Finance expert says CPS history offers a solution

Print More
State GOP leaders are lining up behind Gov. Bruce Rauner’s proposal for a state take-over of CPS.

Photo by Grace Donnelly

State GOP leaders are lining up behind Gov. Bruce Rauner’s proposal for a state take-over of CPS.

A group of Republican lawmakers are proposing a state takeover of Chicago Public Schools — and the option to file for bankruptcy — in order to fix a system that they described as “absolutely collapsing on itself.”

The draft proposal — which already has the support of Gov. Bruce Rauner — would allow the Illinois State Board of Education to appoint an oversight board to “look at the books and see what they have to deal with” before making decisions about how to fix the district’s financial mess, said state Sen. Christine Radogno during a Wednesday morning press conference.

CPS is excluded from a state law that allows the state to take over failing school districts.

City and district officials, in addition to the Chicago Teachers Union and Democrats in the Legislature, vehemently oppose a takeover.

While it’s unlikely such legislation would pass in Springfield, it wouldn’t be the first time CPS finances have come under the control of an oversight board. In 1979, mismanagement in the district led to a fiscal crisis and some payless paydays. Eventually CPS lost access to the financial markets and could no longer borrow its way out.

The following year the state Legislature stepped in to create the Chicago School Finance Authority. The governor and Chicago mayor jointly appointed a five-member board that had the power to issue bonds and levy a separate property tax for that debt. Between 1980 and 2010, the Finance Authority issued over $1 billion in debt.

“Don’t forget history. Sometimes history is not that bad,” says Donald Haider, a professor at the Kellogg School of Management at Northwestern University who served as vice chairman of the Finance Authority. “We’re trying to problem solve and keep schools open. What are the options? You used this once, and it was temporarily effective.”

Haider, a former city chief financial officer, recently sent Rauner’s staff some materials on the Finance Authority and has been suggesting for quite some time that city and state leaders revisit the idea. In 2010, for example, he wrote an op-ed in Crain’s about the option.

The scope of the Finance Authority’s power changed over time.

During the first half of its 30 years in existence, the Finance Authority was charged with approving the CPS budget to assure that it was balanced before schools could open in September. Haider says this power also served to keep CPS from agreeing to “end-loaded contracts” with the teachers union, in which there were several years of small raises followed by one larger raise in the final year.

Haider described the Finance Authority as a “clear deterrent to make sure they not only balanced the budget but they didn’t give away the store in the out years.”

Some of those powers went away in 1995 when the state gave Chicago’s mayor unfettered control over the school system. In its final years, the Finance Authority’s main job was to make sure its debt was paid off.

Less drastic than bankruptcy

Haider calls the Finance Authority “less drastic and more predictable than bankruptcy.”

Filing for bankruptcy allows government entities to refinance their debt and restructure existing contracts, including those with labor unions. However that can’t happen in Illinois without a change in state law. Lawmakers have proposed legislation to allow municipalities to file for bankruptcy, but the legislation would need to be amended to allow the school district to do so.

Rauner first floated the idea of bankruptcy for CPS last April. On Wednesday he again called for that option. “Hopefully [bankruptcy] won’t be necessary,” Rauner said during a press conference. But he said having that option available can “protect children and taxpayers.”

Radogno and House Republican Leader Jim Durkin have yet to file their own legislation, although it’s expected to come in the next few days.

Their proposal would create a five- to seven-member oversight board appointed by the state superintendent, Tony Smith, who was appointed by the governor, according to a statement from Radogno and Durkin. That board would replace the current CPS board, which is appointed by the mayor.

The proposed oversight board would eventually be phased out and replaced with an elected school board — once ISBE determines the district is “no longer in financial difficulty.”

Democrats in the Legislature called the proposal laughable. “I honestly think it’s politics, trying to divert attention from the fact we [as a state] have no budget,” says state Sen. Heather Steans. “I don’t know if a new governance structure is the issue here. There are just structural revenue problems we’re seeing across the state.”

In a statement, CPS CEO Forrest Claypool described lawmakers’ proposal for a state takeover a “distraction” and repeated a call for the state to pay into the district’s pension costs, as it does with other school districts. The district says equalizing the pension funding system would give CPS about $500 million ­— about the same amount that the district is missing to cover this year’s budget.

For its part, the CTU called the lawmakers’ proposal a “non-starter when state government has so far been unable to assume responsibility for its own budget.”

District and union leaders are meeting daily to negotiate a four-year labor contract, as Claypool is pressing for a deal by the end of the month.. Teachers have been working without a contract since July.

In the meantime, the financial picture at CPS continues to look bleak. Over the past week, two rating agencies downgraded the district’s credit rating. And CPS is planning to take out even more debt to pay the bills.

Says Claypool: “CPS and the CTU leadership are working feverishly to reach a deal that would cut costs while preventing midyear layoffs, the district is going to market with $875 million in bonds, and we’re on the verge of even deeper cuts to the bureaucracy.”

