Chicago Public Schools is paying a steep price on its latest round of borrowing, in part because there’s a risk it might not be able to repay, municipal finance experts said.
CPS will pay a 6.39 percent interest rate — four times what a government body with good credit would pay — on a $275 million loan it finalized this week with JPMorgan Chase. That rate will go up if the district’s credit rating continues to fall. The school district needs the loan to help make a $716 million teacher pension payment by June 30.
“JPMorgan is getting an extraordinarily high rate — some would consider punitive to the borrower — for the risk they have been taking on,” said Richard Ciccarone, president and CEO of Merritt Research.
Ciccarone said the loan terms suggest few lenders were willing to engage. The bank stands to make between $13 million and $15 million over the course of the loan, which must be paid back by March 2018.
CPS is being punished for its bad finances, which has led to its credit being downgraded to junk status, and because it’s counting on a dysfunctional state government to supply the money the district needs to repay the loan, experts said.
Illinois is heading into its third year without a budget and is hopelessly behind in paying bills to school districts hospitals and social services. Lawmakers return to Springfield on Wednesday to try again to pass a budget.
Under the terms of the loan, CPS intends use hundreds of millions in state grant money it’s owed by the state to repay JPMorgan Chase. But a major reason CPS needed the loan in the first place is that the state is delinquent in paying out those grants.
CPS officials said Illinois is legally obligated to dole out the grants by Dec. 31.
The governor’s office insists that the blame for CPS’ continued financial problems lies with the district itself.
“We are saddened that the Chicago Public School district is trading its future financial health for another short term easy fix,” spokeswoman Eleni Demertzis said in a statement. “It has no one to blame high interest rates on other than the decades of mismanagement that created this crisis.”
Bobby Otter, budget director for the Center for Tax and Budget Accountability, said Chicago schools will feel the impact of the high-interest loan immediately. It will force CPS to spend money meant for next school year on expenses for the school year that’s just ended.
Already, $1,500 of the $11,615 CPS has to spend per student goes to whittle away the school system’s accumulated debt.
An earlier version of this story misstated the amount CPS owes the Chicago Teachers’ Pension Fund by June 30. The correct amount is $716 million.