Facing junk-bond status as it drowns in underfunded pension obligations, the Chicago public school system is trying to induce investors to buy its debt through an accounting scheme that will (theoretically) allow the bonds to keep paying interest even if the system goes belly-up. Reuters reports:
Chicago’s public school (CPS) system plans to sell a new type of bond issue in an attempt to separate the debt from the district’s severe financial woes and protect it in a potential bankruptcy filing, according to a document released by the district on Tuesday.
The preliminary prospectus for the debt indicates the Chicago Board of Education will issue $500 million of bonds secured solely by a capital improvement property tax and not by the district’s general obligation pledge. […]
CPS cannot currently file for municipal bankruptcy in Illinois, although there have been attempts to change state law to allow such a move. The prospectus includes legal opinions on a “hypothetical bankruptcy” by CPS that conclude payments on the new bonds would not be automatically stopped by a federal bankruptcy court and that bondholders would retain a lien on the tax revenue.
Yields on ordinary debt from CPS have reached nine percent in recent months. The latest effort to market its debt reflects a new level of desperation on the part of the district, which has failed for years to put enough money aside to fund teacher pensions even though residents of the state of Illinois and the Windy City pay above-average tax burdens.
The presence of the term “hypothetical bankruptcy” in the bond prospectus also highlights the fact that the district’s policymakers have given more than idle thought to the possibility that the school system may be forced into Title IX proceedings. (There have also been rumblings about bankruptcy for the entire city).
A handful of local governments have been forced into bankruptcy in the wake of the financial downturn, including Detroit and San Bernardino. But if pension debt keeps accumulating unchecked, the next wave of bankruptcy might extend beyond post-industrial regions in persistent decline and sweep up our mightiest urban centers as well.