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 The state's school board, stocked with Republican Governor Bruce
Rauner's appointees, is expected to declare Chicago's school system
in "financial difficulty" as early as April under an Illinois law
authorizing state takeovers of financially distressed school
systems. Rauner, who is seeking to take over the schools' district,
contends that finding would bar the nation's third-largest public
school system from further borrowing.
Chicago Public Schools (CPS), which only just borrowed $725 million
through a bond sale, says it is exempt from the law, thus keeping
Rauner and his State Board of Education from dictating financial
decisions involving the system, including its ability to borrow
additional funds.
CPS plans to tap an existing $370 million credit line with Barclays
Bank to help pay its June 30 pension obligation, according to
Moody's Investors Service analyst Mark Lazarus. But that could also
be in jeopardy because of Rauner's stance.
The district has indicated a need to sell more debt, but that seems
unlikely now. "I'd say it's dangerous to issue it, and it would be
more dangerous to buy it," said Richard Ciccerone, who heads Merritt
Research Services, a Chicago-based municipal credit data company.
CPS already carries a $6.2 billion debt load, and its finances
remain precarious after February's borrowing. In that bond offering,
the system disclosed it expected to have only $24 million in
operating revenue when its fiscal year ends June 30. Budget cuts
announced by CPS CEO Forrest Claypool since then could grow that
balance to as much as $118 million, according to Moody's.
Still, that wouldn't represent much of a cash cushion given that
more than 40 percent of the cuts are not guaranteed and this is a
schools' district with a $5.7 billion annual budget. CPS aims to
save $65 million by reducing its contribution to teachers' pension
payments by 7 percent but teachers have threatened to strike over
the issue in April, likely leaving a state labor panel or the courts
to decide the legality of that cut.
Since January, Rauner has staged a running attack on CPS and
Chicago's Democratic Mayor Rahm Emanuel, who controls the school
district. "They've misspent hundreds of millions of dollars, and
they hurt their students and their teachers as a result," Rauner
told reporters at a news conference in Chicago last month.
As justification for a state takeover, Rauner's office cited
Illinois law permitting the State Board of Education to seize
control of financially troubled school systems and to block new
borrowing. Claypool insists CPS is exempt, but Rauner's office
claims the exemption no longer exists because it is based on an
obsolete part of the law.
"If it determined that any school district was in financial duress,
the state board has the right, the legal authority, to block any
debt offerings," Rauner said.
The dispute itself could prevent CPS from selling bonds, according
to legal experts. That is because lawyers representing the system
likely cannot issue a clean opinion on the district's debt offering
as legal, valid and enforceable, a necessary assurance for
investors.
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Any plausible question about the validity of the debt would probably
prevent attorneys from giving such an unqualified opinion, said
Clayton Gillette, a professor of local government law at the NYU
School of Law.
Without that, the bonds probably will not be marketable, he said.
Even if the offering could be sold, investors would demand very high
rates as compensation for the risk, Gillette added.
"So at the very least (CPS) is going to end up paying more,"
Gillette said.
Already, CPS has struggled in the bond market. The district pulled
back an $875 million long-term junk-rated bond issue in January,
ultimately selling only $725 million of bonds on Feb. 3. To attract
investors, CPS needed to offer an 8.50 percent rate on most of the
bonds, up from the 7.75 percent they were aiming for in January. The
total cost to retire the bonds through maturity in 2044 is about
$1.9 billion.
Nearly 80 percent of proceeds from February's bond issue was
earmarked to boost operating cash - a troubling sign for bond
investors.
"If an entity depends on market access to pay bills, that to us is
effectively insolvent," said Triet Nguyen, who tracks distressed
municipal bond credits at financial services company NewOak Capital
in New York.
Nguyen said that happened with Puerto Rico, which like CPS relied on
bond sales for liquidity. The U.S. territory, which has not been
able to sell municipal bonds since 2014, has defaulted on some debt
and is seeking restructuring help from the U.S. Congress.
"There's a high probability this could happen [in Chicago],
particularly under the backdrop of such vocal criticism from the
governor," Nguyen said.
The district's lack of market access could make banks wary of
extending any new credit too, he said.
With uncertainty about its prospects rising, CPS also could hit a
ceiling on the interest rate it can pay for its long-term borrowing.
A state law forbids long-term public borrowing at a rate over 9
percent - just half a percentage point above the top rate in
February's bond sale.
"They don't have much room for any future borrowing," said Laurence
Msall, president of the Civic Federation, a nonpartisan
Chicago-based financial watchdog group that tracks CPS finances.
(Reporting by Dave McKinney and Karen Pierog; Editing by David
Greising and Martin Howell)
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