MEDIA WATCH... Chicago's 'automatic' property tax increase touted by the Tribune is ignoring the financial incompetence and ignorance of the Claypool Cronies Club...

On March 20, 2016, the Chicago Tribune led its front page with a lurid "news" story about how Chicago Public Schools will be forced to raise its local property taxes if the Board misses a bond payment. But since the summer of 2015, the Tribune has been ignoring the vast depth of ignorance about CPS finances that has characterized the latest "Chief Executive Officer" of CPS -- and his club of cronies from the Chicago Transit Authority.

By the time of the August 2015 meeting of the Chicago Board of Education, the latest (fourth) "Chief Executive Officer" of Chicago's public schools, Forrest Claypool, was about halfway through the packing of the top CPS executive posts with those now known as "Claypool's Cronies"... Above, Ronald Denard (left) is shown at his first Board meeting. Denard assumed the new title of "Vice President for Finances" at an annual salary of $225,000, higher than anyone but Claypool. Without discussing how Denard, who had worked with Claypool at the Chicago Transit Authority, was suddenly qualified in school finances, the members of the school board voted, unanimously and without debate, to approve not only the Denard appointment and the creation of the new position title, but also a "residency waiver" allowing Denard to continue living in the south suburbs. Substance photo by George N. Schmidt.While it is true that Chicago's local property taxes are among the lowest in the Chicago area (and this has been known for a decade, according to legitimate studies by the Civic Federation), when Mayor Rahm Emanuel put his Chief of Staff in as his fourth CEO since his May 2011 inauguration, the question remains how well the current crop of CPS officials understand the complex realities of the financials of the Chicago Public Schools. Within five months after Claypool too power, he had raised the budget for administration and bureaucracy by several million dollars to hire his buddies, all of whom were experts in transit -- not education or school finances.

At the same time, Claypool was dispatching regular announcements that the so-called "deficit" was going to cause as many as "5,000 teacher layoffs..." Then there would be "thousands" of layoffs (no longer 5,000) in November. Then many many many layoffs in January or February or maybe March.

If CPS ever misses a debt payment,, property owners would see taxes jump, by Heather Gillers, Chicago Tribune, (on line? March 17, 2016. On the front page of the print edition on March 20, 2016).

As Chicago Public Schools' money troubles worsen, students and their families face increasing uncertainty. Dozens of classroom staff were laid off last month after the school district cut principals' second-semester budgets. A strike is looming as CPS prepares to slash teacher benefits.

But 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.

Had CPS secured voters' approval before issuing its bonds, the district would have a dedicated stream of property tax revenues available to pay off the debt. But for 20 years Chicago school officials have avoided holding referendums by promising to use an existing revenue source to make debt payments: mainly the per-pupil education funding the district gets from the state. Property taxes serve as a backup.

With this type of borrowing, called an alternate revenue bond, the pledged revenue stream usually covers the debt payments and the backup option isn't called upon.

"It rarely means additional burden on the property taxpayers, and that's true throughout the U.S.," said James Spiotto, a Chicago-based lawyer and expert on government debt who has testified before Congress about municipal bankruptcy.

Indeed, in a statement responding to Tribune questions, the district noted that "CPS has used alternate bonds since at least 1997 and has never failed to make a debt service payment."

But some analysts believe the district's ongoing cash crisis makes that scenario more likely.

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."

The cost to homeowners and businesses could be steep.

As an example: If the school district had been unable to make last year's debt payment in February 2015, this year's taxes would have increased by $725 for the owner of a $250,000 home, according to calculations performed by the Cook County clerk's office in response to Tribune questions. If CPS had come up $200 million short that same year, the same homeowner would have paid an additional $188.

Moody's Investors Service viewed CPS' Feb. 15 debt payment as so uncertain that when the money arrived on time, Moody's made it the top story in its weekly public finance newsletter.

"Had the district not made the deposit (or made a partial deposit), the total debt service cost (or insufficiency) would be placed on the tax rolls of Chicago residents," Moody's noted.

Back-door referendums

Governments that lack home-rule power, such as school districts and small towns, typically hold referendums before issuing debt. That forces public officials to earn voters' support for their spending plans and creates a dedicated stream of new tax dollars to make the annual bond payments.

But state law also allows those governments to circumvent referendums by pledging a revenue stream other than property taxes to pay off the debt — a method CPS has used to borrow billions of dollars.

A government issuing these alternate revenue bonds can conduct what bond contracts call a "backdoor referendum." Public officials announce the deal in local newspaper ads and need to hold a referendum only if someone objects and collects about 100,000 signatures in 30 days.

