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Desperate Chicago School System Looks to Shield Debt from Potential Bankruptcy

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.

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  • ——————————

    And they want to be a sanctuary city…good grief…..

  • Andrew Allison

    Let me see if I have this right: CPS wants to borrow money in order to pay current unfunded pension obligations; is clearly bankrupt but (currently) unable to file bankruptcy; and wants to sell bonds which guarantee interest payments in the event of bankruptcy. Given that the CPS is is inevitably going to default on its general obligation debt, which has a senior lien on the tax revenue, just how does it propose to do that? Not to mention the fact that whole scam begs the question of how CPS plans to pay future pension obligations. I also wonder how much that could have gone to the pension fund CPS spent cooking up this scheme.

    • The priority of levies is overcome by establishment of a new bond issuing authority with a dedicated revenue stream to service them.

      • Andrew Allison

        I believe that the revenue stream for the general obligation bonds is the same as that for the proposed new bonds. You can bet that the former will fight like hell to establish seniority.

  • FluffyFooFoo

    Notice the Obamas are not moving back to Chicago after they leave the White House.

  • catorenasci

    Change the law so the CPS can go bankrupt. Make getting rid of the public employee unions a condition for any additional taxpayer funding.

  • I predict that the Capital Improvement Property Tax will result in a collapse of property capital improvements and therefore little revenue.

  • John Tyler

    It is totally clear what will happen if CPS goes bankrupt; the bankruptcy court will screw over the bond holders and the teachers’ (existing and retired) pensions and salaries will be left untouched.
    No changes at all will be mandated at all as to how pensions and salaries (and their salary increases every few years) are determined.

    And to fund all of this – post bankruptcy – the City of Chicago will cut back on, say, garbage collection frequency. You know, cut back on those services that the citizens really, really notice and voila !! – the City is “forced” to once again raise taxes.
    This formula is about as old as the Pythagorean Theorem.

    Tell me please, what part of this is surprising or unexpected??

    The REAL idiots here are those institutions and individuals who will buy bonds issued by the CPS.
    Anybody or any agency that buys any new bonds issued by the CPS (or maybe even by the City of Chicago) deserves to lose their “investment.”

    • John Stephens

      No one could possibly be stupid enough to lend the City of Chicago any amount of money that they’re expecting to ever see again. The only explanation that makes sense is that they’re expecting some sort of non-monetary consideration. A Chicago municipal bond is nothing more than a receipt for a bribe.

    • JR

      Agree 100%. Look at Detroit. Bondholders totally get screwed. Lending to Chicago for anything longer than 3-6 months is asking to be screwed hard.

  • Disappeared4x

    Wall Street never sleeps! If you can not monetize it, then tax something tangible, and then monetize that tax to pay for what could not be monetized. Add a tablespoon of confidence, simmer on low for 100 years.

    Next recipe? Reverse pension borrowing, like reverse mortgages …

    The ‘dedicated revenue stream’ concept enables New York State to sustain/rollover mountains of debt for capital projects since Mario Cuomo’s era.

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