Chicago Mayor Brandon Johnson prepares to testify before Congress on March 5. At a press conference in Chicago Tuesday, Johnson noted “I’m home now” and said he could speak more freely, including concerning the impasse with Chicago Public Schools.
Bloomberg News
The Chicago Public Schools ended the week no closer than it began to answering the query of how or if a scheduled pension payment might be made.
The Board of Education Thursday abruptly pulled from its agenda a planned vote on the district’s amended budget and intergovernmental agreement with the town on a Municipal Employees’ Annuity and Profit Fund pension payment.
The payment is speculated to cover school district employees covered by MEABF, a city worker pension fund.
Chicago Mayor Brandon Johnson — who appointed a majority of the college board — wants the district to make the payment, which might help him take care of the town’s budget gap.
“I will remain optimistic and positive that the board recognizes its responsibility” to pay for each collective bargaining agreements and the MEABF payment, Johnson added. “Clearly, my administration is committed to helping this body of presidency turn into a successful body of presidency… We expect people to do what they said they’d do.”
However the largely junk-rated district will not be legally chargeable for the payment, said Joe Ferguson, president of the Civic Federation of Chicago, an independent research organization that analyses the funds of Chicago and Illinois goverments.
He said the most effective option for the district now “when it comes to signaling to the finance markets that CPS is working in accord with its budget without taking up any additional debt” is to let fall on the town the issue Chicago created for itself when it assumed CPS would make a disputed MEABF payment CPS has no legal duty to pay.
“The perfect option for the district is to not make the payment, which it will not be obligated to make… and to easily utilize the funds which might be available,” Ferguson said. “That may be coupled with cuts of some sort or an try and slow-roll other expenditures within the budget if additional money is required.”
Into the combination was added a report by the firm Baker Tilly, dated March 17 and commissioned by Board of Education President Sean Harden, a Johnson appointee.
It outlined three paths forward for the board. One would require current 12 months budget reductions. One other would involve additional tax increment financing surplus from the town. and a 3rd calls for debt restructuring through refunding current outstanding issuances, issuing taxable alternate revenue bonds to refinance debt, or issuing taxable alternate revenue general obligation bonds.
On the third path, the report stressed that the board should seek the advice of its own municipal advisor before proceeding, and noted that those taxable bonds would carry higher interest costs than tax-exempt bonds and will contribute to future budget shortfalls.
A debt restructuring, which Chicago’s Chief Financial Officer Jill Jaworski pushed on the recent amended budget hearings, often is the easiest option politically. But advocates of that option have neglected the sensible difficulties involved, said University of Chicago Harris School research professor and Center for Municipal Finance Director Justin Marlowe.
“The Baker Tilly report was fair in its assessment of the challenges in executing that type of debt refinancing,” he said. “But I also think it was somewhat understated when it comes to just how difficult the credit market conditions are in the mean time and the way difficult they will turn into within the very near future.”
The Federal Open Market Committee has backed away from further cuts to the benchmark fed funds rate, and Trump administration tariff and federak spending turmoil has unsettled the markets.
“It should rely upon market conditions in a way that past refinancings haven’t,” Marlowe added. “And I feel that given the turbulence within the capital markets, there is a likelihood that the refinancing is perhaps less effective than CPS might like and possibly even ineffective.”
The board’s task now’s “selecting the least bad option,” Marlowe said. “None of them are good.”
The refinancing option could even make the issue worse, depending on how the market timing goes, he said.
On the positive side, the Baker Tilly report didn’t include the choice of taking out a short-term loan, which Marlowe said would likely have forced rating agencies’ hands.
“That is to not say that the choices that the report mentioned won’t [lead to a downgrade],” he said. “Nevertheless it won’t be as mechanical a relationship… as it could be in the event that they had done that short-term [borrowing] option.”
At a press conference Tuesday, Mayor Brandon Johnson criticized CPS’s failure to account for costs from collective bargaining agreements with unions.
The mayor also emphasized his own teaching experience and noted he’s the one Chicago mayor to “block elevators and [go] on a hunger strike” to defend keeping schools open. “Nobody goes to query my commitment to public education,” he said.
Harden, the college board president, said Thursday that the votes on the amended budget and the intergovernmental agreement were being called off since the district could be very near an agreement with the Chicago Teachers Union in ongoing contract negotiations. Board member Ellen Rosenfeld told the meeting Thursday that board members had received no notice of the abrupt reversal.
“There are two major things that I feel [the reversal] signals, but we’re all reading into opaque space here,” Ferguson said. “Quite clearly, the votes didn’t exist to get that amendment passed, and that is significant. … The ‘no’ votes have probably solidified right into a very firm bloc given all that has been revealed.”
Ferguson said the query now is whether or not a collective bargaining agreement may be reached, presented to delegates for a vote after which approved by the board in time for the town to shut out its books on March 31, by which era it must know if CPS is making the disputed MEABF payment or not.
The logical path forward, he said, can be for Harden to one way or the other tie the union contract vote, the intergovernmental agreement vote and the amended budget vote together, forcing a difficult alternative for board members who had previously been leaning toward “no.”
If that won’t approved, the town still needs time to go before the City Council and seek authority to attract upon reserves or make another fiscal changes, Ferguson said.
As for the the debt refinancing that might make it possible to make each the collective bargaining agreement payments and the MEABF payment, Ferguson acknowledged Baker Tilly identified tools available to the district.
“It’s lower than clear whether those tools are truly available legally, they usually have made it clear that separate and aside from the legal availability, there might be adversarial financial consequences for CPS since it’s taking up more debt” at a moment of maximum fragility, he said.
“Are we talking about refinancing at a lower rate?” he asked. “Understanding that we’re already coping with debt that likely was issued with the district in junk status, getting a greater rate at this particular moment without extending the term is unlikely.”
Marlowe noted that “it’s all the identical property tax base” at the top of the day.
“We are able to make these distinctions between the town and CPS as operating entities, but… you’ve gotten to think about it as an integrated whole,” he said. “The governance problems have been there for a very long time, but have now been brought out within the open in a really visible way.”
Added to the equation are recent changes on the federal level, including the Trump administration’s try and abolish the Department of Education, which mean the town and CPS especially can have fewer resources to work with.
“Given the governance relationship between CPS and the town, the mayor needs to be a central player in that story, but… it’s totally difficult for him to play that honest broker role, even when he’s being real [in trying], which I actually do consider this mayor is. That is virtually unattainable to do given his origins” as a teacher and CTU organizer,” Marlowe said.
“Any individual’s going to blink, any person’s going to capitulate, after which that might be the start line for a more lasting governance relationship,” he said.
Each S&P Global Rankings and Moody’s Rankings have warned the board its rating trajectory will rely upon the end result of contract negotiations and the district’s willingness to chop costs.
S&P assigns the Board of Education a speculative-grade rating of BB-plus with a stable outlook. Moody’s assigns the board a rating of Ba1, one notch below investment grade.
Fitch Rankings gives the board an issuer default rating and unlimited tax general obligation bond rating of BB-plus and a dedicated capital improvement tax bond rating of A. The outlook is stable.
KBRA rates CPS GO bonds either BBB or BBB-plus, depending on whether the bonds have a special revenue bond legal opinion attached. The outlook is negative.