Chicago Schools Under the Sword

Two days: that’s all it would take for Chicago’s public school system to lose most of its remaining cash. According to the Sun-Times, the four financial institutions with which the school system made debt swaps could demand payment of about $228 million on two days’ notice—wiping out the money left in the system’s main reserve fund after CPS drained it of $862 million to balance this year’s budget. With that fund depleted, CPS would be left with only its “debt-stabilization fund” of $174 million, and an even more serious liquidity problem than it already has.

The system is at risk of sudden termination because of last month’s credit downgrade, as the debt-swap deals mandated a minimum bond rating. As of now, a CPS spokesman said, none of its creditors have called in their markers. The story, however, provides a glimpse into just how badly the city’s schools are doing, financially speaking. And that’s aside from the corruption; CPS’s CEO is currently on leave and under federal investigation for a multimillion-dollar contracting scandal.

Illinois Governor Bruce Rauner is murmuring about the possibility of bankruptcy, though state law doesn’t permit the school system to declare it as of now. Both the school system and Chicago Mayor Rahm Emanuel say they won’t consider it. But where, exactly, do they think they’re going to get more money for the struggling system? Search us—and everyone else:

Even if the financial institutions don’t demand the termination payments from CPS, the school system appears to have few options for digging itself out of the projected $1.1 billion shortfall next year. The state is struggling with its own pension crisis, so big increases in funding from Springfield appear unlikely.

State law caps school property-tax increases at 5 percent a year or the rate of inflation, whichever is less. Chicago school officials could ask voters for permission to raise taxes more than that — with little likelihood of success.

Emanuel plans to release surplus money from the city’s tax-increment financing districts — where property taxes are supposed to be spent on infrastructure and development projects within those zones. But over the past three years, those surpluses have provided CPS no more than $32 million a year.

In the meantime, the school system is going to try to borrow more money:

Even though Wall Street credit-rating agencies downgraded the school system’s credit rating last month to just one notch above so-called junk status, making it likely it will cost more to borrow money, CPS is preparing to do that this week. It plans to go to the bond market to borrow $296 million. The money is to pay for recently completed projects including playgrounds, air-conditioning systems and a program to reduce energy use in schools.

The Windy City is fast becoming the “winded city”—too short of breath to outrun yet another catastrophe.

[This post has been edited]

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