J.P. Morgan Chase & Co. and Chicago-based Nuveen Asset Management have made realized and paper profits exceeding $110 million on purchases this year of $763 million in Chicago Public Schools bonds. The school system has said it needed the money to replenish its dwindling coffers before the new school year and to build and repair facilities.
The terms of the bond sales highlight the choices the school district faces after years of pension shortfalls and relying heavily on borrowing. The 397,000-student school district struggled to sell municipal bonds in February until Nuveen bought about one-third, and the district decided in July to borrow directly from J.P. Morgan for fear that investors might balk again, a spokeswoman for the Chicago Board of Education said.
The seeds of the crisis in Chicago were planted long ago when powerful teachers’ unions negotiated implausible lifetime pension guarantees, and politicians, eager to win their favor, acceded. It turns out that Wall Street financiers are an unexpected beneficiary of this corrupt bargain.
Debt service is already eating up ten percent of the Chicago School District’s budget, and city’s deteriorating finances may cause creditors to jack up rates even further. If it doesn’t find a way to plug the holes in its fiscal ship, Chicago could well face the same fate as Puerto Rico and Detroit the next time a recession causes its tax base to contract.
The leftwing champions of blue model governance think that they are siding with the little people against powerful interests. But while financiers and teachers’ unions are doing just fine under the Chicago status quo, the district’s disadvantaged students seem to lose out—over and over again.