By: Mark Glennon*

For the Chicago Public School system, it’s not just the near term cash crunch or the $634 million payment to its pension scheduled for the end of this month. CPS is a financial basket case — structurally and fundamentally insolvent. A dose of reality was administered recently by a financial report prepared by Ernst & Young, which has been widely discussed. Among it’s conclusions:

CPS has effectively been running a deficit for the past four years of about $500 million annually, which has been mitigated by non-recurring revenue and deferral of pension payments…. Even with a UAAL pension holiday for another five years, there remains an estimated accumulated deficit of $2.4 billion by FY 2020. [Emphasis added.]
The imperative for a dramatic, long term solution may be apparent, but nobody has proposed anything more than a short term fix. Nobody. Yes, there’s the ‘just-raise-taxes’ refrain, but two problems with it become clearer every day. First, all the overlapping jurisdictions in Chicago will be seeking major tax increases and, again, nobody has dared suggest a comprehensive answer to the aggregate problems based on more revenue — because there is none. Second, taxpayers increasingly seem fed up with paying more into broken systems. Just to start properly funding pensions would require a property tax increase of over 50%, and it seems pretty safe to say voters won’t tolerate that.

 

A serious response seems to require wholesale ‘reconstitution’ similar to that done for some individual schools in the past. Keep in mind that school districts are separate entities — their contracts and liabilities do not bind the city, nor would they bind a new, reconstituted entity.

Reconstituting the entire system would probably include the following:
– Create a new entity, or perhaps several of them, to run the schools, bringing in the private sector where that’s the best option.
– Terminate funding for CPS from all sources and redirect that funding to the new system. Transfer needed assets to the new system, probably in exchange for assumption of certain bonded debt. Put CPS in a Chapter 9 bankruptcy if necessary.
– Cease all funding to the Chicago Teachers’ Pension Fund and, instead, begin funding a new, affordable one designed to supplement the loss to retirees who need it. Let the old pension bleed out or distribute its assets as may be decided in bankruptcy. Non-teacher employees, who are in a different pension for city employees (MEABF), might be kept in that system.
– Terminate all CPS employees and rehire the good ones.

One element of this option that hasn’t really surfaced yet may turnout to be important: liability for claims by previous bond buyers. I am not about to attempt to quantify that, so let’s just say there are those who think it’s out there, and meaningful. Do we want school kids bearing the price? And another benefit, it’s done properly, would be no more Chicago Teacher’s Union.

Now, a few FAQs:

Myriad legal obstacles stand in the way, right?
No, they are all statutory, at the state level, and could all be removed if the political will was there. The constitutional pension protection clause would not be an issue, particularly if the old CPS files under Chapter 9.
Isn’t something less radical workable — a more traditional Chapter 9 or a voluntary reorganization?

There’s just not enough there to work with. Without massive concessions from all stakeholders — concessions so large that you cannot expect to get them — there’s no reorganization plan here that could work, outside of Chapter 9 or in it. If there are other alternatives, let’s hear them. We haven’t yet.

Wouldn’t this be terribly complicated in light of CPS’ immediate problems? Negotiations over the enabling legislation would be complex.
Yes, but if the will to do it was there, and the process commenced by redirecting pension contributions to operations, there would be enough time.
Isn’t it naive to think that City Hall and a majority of the General Assembly would go for this? Won’t denial, delay, extend and pretend prevail until schools start closing, and probably well afterwards?
Yes.

 

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

 

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mark glennon
I’ve gotten several questions about exactly what “reconstitution” means, so let me elaborate a bit. Basically, it’s just creating a new municipality to take on some or all of the functions of the old one. It can take many forms and may be sweeping or not. A couple old-timers in Illinois government — a former government official and state senator — told me they agree that CPS will probably come to this, and that it’s similar to what Springfield did with the CTA in the 1970s and McCormick Place in the 1980s. Like the CPS, Chicago had run both of those into the ground. The RTA took… Read more »
nixit71
The CPS situation is worse than you think. You know how Rahm is complaining that Chicago residents pay into 2 different pension systems – TRS via state income tax and CTPF via property taxes? And how the state is supposed to reallocate $100-200M of state income tax funds from TRS to CTPF to compensate for this “double taxation” but hasn’t? Well, according to the analysis below, Chicago already takes far more than their fair share of funding from multiple education sources in the state: http://www.senategop.state.il.us/Portals/0/Docs/Cost-Shift-FINAL.pdf?timestamp=1409174250732 And lest we forget, CPS gets 20% of its funding from the Feds, which can be 5-10x higher than most school districts.… Read more »
Mike
One component of a CPS overhaul could be an ISBE takeover of the CPS school board. It’s debatable whether the ISBE could do a better job of running the school board than the current board which is appointed by the City of Chicago. The Illinois State Board of Education has taken control of several school boards in the past, setting up a “financial oversight panel” or “school finance authority” for each one. http://www.isbe.net/finance Examples are East St. Louis School District 189 (East St Louis SD 189) , North Chicago School District 187 (North Chicago SD 187) , Proviso Township High School District 209 (Proviso Twp HSD 209),… Read more »
mark glennon

Excellent point. You’d still have the issue, however, of the CPS being on the hook for payments to pensioners, although that is up in the air, which we have been writing about.

Mike
The pensions will be in a perpetual crisis until the pension sentence added to the state constitution in 1970 is repealed in its entirety, and all the pension systems overhauled into something sustainable. Public Sector Pensions are first and foremost political tools, they were not designed to be sustainable at a price acceptable to taxpayers. The politicians and special interests tricked and outsmarted the taxpayers to obtain hiked pensions, and continue to do so. Amazon Prime customers can download Bill Zettler’s 300 page book titled Illinois Pension Scam for free; or the e-book can be downloaded for a few bucks, or a print version is available. The… Read more »
Bruce

Karen Lewis won’t be sending you any Christmas presents this year…

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