Chicago Public Schools to Close?

On CBS Chicago, we read:

One day after the city of Chicago took a big hit to its credit rating, a leading bond-rating agency further downgraded the Chicago Public Schools debt to “junk” status.

The Moody’s Investor Service applied the Ba3 rating to the Chicago Board of Education’s $6.2 billion in debt.

Like the city, CPS is facing a huge problem with increasing required contributions to teachers’ pensions.

“The Ba3 rating reflects CPS’s steadily escalating pension contributions and use of reserves to fund those contributions,” Moody’s said. “We believe pension costs will place increasing strain on the district’s precarious financial position absent material revenue growth or expenditure reduction, both of which appear increasingly difficult for the district to achieve.”

The rating means the school system’s ability to pay off its debt is at risk. It also means it will cost more for CPS to borrow in the future.

The Chicago Public School system is a total basket case, financially-speaking. I sincerely doubt they will be able to raise the money they need to meet their shortfalls through the debt markets; especially not now that CPS bonds are rated “junk”, which many investment funds do not buy as a matter of policy.

This didn’t come out of left field. Last month, the governor of Illinois said this in a town hall-style meeting:

Many other states have allowed local governments to decide whether they need to declare bankruptcy. Bankruptcy law exists for a reason. It’s allowed in business so that businesses can get back on their feet and prosper again by restructuring their debts. . . .

The state has a crisis, the city has a crisis. I’m concerned that [CPS] is going to have to go bankrupt. Bankruptcy code exists to help the organization get out of financial trouble. There’s a reason for the bankruptcy code.

He says the unions are partially to blame:

Then [Governor Rauner] told the sympathetic audience – which minutes later gave him a standing ovation – that unions are partly to blame for why municipalities and school districts in Illinois can’t file for bankruptcy in order to renegotiate debt.

“Insiders in our system currently have made bankruptcy in government units illegal because some people never want to restructure contracts – contracts brought into place through insider deals,” said Rauner, who also advocated for right-to-work zones.

After hearing this, the Teacher’s Union head flew into a rage:

Afterward by telephone, Chicago Teachers Union President Karen Lewis denounced Rauner’s bankruptcy suggestion, saying “to throw the entire system into chaos, financial chaos is irresponsible.”

Calling the governor “basically a robber baron,” engaged in “union busting,” Lewis wondered “how much respect does Bruce Rauner have for people who walk away from their debts, for regular, ordinary people who walk away from their debts?”

Chicago public schools are in trouble. Really, truly, in trouble.

There is a very real possibility that public schools in Chicago could close. Either they will close because the district cannot afford to pay union wages for the teachers, or they will close because the teachers are going to strike. Either way, this could really happen within the next few weeks.

Mayor Rahm “Godfather” Emanuel should be thankful it’s almost summer, which gives a slight reprieve to the issue. But if the closure goes on for an extended period of time, then he is going to have a defunct public school system at the start of the school year, meaning that kids will not go to school; not in Chicago, at least. What the heck is he going to do with all these kids?

I cannot see how the schools can possibly go on the way they are, if they cannot raise money through selling debt. If nobody buys CPS bonds, then the only other option is to renegotiate teacher wages. The only way that anyone will buy CPS debt is if wages can return to a market level, as opposed to the massive heights agitated for by the unions. Market wages for public school teachers would be far lower than what the union currently charges.

The teacher’s union makes a lot of noise, but the big stick is nowhere to be found. If nobody lends money to CPS (which I do not think anyone will), then wages are going to have to be restructured. The Teacher’s Union will probably go on strike. They will organize marches downtown. They will wistfully cry, “Shouldn’t we care more about education?” But the fact of the matter is this: Without funding, this is it. The Chicago Teacher’s Union will have reached the end of the line. When the money really is gone, what can you do? A strike would be borderline pointless. If the money isn’t there, they aren’t getting their way no matter how much noise they make.

The ol’ standby is likely to reappear: “Tax the rich!” Problem: the Governor of Illinois has pledged to not raise taxes. His exact words were this: “Taxpayers of Illinois are not going to bail out the city of Chicago. That ain’t happenin’.”  Hopefully, he will stay true to his word and not raise taxes. A cent taxed for CPS is, quite clearly, a cent wasted. History shows us this. Numerous tax increases over the years have not been able to lead CPS away from the ultimate doom it now faces. If tax increases weren’t enough to save it in the past, why would they be enough now?

There is no tax increase in the pipeline. There is no widespread support for a tax increase to float the massively bloated CPS. It looks to me like the rest of Illinois is fed up with feeding the Chicago monster. The Rahmfather is on his own.

On a grand scale, here is the main takeaway to consider: we are supposedly 6 years into an economic recovery after the massive recession of 2008/2009. If this is how bad public finances are after 6 years of “recovery”, then how much worse will they be when the next major recession hits? If CPS can’t even raise money in a supposed recovery, then how on earth are they going to raise money in a recession?

My recommendation: if you are a government worker in Chicago, especially for CPS, then be prepared to get hosed. Have a backup plan.

Tags: , , , ,

Comments are closed.

%d bloggers like this: