“The state has a crisis, the city has a crisis. I’m concerned that [CPS] is going to have to go bankrupt,” he said during a moderated discussion at a Chicago Public Education Fund luncheon. “Bankruptcy code exists to help the organization get out of financial trouble. There’s a reason for the bankruptcy code.”
Then he 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.
The governor’s comments were met with wide disapproval among city leaders and the Chicago Teachers Union – a rare instance of agreement between public figures that are often at odds.
Libby Langsdorf, a spokeswoman for Mayor Rahm Emanuel, assured that CPS is not looking into bankruptcy as a way to solve the $1.14 billion budget deficit it faces next year. Instead, she said, the mayor looks forward to discussing with Rauner issues such as statewide spending on education, and state subsidies to the Chicago teachers pension system. CPS is the only Illinois district that doesn’t get subsidies.
“Instead of proposing to solve the state’s fiscal crisis on the backs of local governments, he should be working to ensure that Chicago, the biggest economic driver in the state, gets back on sound footing,” Langsdorf said in a statement.
Meanwhile, Chicago Teachers Union President Karen Lewis called it “irresponsible” for Rauner to even suggest bankruptcy. “Why would he bring this up and suggest it to CPS other than for it to be a way to get around our contract — and we’re in the middle of negotiations?” she asked.
Jackson Potter, also of the CTU, suggested raising taxes on the wealthy or the so-called LaSalle Street tax to generate revenue to help the state generate more revenue to fund schools. “Instead Rauner is putting us on a trajectory of a downward spiral, where it’s going to worry creditors about not getting their money back, make borrowing more expensive and exacerbate their financial crisis for people who are in debt.”
State would have pass bankruptcy law
Ralph Martire, executive director of the Center for Tax and Budget Accountability, says the state Legislature would have to pass a law in order to allow for bankruptcies – an idea that some conservative lawmakers have recently brought up as a way to get out of public employee obligations. And last year the Illinois Municipal Association held a session on the issue called “Finance: Lessons from Detroit and Pension Cases” during its annual conference, the Better Government Association reported.
Even if bankruptcy were an option, Martire says there would be plenty of drawbacks for a school district like CPS: “There would be a huge loss of confidence in the school district and a mass exodus of qualified teachers and staff who do not want collective bargaining through bankruptcy court. And the district’s ability to [issue debt] would be severely limited,” he says. “It would not be a happy place to be.”
In 1979, CPS went virtually bankrupt after dipping into funds that should have been restricted for debt repayment. The Legislature responded by creating an oversight body that sold bonds to keep the system running and impose budget restrictions. Meanwhile, school staff suffered payless paydays and stiff budget cuts all around.
Few U.S. school districts have ever declared bankruptcy, says Michael Griffith, a school finance consultant with the Education Commission of the States. He says states have to adopt a federal bankruptcy law in order to allow that to happen. Then, a federal judge must determine if a specific government entity qualifies for bankruptcy.
If so, the federal judge becomes responsible for deciding whether the municipality or school district can get out of pension debt by lowering payments to retirees, break contracts or renegotiate collective bargaining agreements. “Lawmakers often don’t like this law because it gives power to a federal judge and takes away power from them,” Griffith says.
More common is that states have provisions that allow them to declare a financial emergency, but that only allows school districts to reopen collective bargaining agreements. Currently that’s not an issue in Chicago considering the teachers’ contract expires at the end of June.
Illinois law does allow the state to take over the financial decisions of school districts that are in trouble — and to provide them some financial assistance. Currently, Proviso in the western suburbs, North Chicago in the far northern suburbs and downstate East St. Louis have state financial oversight panels.