Chicago Schools In "Dramatic Trouble": "They're Looking At A Disaster," Illinois Governor Warns

Back in September, we noted that Chicago’s schools are in trouble. Deep trouble.

Amid Illinois’ intractable budget crisis, the city’s public school system opened with a budget shortfall of nearly a half billion dollars.

Borrowing and trimming the proverbial fat helped close some of the $1.1 billion hole but once the board reached the point where “further cuts would reach deep into the classroom” (to quote system chief Forrest Claypool), the schools asked Springfield to make up the difference which amounts to $480 million.

The Chicago Public School (CPS) system has nearly 400,000 students and more than 20,000 teachers. Around 1,400 jobs were eliminated in an effort to save money and more layoffs may be just around the corner if Springfield - which is mired in budget gridlock - doesn’t step in.

One problem is the CPS pension liability. As WSJ noted four months ago, “the district’s pension costs have more than doubled in recent years after the board took a partial 'holiday' for three years from paying the amount needed to put the retirement system on a path to long-term solvency.”

“It is like the board is a desperate gambler at the end of their run,” remarked Jesse Sharkey, vice president of the Chicago Teachers Union.

Governor Bruce Rauner wants nothing to do with bailing this “desperate” bunch of “gamblers” out. “Let’s be clear Chicago Public Schools are in dramatic trouble,” he said last week. “They’re looking at a disaster somewhere in the next nine months in the Chicago public schools.” As Bloomberg reminds us, "CPS is the only state district that pays for its teachers pensions."

Rauner went on to predict that Springfield would be blamed if (or perhaps “when” is the better word) disaster finally strikes: “For them to say ‘hey you owe it to us, it’s Springfield’s fault, pick up our pension liability and let us kick the can in the rest of our pension liability, no, no, not happening.”

“No, no, no,” and that means it’s back to the bond market for CPS, where investors are set to punish the board for their abysmal financial predicament.

As Bloomberg goes on to note, the system’s GO debt is trading near its lowest levels since September and the Chicago Tribune’s editorial board isn’t happy about it. “While Springfield yawns, CPS borrows money it shouldn't, at rates that it (read: that taxpayers) can't afford,” the Tribune lamented, in a piece written late last week. “The cost of that borrowing now is nosebleed steep: CPS recently agreed to shell out 10 times the interest rate that a healthy district would typically pay its lenders. Ten. Times.”

Here’s more:

But CPS won't stop. The district plans to sell as much as $1.2 billion of debt later this month. The rate CPS pays again will be punishing.

 

Punishing, that is, to nearly 400,000 school children. Every dollar CPS spends on debt service cannot be spent on classrooms, teachers, books — education.

 

That is, every dollar that pays back this astonishing level of borrowing, for years on end, won't go to teaching kids.

 

The ephemeral Springfield bailout? Prospects for that are as grim as ever.

 

Gov. Bruce Rauner says he will help CPS if Democrats in the legislature grant some of his demands for political and government reforms that public employees unions oppose.

 

In the last week, a frustrated Emanuel has accused Rauner of using Chicago schoolchildren as pawns "in a political game in Springfield to get an agenda done that people don't agree with."

 

Chicagoans have heard this accusation from Democratic politicians for months now. But Rauner (you, unlike Madigan and Cullerton, may recall that he won the 2014 election for governor of Illinois) evidently won't be bullied or bought off. The Democrats in Springfield and, yes, Chicago will have to deal with his demands. They will have to compromise. To the extent any pol uses those children as pawns, everyone in this tragicomedy uses them as pawns. None more, none less.

 

CPS officials said Friday that layoff notices for central office staffers should start going out by mid-January.

 

CPS bonds are rated as junk. More downgrades seem likely. Even higher interest rates loom.

 

Claypool told us last month that he expects "at some point" lenders would stop lending to CPS. "You build such a deep amount of cash debt that you can't ever pay it back."

Right. Which means a taxpayer bailout here is inevitable whether it's through an outright cash injection from Springfield, higher taxes, or both. As a reminder, Chicagoans are already the most-taxed residents in Illinois.

"Politicians in City Hall arrogantly assume that Chicagoans will stomach more and more tax hikes," Illinois Policy writes. "The expectation of higher property taxes to bail out the city’s other pension funds and the nearly bankrupt state of Chicago Public Schools will only make out-migration worse."

In other words, Springfield doesn't want to help (and even if they did, the budget boondoggle would probably constrain Rauner's ability to help) and taxpayers in Chicago are already grossly overburdened. Meanwhile, CPS is on the brink of being priced out of the bond market.

With no viable options, the base case is now that described by Chicago Democrat John Cullerton last year: the system will lose 3,000 teachers and will be forced to shorten the academic year.