Catalyst reporter Kalyn Belsha contributed to this report.

  • Concerned Parent

    Downstaters and republicans on ILL, better watch out: The taxpayer-supported systems, with collective assets of nearly $5 billion, are intended to provide public safety workers and their families with stable retirement incomes.
    But the collective unfunded liability of those pension funds is $3.3 billion, BGA
    Rescuing Illinois research determined. Moreover, dozens of the funds are in
    immediate financial peril.
    “If [Chapter 9] was available now I can think of several towns that would do it right now,” says municipal attorney Burt Odelson. “Municipalities are having a
    terrible time paying the bills.”

  • Northside

    Let’s face it all this fancy talk is basically a way to say he wants tonpay cps teachers with a 40percent cut. Don’t raise everyone’s taxes 1 percent..just cut the teachers to salaries that can’t afford living in the city they are required to live in. If cps will be treated like all.districts then rained needs to take the cause for.75percent for a strike. Residency law and appointed board..yeah right

  • Concerned Parent

    By: Rod Estvan
    Runner plays his hand now the CTU must play theirs
    All of us that are left alive that lived the reality of the Finance
    Authority take over of CPS in 1980 need to prepare teachers and parents
    for what could be coming if we are not vigilant. I wrote my Masters
    Thesis on this experience because it had such a profound impact on me
    and I used many articles that George wrote back then along numerous
    other sourecs as academic references in my thesis. One lesson that we
    all learned is that bankruptcy is when the financial institutions refuse
    to provide an entity with any further short term credit and at that
    point CPS has a profound cash crunch. Heather Gillers in a Trib article
    published on Jan 21 titled “Next CPS budget will have an even bigger
    hole to fill: $800 million” attempted to discuss that tipping point.
    Currently CPS still has a line of credit in the many millions of
    dollars, but the truth is eventually it will get cut off given the path
    we are on.
    Conceptually a huge problem for the CTU in this current crisis is ideologically being tied down to the theory of “broke on purpose.” Its an idea that to a degree the fiscal crisis is a created one and to a degree its part of a long term attempt to break the Chicago Teachers Union and force ever greater privatization. I would argue that the leadership of CPS under
    both Daley and Emanuel are not capable of such a long term vision, they
    spend their time trying to appease the Civic Committee by privatizing,
    trying to provide some level of functional literacy to desperately poor
    children by funding pre-school and universal kindergarten that they have
    no funding for, and open ever more selective schools for the middle and
    upper class residents of Chicago that the district can also not afford.
    There is no vision, there is no master plan, its just survival.

    Charter schools and privatization efforts will eventually face the axe too if
    the crisis progresses. As much as our patriotic financiers of America
    love privatization, they like losing money even less and will not
    hesitate to force CPS to lower payments to charters and cut payments to
    other privatization schemes to a degree that making what they consider a
    “reasonable” profit is no longer possible.

    Rauner plays banks and other financial institutions for the profit whores they
    are. Hence he had no hesitation over borrowing money and then
    bankrupting a firm he has acquired that he projects not to generate a
    “reasonable” profit in the immediate future when operating GTCR. He
    wants to apply those principles to the public sector which no doubt a
    significant part of even conservative civic elite of Chicago finds
    frightening. But they have discovered that they can’t control Rauner
    once he got power. (This is also a deep fear in relationship to Trump
    winning the Republican primaries.) In order for the CTU to survive and
    for future children to get any type of an education the inherent
    contradictions within the civic elite have to be utilized to the extent
    possible. Rauner by playing the bankruptcy card rather than the
    traditional restructuring card may have over played his own hand. Right
    now he has complete hegemony over elected Republicans in the State
    legislature, but I have no doubt there are conservative members of the
    Assembly getting very nervous as to where this is all going.

    If Ruaner had used the existing school code that provides for a financial
    oversight panel to be appointed with significant oversight powers over
    school boards and played that out for a year he would have been in a
    stronger position to seek full dissolution of the CPS Board. But by
    moving so fast he has given the CTU and our children a chance, its an
    opportunity that needs to be exploited. Part of exploiting this
    opportunity is seeking more money for CPS via a property tax referendum
    that is allowed under the existing PTELL law that applies to CPS and
    Rauner can’t stop by executive action. It need not be designed to
    provide enough money to attempt to solve the entire fiscal crisis, but
    enough to show the credit rating agencies the City can and will fund its
    schools with or without a State bail out. The Governor would no doubt
    pull out every dollar to defeat such a referendum arguing it is a plan
    to fund the “union bosses.” Its a fight that needs to be taken on and
    its the one long term source of funding beyond TIF money which will
    likely be released.

  • Concerned Parent

    About Rauner? Same day Lutheran Social Services cut 43 %of its Illinois, plus 30 programs helping 4,700 people, the Rauner administration announced it hired a new chief of staff for First Lady Diana Rauner. Pay: $100,000 per year.

  • Edward Hershey

    Solution? Uyyy me. . . this is some stuff, right here. . .