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Moody’s: Bankruptcy, Skipping Pension Payments Options for CPS

Updated 5:40 p.m. 

The credit rating agency Moody’s Investors Services outlined three “painful” options for how  Chicago and its public school system could get out of money trouble.

The school district could consider another property tax levy to pay off its growing debt or skipping its pension payment to the Chicago Teachers’ Pension Fund, Moody’s says in a pair of reports issued to potential investors Thursday. 

The boldest option was floated as a last resort: Chicago Public Schools should consider seeking state authority to file for bankruptcy. 

Bankruptcy and skipping a pension payment would require changes to state law and bankruptcy has been raised by Gov. Bruce Rauner and Illinois Republicans in the past, but was quickly dismissed by Mayor Rahm Emanuel and others. A spokeswoman for the school district on Thursday said all three options would create more financial problems and would be bad for city taxpayers. 

These reports come one week before the city plans to borrow more money to cover its debt payments and one month after Mayor Rahm Emanuel sent a letter to the credit rating agency accusing it of bias. The city hasn’t requested a credit rating from Moody’s in two years.

“It has become increasingly clear that Moody’s rating methodology and agenda are far from objective and independent,” Emanuel wrote in the December letter. “This is not to say that the City should be rated AAA, but… your current rating does not accurately reflect the City’s credit or our ability to pay debt service when due.”

The report about the City’s finances does acknowledge some of the steps Emanuel has taken to improve both the city’s and the school system’s finances. Specifically, it notes the additional property tax levies that have been created to fund the pensions of city workers, police officers and public school teachers. 

But, the report says, “contributions will remain insufficient to keep reported unfunded liabilities from growing for at least 15 more years.”

The reports issued Thursday are meant to help potential investors decide whether to lend Chicago money.

Matt Fabian, a partner at Municipal Market Analytics, says the city is on the right track, but it’s delicate.

“In general, the city is doing the right things,” Fabian says. “But it’s just started doing the right things. And it’s depending on time to give it more financial flexibility. Maybe it will have that time, and maybe it won’t.” 

He says risks faced by the city and its school system are probably the top two conversations in his professional world.

“The problem with Chicago is not so much the economy, and it’s not even really the pensions, long-term,” he says. “It’s the political issues.”

For instance, raising taxes too quickly could trigger a political backlash, which Moody’s also acknowledges in its report. But going slowly increases the risk that something else — like a recession — could make the financial problems worse.

Dan Weissmann contributed reporting for this story.

Becky Vevea is a reporter for WBEZ. Follow her at @wbezeducation.

A previous version of this story mischaracterized the purpose of Moody’s report.

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