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.

State law limits CPS' ability to raise property taxes, but that cap applies only to taxes collected for operating revenues — the money the district uses to run the schools. The tax cap specifically exempts taxes collected for debt service, so there is no limit on the amount of money CPS can collect to pay bondholders.

Former Chicago Mayor Richard M. Daley, who took over CPS in 1995, poured billions of bond dollars into expanding and replacing city schools. Instead of seeking property tax increases, the Daley administration identified two alternative sources of school district revenue — a state business tax that is distributed to local governments and, later, the per-pupil state education funding. Mayor Rahm Emanuel has also borrowed against those funding sources.

As CPS' debt load has grown, the amount of per-pupil education funding earmarked for bond payments has increased dramatically. The district currently expects to spend $383 million in per-pupil aid on next year's debt payment — more than a third of the total unrestricted per-pupil education dollars CPS gets from the state.

Should the district ever fail to make its full debt payment, taxpayers could also pay a significant price.

The steps are laid out in the bond contracts. Each time CPS issues debt, the school board approves a property tax increase equivalent to the amount needed to make payments on the bonds — taxes school officials hope never to collect.

CPS also sets aside money every February to cover debt payments due over the next year and deposits it with several predetermined banks, known as the trustees. Once that deposit is made, the school district must pass a measure abating — or canceling — the tax increase prescribed in the bond contracts.

If CPS were to fail to make the deposit, however, the trustee banks under the contract would direct the school board to proceed with the tax increase. The county clerk then would collect the taxes and deliver the money directly to the trustee banks.

"It wouldn't even come back to the district," said Mark Lazarus, an assistant vice president and analyst with Moody's.

A surprise tax hike like that is unusual, but it has happened. In 2009, property owners in the city of Littlefield, Texas, suddenly found themselves footing the bill for debt payments on a 300-bed prison. The city had used rent from the state and private prison operators to make the payments for eight years. But after the recession and changes in sentencing practices, the prison sat empty until last year.

"When that happened, the facility was not bringing in any revenues, so tax revenues had to supplement the payment of bonds," said interim City Manager David Brunson.

Looking ahead

CPS is scheduled to set aside money for its next debt payment — an expected $540 million — in February 2017. A lot could happen before then given the precariousness of the district's finances.

According to a CPS presentation to investors, there is an $800 million hole in the district's preliminary budget for the 2016-17 school year. To narrow that gap, the spending plan relies on a $458 million bailout by the state legislature — which has shown little inclination to subsidize Chicago schools — as well as labor concessions that the Chicago Teachers Union opposes. Teachers are threatening to strike as soon as April 1 over some of those changes.

As CPS' debt payments have grown, the district has devoted an increasing amount of its per-pupil state education funding to paying off bonds. The school district began borrowing against its state education dollars shortly after the state restored CPS' unfettered access to borrowing in 1995. As CPS' debt payments have grown, the district has devoted an increasing amount of its per-pupil state education funding to paying off bonds. The school district began borrowing against its state education dollars shortly after the state restored CPS' unfettered access to borrowing in 1995. Every... (Heather Gillers and Geoff Hing)

If its hopes don't pan out, the district has little rainy-day cash to fall back on. CPS is on track to finish its fiscal year in June with only $118 million in its general operating fund — 2 percent of its annual budget, according to Moody's.

Money available to run the schools will drop dramatically next year if CPS carries out its plan to put $383 million in per-pupil aid toward its debt payment — more than double the average amount used that way over the past 10 years.

And CPS may not be able to rely on the kind of last-minute borrowing that helped cover last month's debt payment. In order to get that deal done, the district had to pay rates as high as 8.5 percent, and state law forbids CPS from paying more than 9 percent except in an environment of very high interest rates.

"If the headlines continue to come out negative, it very well could be that there's just not enough interest to sell the debt at levels that are within that cap," Ciccarone said.

Gov. Bruce Rauner has asked the Illinois State Board of Education to determine whether CPS fits the state definition of a school district in "financial difficulty" — a distinction that could limit the district's ability to take on new debt and pave the way for a state takeover.

Emanuel, who contends the state lacks the authority to take control of the school district, continues to urge Rauner and state lawmakers to overhaul state education funding — a call reiterated in CPS' statement responding to the Tribune's questions.

"Over the long term, CPS has made clear that stabilizing our finances means that we cannot continue to borrow at these levels, and that the State of Illinois must fix the broken funding formula," the statement said.


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