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Chicago Blues
Students Lose, Wall Street Wins in Blue Model Merry-Go-Round

The catastrophic fiscal mismanagement of Chicago’s public schools is creating a windfall on Wall Street as the district borrows from big banks at ruinous rates. The WSJ reports:

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.

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  • Anthony

    “Hooked on Debt: Are local governments…getting in over their heads?” See:

  • JR

    Well, yeah. Since when did Democrats cared about disadvantaged students? Come on now, let’s be real.

  • Andrew Allison

    Your socialist tendencies are showing. Given that the Chicago Public School District is extremely unlikely to be able to service, let alone repay the debt, why are the interest rates exorbitant? Why, pray tell, should any municipal agency’s credit unworthiness be treated differently from that of any other borrower?

    • LarryD

      At some point, Chicago will default. And the creditors will be shafted. At some point, the Federal Government’s debt addition will come home to roost, hyperinflation or currency collapse, but it will be ugly. Depending on the lead up, Venezuela may or may not be our future.

      Cities were invented to facilitate trade and industry. The modern American city has driven most industry away, its dirty, ugly, and employs all those detestable working class people. Modern communications and transportation have pretty much eliminated the other utilities of cities. They are obsolete, playgrounds of the elite, with plenty of poor folks the elites can pretend to care for. Financially unsustainable. They’re going to die, all of them. Some faster than others, some are further along the road than others.

    • f1b0nacc1

      The truth is (As JR points out above) that the creditworthiness of these institutions will NOT be treated differently, with predictable results.

    • Dave6034

      The suckers in this story are the Wall Street financiers, unless they find bigger suckers to flip these bonds to. Chicago’s tax revenue will never come close to balancing its budget — never mind a surplus that repays the debt with interest.

      • Charlotte Aines

        The suckers will be the hoi polloi who didn’t know the mutual funds in their 401K invested in these bonds.

  • Bob Parkman

    The news this week is the enrollment drop in the Chicago Public Schools to about 380,000. Of course with fewer students you need fewer teachers, but the Teacher’s Union goes berserk about cuts and wants still more money.

    Public “institutions” like this are run for the benefit of the teachers, not the students.

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