By: Mark Glennon*
There’s no point in sugarcoating this. The financial crisis at the Chicago Public School District may come to a head this week, and the impact will extend beyond the school system. A CPS bond sale is scheduled for Tuesday, which is widely seen by financial markets as a test of whether it has a pulse. Here is a summary of key points from various sources:
• CPS is just about out of cash, and its cash could be entirely wiped out on 48-hour notice, according to the Sun-Times. Specifically, the banks owed on $228 million of swap agreements have the right to demand it with that two-day notice, which would just about deplete CPS’s cash reserves, unless a negotiated settlement is reached.
• CPS’ structural deficit is horrendous and ongoing. In its most recently reported year, it had a loss in net position of over $1.1 billion with an operating fund deficit of $513 million, and that’s on just $5.4 billion in total revenue. In addition, its pension’s unfunded liability grew by over $100 million in the last reported period, despite higher employer contributions and good market returns. Its unfunded liability stands at $5.5 billion and it’s 53% funded.
• It’s current budget is a gimmick-based monstrosity. The Civic Federation details why, here.
• The resignation of CPS’s CEO and related Federal investigation aren’t a just-another-day-in Chicago story. They’ve brought the overall management and control system of CPS into question, and the Federal investigation is deeper than first reported. ABC7 says it has “a gush of details in federal subpoenas served this week on top Chicago Public Schools officials,” and that the three of the CEO’s top lieutenants have been joined under scrutiny. “How could they be so dumb,” asked a Crain’s headline.
• “Rating shopping” seems indicated, which is a very bad sign. Bond issuers typically line up major rating agencies ahead of a bond sale. This sale was rescheduled from last month, after both Moody’s and S&P downgraded CPS to a notch above junk. Ahead of the new sale,” according to The Bond Buyer, CPS “did not seek a rating from Moody’s. It sought fresh reviews from Fitch Ratings and Standard & Poor’s and a new rating from Kroll Bond Rating Agency.”
• Much attention has been given to Governor Rauner’s comment that he’s “concerned that [CPS] is going to have to go bankrupt.” Duh, you might be thinking, but some in the media have reported that as a dangerous endorsement of bankruptcy for CPS, so the concern about a Chapter 9 bankruptcy is real — though legislative authorization from Springfield would be needed for that.
Some additional thoughts:
CPS is not an island. Kids must be schooled. Whatever happens, deficits like CPS has sustained cannot continue and the school system, if it breaks, will need funding from somewhere, no matter how aggressive its cost cutting becomes.
Another 30 Illinois school districts have less than 30 days cash on had. Will whatever happens to CPS become a precedent in any way?
Rahm’s position can be summarized as gimme-gimme-gimme to Springfield, but Rauner has said emphatically that he won’t let Illinois taxpayers bail out Chicago. Rauner’s experience, I think we can assume, taught him not to throw money at problems before they are fixed. The Bush administration put $17 billion into GM and Chrysler when everybody was insisting bankruptcy couldn’t happen to them. They went bankrupt. The money burned. We have a governor with relevant experience that should guide him differently. The state has no money to share anyway.
People in public finance who I know express far more alarm in private than anything you see publicly quoted. One email I got from a former municipal bond underwriter says,
I don’t see how anyone knowledgeable would do the underwriting right now, give legal opinions, etc… What is the revenue stream that will pay these bonds back? Can’t be property taxes. No state help. City population shrinking. This is meltdown unfolding before our eyes.
CPS bonds sold off last week, taking them to a yield that’s much higher than benchmarks but still under 7%. You be the judge of whether that’s fair compensation for the risk. As for me, well, let’s just say I think critics of the Efficient Market Theory have a new Exhibit A.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.