The Chicago Public School (CPS) system is bankrupt in every way but the final declaration. That declaration is a foregone conclusion, and bondholders will take it on the chin.
CPS Treasurer Jennie Huang Bennett disagrees with my assessment. So does Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.
For her part, Bennett explained in a January online presentation that if the school district were unable to make a debt payment, “the taxes are then extended and collected for the benefit of bondholders.”
Fabian, Bennett, and others think “backdoor” tax guarantees hidden in bond offerings mean Chicago taxpayers will necessarily have to pony up if the school district defaults.
One side is wrong. Which side is that?
Let’s dive into this debate with a look at the Chicago Tribune article If CPS ever misses a debt payment, property owners would see taxes jump.
If the school district ever comes up short on its debt payments, the investors who bought CPS’ bonds can rest assured they will get what they are owed — straight from Chicago taxpayers.
The school district’s bond contracts include a little-known provision that would trigger a property tax increase if CPS fails to pay. The county clerk would deliver that additional revenue directly to a bank — much the way a creditor might garnish an individual’s wages.
“Citizens don’t know the extent to which their own assets are pledged to pay bondholders,” said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.
Last month CPS struggled to scrape together enough money for a $474 million payment on its $6 billion debt load. To come up with the money, the district had to borrow about $200 million — a deal that initially stalled for lack of investors and finally got done less than two weeks before the Feb. 15 due date.
To reassure prospective investors, CPS Treasurer Jennie Huang Bennett explained in a January online presentation that if the school district were unable to make a debt payment, “the taxes are then extended and collected for the benefit of bondholders.”
Back-door referendums
Giving creditors the ability to trigger a tax hike if the alternate revenues come up short is a standard provision in the bond contracts.
“It is a method that allows taxpayers to be on the hook for bonds they did not approve in a referendum,” said Richard Ciccarone, president and CEO of Hiawatha, Iowa-based Merritt Research Services.
Battle Over an $800 Million Hole
A battle between bondholders and the school district is on deck. In a CPS presentation to investors, the CPS admitted they have a $800 million hole in the district’s preliminary budget for the 2016-17 school year.
The school district and mayor Rahm Emanuel expect governor Rauner to come up with a $458 million bailout and labor concessions as well. The odds that Rauner caves in are roughly 0%.
Teachers are threatening to strike as soon as April 1. Throw into the mix state law caps which forbid interest rates over 9.0%. The next bond offering may not fly.
For a detailed look at the last bond offering that barely flew as well as the sorry state of affairs of the system in general, please see “Bond Girl” Blasts Chicago Public School Bonds, Says “CPS Genuinely Insolvent”.
Bond Market Does Not Believe CPS Treasurer Bennett
Note that the district had to pay 8.5% in its last bond offering.
Hmmm. It seems bondholders don’t believe Bennett’s preposterous claim, and neither do I.
The fact is, bondholders can’t “force a tax increase.” The county clerk can assess the tax, but that tax can be challenged.
Since Chicago is a city of landlords, I would expect all kinds of enforceability challenges. Those challenges could drag on for months or even years.
Meanwhile the district would be in default. Yields would soar, and so would penalties and taxes to make up for it.
There is nothing automatic about payment. Bennett’s claim may very well trigger a lawsuit. It’s certainly a lie.
CPS Bankruptcy Coming Up
The one-sided Tribune article smacks of something written by the CPS and panicked boldholders, for the sole benefit of the CPS and panicked bondholders.
Would mayor Rahm Emanuel really take this all the way through the courts, knowing “victory” would mean massive tax hikes on top of the biggest tax hike in history he passed last October?
His comment at the time was “It’s Not a Piece of Art“. Indeed!
Would he really pass another hike just to pay off bondholders, with the city getting nothing out of it but more misery?
Faith in Munis About to Crash
On January 20, the “B” word hit Chicago as Governor Proposed Bankruptcy for Chicago Public School System.
Last December, in Death Watch Illinois, I pointed out “Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up“.
Some muni-bondholders, and those who depend on them, are more than a little overboard with their faith.
Tax Hikes Not the Answer
This mess cannot be fixed with tax hikes or fairy dust from Springfield. There simply is no money.
Heck, solvency of the entire state is in question as Illinois IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities.
Let’s stop pretending there is another solution for CPS, because there isn’t. A CPS bankruptcy looms.
The sooner Mayor Emanuel admits that, the better for him, the better for Chicago schools, the better for Illinois, and most importantly … the better for the kids!
In all this bickering, it seems we have forgotten about the kids and the taxpayers.
For the sake of the kids, if for no one else, Mayor Emanuel should be on the phone right now with Governor Rauner and House leader Mike Madigan, begging for a bankruptcy law.
If for some reason you still think muni-bondholders cannot or will not be stiffed, please pick up your phone and dial 338-7648 (D-E-T-R-O-I-T).
Mike “Mish” Shedlock
