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By: Mark Glennon*


Suppose bankruptcy for Chicago Public Schools could somehow entirely cancel all its unfunded pension liability, all its bonded debt, and let the school district switch over to a new retirement plan for future work funded at levels common in the private sector. Surely that would more than solve the district’s budget problems and free up plenty of cash for education, right? After all, its commonly reported that the only hole to be plugged in CPS’s new budget is $480 million, which CPS hopes to get to get from the state. Just the contribution to its defined benefit plan is $675 million this year, which smart readers probably know is many times what the private sector would pay.  And erasing annual service on bonded debt would be huge, right?


Nope, even 100% haircuts on those obligations would barely balance the budget in a sustainable way. Here are the numbers:


First, the actual hole in CPS’s budget is $1.1 billion. That’s due to use of revenue in the budget from one-time sources and further “scoop and toss” borrowing, which is issuing new debt to pay off old debt, all according to a detailed analysis of the budget completed by the Civic Federation. None of that is sustainable, and it’s in addition to that $480 million CPS probably won’t get from the state.


For its pension, CPS is budgeted to contribute about $675 million this year, with big increases thereafter, most of which is applied against the unfunded liability already accrued. That’s currently 28% of its roughly $2.4 billion payroll. In the private sector, an employer would typically contribute roughly 6% of salary towards a retirement plan. So, if CPS was doing the same it would be contributing $144 towards retirement instead of that $675 million it now pays. It would therefore save $531 million on pension expense.


Source: CPS 2016 budget,
Source: CPS 2016 budget,

For bonded debt, total annual payments on it are about $540 million (about 8% of its budget), and they are projected to stay around that for the near term, as shown in the chart on the right.  The total outstanding balance on all bonds is about $6.3 billion, according to CPS’s 2016 budget.


Wipe out all that debt service and add it to the pension savings and you get $1.07 billion, just a tad short of the budget deficit.


The problem, however, is that cuts nearly that large aren’t feasible. Even my fellow pension critics would agree, I think, that total cancellation of the unfunded pension liability would be far too harsh. Officially, CPS’s pension is about 50% funded. (We wrote here last week about its most recent actuarial report.) In bankruptcy, that number is likely to be revised significantly for the worse, as happened in the Detroit bankruptcy. CPS’s unfunded portion could well rise to 75%. Cancelling that debt entirely would mean pensioners get just 25% of what they were promised.


Nor is cancelling all bonded debt feasible. Some of it is secured, which must be paid in full. Even unsecured debt is supposed to be paid on a parity with unfunded pensions and other unsecured debt. That’s based on the letter of Chapter 13, though, in practice, larger haircuts can be expected for bondholders, as happened in Detroit. Still, some degree of equality would have to be maintained and bondholders would be represented aggressively, so giving something substantially more than zero to pensions implies something for bondholders, too.


Nevertheless, bonded debt is far more at risk in bankruptcy than commonly thought, which I’ll come back to below.


Since unsecured pension and bond liability cannot be cut to zero, that means other items in the budget must go. Those other items are below, which is CPS’s operating budget. Take your pick which to cut. Salaries are the biggest target, comprising 68% of the budget, making layoffs and salary cuts perhaps the most likely. Note that the much-discussed  “pension pick-up” is not that big an item. CPS pays 7% of the 9% of salary that’s called the “employee’s contribution” to the pension. As you can see, however, it’s just $167 million in the current budget, shown in green. CPS wants teachers to pay it themselves and it’s a key reason why teachers have voted to strike.


Source: CPS Budget Overview -
Source: CPS Budget Overview –


The biggest unknown may be how much remains to be saved simply through better management — cutting waste and fraud, for which CPS has been notorious for decades. To the extent they are objectively verifiable, they could be included in a Chapter 9 plan. The Better Government Association this week released a report questioning whether $1 billion in operational savings in CPS claimed by Mayor Emanuel have in fact been realized. Maybe there’s still potential there.


Likewise unknown, at least to me, is the potential for the private sector to take over some schools. I have not seen clear cost savings discussed on that possibility and, personally, could not venture a guess.


Now, a few other points about bankruptcy.


First, remember that Springfield would have to authorize the filing. Bankruptcy is only open to muncipalities in states where it is authorized, and Illinois is among the states where it’s not.


Second, if CPS and the state really wanted to, they could slam bondholders. CPS’s bonded debt is mostly either unsecured or secured by collateral that can be taken away, rendering it unsecured.


Specifically, some of CPS’s bonds are “GOs,” — general obligation bonds, which are backed by the CPS’s full faith ad credit, but that does not mean they are secured. GOs historically were unsecured and are sometimes wrongly assumed to be so. It appears that most, perhaps nearly all, CPS bonds at least purport to be secured by some form of collateral. Primarily, that collateral is reimbursements from the state and anticipated streams of income from tax receipts.


But that collateral rests on shifting sand. Reimbursements from the state are subject to what’s called “appropriation risk.” The State of Illinois, for example, could simply choose to cut cut funding its stream. That doesn’t necessarily mean cutting off the money. It would be easy to replace or re-characterize whatever funding it provides to CPS in a manner free from bondholders’ security interest. Second, much of CPS’s bonded debt is secured by tax receipts coming directly to it — property taxes being the most important. Even that could be changed by statute. The entire school funding and property tax system is long overdue for a major overhaul. If you doubt that, read how the current system has doomed many Illinois towns, include most of Chicago’s south suburbs.


Writing a few hundred pages about what Chapter 9 might look like would be pretty easy for CPS, like most municipalities, but the bottom line would be that we don’t know. Municipal bankruptcy is fraught with unknowns, as experts constantly warn. The real issue is not whether bankruptcy is an attractive option, it’s whether it’s inevitable: If even total cancellation of pension and bond debt would barely balance its budget, how can it be balanced outside of bankruptcy?


CPS, however, is in the fairly unique position of having one other option available, which is to totally reconstitute it, a process that’s not uncommon in the private sector. We wrote about that option in two earlier articles linked here and here. That option would again require full cooperation of the General Assembly, but it offers the same benefits as bankruptcy — cutting pension and bonded debt by leaving those obligations stranded and unfunded.


*Mark Glennon is founder of WirePoints. Opinions expressed are his own.



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It appears that the bankruptcy of Chicago Public Schools is inevitable. If it is true that the budget is in the red even if ALL pension debt and bond debt were eliminated, how can bankruptcy be avoided. Much like Detroit, taxes cannot be raised high enough to pay off the debt, and not cause a mass exodus from Chicago. The State of Illinois is too broke to help CPS, Chicago or Cook County. To me the real crisis to avoid is having Chicago, Chicago Public Schools, Cook County and the State of Illinois all in the bankruptcy process at the same time. This would be a truly… Read more »

1.07 million – typo? Billion

Space Wrangler

I’m a securities analyst and I often complain about the amount of accounting shenanigans that companies pull. These days I find myself especially bothered by companies’ use of non-GAAP financial metrics which often completely distort the true picture. But man, I will say this, public companies have NOTHING on municipalities when it comes to disingenuous financial reporting. The amount of completely BS assumptions and descriptions and categorizations about CPS’ budget would be hysterical if it wasn’t so depressing. This is really one of the main diseases in the first place: dishonest long-term financial planning.

mark glennon

Absolutely. I think that’s one reason why much of the business community has been too quiet about our problems. They know fraud suits will be abundant after things collapse. Plenty of accounting firms, law firms, actuaries, advisors and underwriters surely are sweating bullets.