will be difficult to get,” he said. Fabian also noted that any negative news about the school district could kill a borrowing deal.
Last year, just as CPS went to market with a bond package, Illinois Gov. Bruce Rauner floated the idea of CPS bankruptcy, prompting the school district to delay the borrowing.
CPS cannot legally take out a loan with an interest rate greater than 9 percent, city officials say.
The Chicago Teachers Union blasted the move, saying that it puts the school district in the hole for years to come.
“This deal is akin to a payday loan that will take years to pay off at the expense of our school communities, while bankers continue to profit off the school district — a scenario that has, in part, led us to where we are today,” the statement read.
Ald. Scott Waguespack, who chairs the City Council’s Progressive Reform Caucus, said his caucus was prepared to do whatever was needed to keep schools open. But the caucus took the mayor to task for not doing more to establish new revenue for the school system.
“It’s time to have a real conversation about progressive revenue once and for all,” he said in a statement.
Fabian noted that the city cannot keep looking to the state to come up with additional money.
“Continuing to rely on the state, short of the fantasy that the state will start to act like a real state … that is the problem,” he said. “CPS and the city can’t continue to go this way.”
Brown emphasized that the mayor and CPS officials don’t want to let Gov. Rauner off the hook. They intend to keep pressuring the state to pay what’s owed school districts across Illinois and to increase school funding. CPS unsuccessfully sued the state this spring in an effort to force it to hand over more money to Chicago.
But Brown said the city and the school district plan to look for long-term solutions.
“The city has a bunch of options on the table and nothing is off the table,” Brown said.
There was some talk of raising taxes in recent weeks and that discussion is expected to resume as CPS confronts continued financial shortfalls for next year’s budget, which is due this summer. Despite the borrowing announced Friday and cuts this year, CPS says it will still end this school year with a $40 to $90 million budget hole.
Andy Kaplan, who sits on the Local School Council at Mitchell Elementary in West Town also holds the state responsible but says parents are getting “numb” to the constant doomsday threats issued by CPS. He also said the budget cuts are hurting students and diluting the quality of education.
“We are at the end of what we can possibly do,” Kaplan said, noting that class sizes are already growing at his school.
Rauner spokeswoman Eleni Demertzis said in a statement that the mayor should stop “pointing the fingers at Springfield. … It's apparent that this mayor of mismanagement is avoiding responsibility as a means to distract from the failures of his own leadership."
City and CPS officials said the $389 million loan, along with revenue from a new pension property tax, will cover the bulk of the pension bill that is due on June 30. CPS expects to pay the pension fund $465 million, with another $250 million coming in the summer after property tax revenue is collected.
CPS expects to make up the difference between the $389 million loan and the $465 million owed to the pension fund from budget savings already achieved, Brown said. This includes school budget cuts and unpaid furlough days for school staff this year.
Schools officials also said some of the savings came from freezing non-salary spending on May 1 and sweeping what was left in the school accounts. CPS officials say schools were warned this would happen in advance. In addition, CPS saved money by consolidating insurance carriers.