Banks holding children hostage... Bond rating does not depend on 'Reserves'

In December, 2003, Bob Peickert told a group of Chicago Teachers Union district supervisors that the union couldn’t push for more money at the bargaining table because it might risk the “bond rating” of the Chicago Board of Education. At the time, Peickert had been in charge of negotiating the Chicago Teachers Union contract with the Chicago Board of Education and had just brought in a contract agreement which ultimately (in June 2004) cost Peickert's boss, Chicago Teachers Union President Deborah Lynch, her job.

At the time, nobody challenged Peickert's assertion, which he had apparently heard from the lawyers for the Chicago Board of Education, Charlie Rose and James Franczek. Franczek's law firm has been called "Mayor Daley's labor lawyers."

Every year since the infamous 2003 contract negotiations, like a Buddhist mantra, the same thing has been repeated by Chicago Schools CEO Arne Duncan, Board of Education public relations staff, union leaders, and others when justifying cutbacks at CPS or the refusal of Chicago to grant teachers and other staff better pay and more competitive benefits.

Claim about 'bond rating' is not true

But is it true? Probably not.

And whether it is the job of special education children and teachers to protect Chicago’s bond ratings while CPS spends wildly on contractors and political patronage is also a question that could use an answer in Chicago.

At some point when CPS officials talk about budgets, they claim that it they dig too deeply into the Board of Education’s “Reserves,” someone will “lower the bond rating” and that will be a bad thing.

A little clarification is necessary before anyone tries to discuss what it means to have someone (always anonymous) “lower the bond rating” of a major public agency.

Bond rating agencies waffle on a percentage

Bonds are rated by three agencies: Standard and Poors; Moody's Investors Service, and Fitch.

Although the three bond rating agencies generally cite a preliminary percentage figure for an institution’s reserves, that figure is flexible, not fixed, according to representatives of the agencies and documents obtained by Substance under the Freedom of Information Act (FOIA). Were this not the case, public bodies would be required to retain an enormous and ever increasing reserve despite a long record of adequate bookkeeping.

Basically, representatives of the rating agencies have told Substance, the track record of administrators and several other factors weigh heavily in favor of a high rating. Municipal bonds are not as risky as corporate bonds, and the rating agencies generally do not scrutinize the reserves of entities with long records (like the Chicago Board of Education) for as high a reserve as private corporations might have to hold.

What this means for Chicago: A $300 million Reserve is much too high

At the present time, the total budget of the Chicago Board of Education (capital and operating) is in excess of $5 million.

Last year, for the first time in history, CPS presented the public with the operating budget prior to the statutory deadline for presenting its budget, while omitting the capital budget. As a result, the “budget” that was voted on at the June 28, 2006 Chicago Board of Education meetings was incomplete. It was also misleading because it gave the public the impression that the total of the CPS budget had dropped from the 2005-2006 school year to the 2006-2007 school year. The capital budget was presented the following month. When the two were combined, the total CPS budget was again in excess of $5 billion.

As the number of independent groups examining the Chicago Board of Education budget dwindles, much public space is dominated by one group, the corporate Civic Federation.

No mention was made by the Civic Federation or the bond rating agencies of this problem with the way CPS is changing its budget to create two apparently separate budgets.

Nor was CPS warned of any threats to its bond rating because of the possibly illegal manner in which the budget(s) were presented.

At least as important as the “reserves” in a major municipal budget is the confidence analysts have in the operations of the entity. Although CPS is facing increasing scrutiny because of its problems in meeting federal requirements, confidence remains high. 


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