Finance expert says CPS history offers a solution

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.