CHICAGO – The Chicago Board of Education is not subject to rules that allow the State Board of Education to curb the borrowing powers of financially distressed districts, Illinois Attorney General Lisa Madigan said in a
"The state board lacks the authority to prevent the Chicago Board of Education from establishing a line of credit or incurring other debt," the opinion said. "The Chicago board may continue to exercise those powers granted" by applicable provisions of the school code, "including the power to establish lines of credit."
Gov. Bruce Rauner warned in February that the Illinois Board of Education could block future CPS borrowings if it determines the district to be in "financial difficulty." CPS countered that the school code statutes exempt the district from such a ban.
The opinion, dated Thursday, appears to ease a threat to the school district's ability to use credit lines. Market participants had warned that the open question and potential for litigation alone could chill future attempts to access the market.
With no near-term public bond offerings planned, the district's priority is to set up short-term credit lines for fiscal 2017. The district has relied heavily on short-term borrowing to keep schools open.
Rauner's comments came after the state board launched a probe of CPS finances, which is permitted under the state's sweeping school code, adding to the escalating tensions between the GOP governor and the Chicago district as it seeks more state aid to ease a $1 billion deficit.
Rauner took the position that if found to be in financial difficulty, the school code would prohibit CPS from issuing bonds or otherwise borrowing money until the district develops a financial plan to be approved by ISBE.
CPS countered that under special provisions of the code that apply to districts that serve a population of more than 500,000 (in other words, Chicago alone) it is exempt from such state oversight rules. Rauner's administration countered that CPS is no longer subject to Article 34A because it applied only when the district's reform board existed. It was dissolved in 2010.
Madigan concluded that the provisions in question have not been repealed and so still apply.
"It is my opinion that the clear and unambiguous language of the school code indicates that the General Assembly intended to treat the Chicago Public Schools differently than other Illinois school districts with respect to financial oversight by the State Board of Education," Madigan's opinion says.
Various provisions of the code do not grant the state board "statutory authority to require CPS to develop, adopt or submit a financial plan" the opinion says, adding that the applicable code does not "require that the Chicago Board of Education seek approval of a financial plan from the state board before it can issue bonds or any evidence of indebtedness, such as establishing a line of credit."
The opinion states that if the district is found to be in "financial difficulty" by the state board, then the mayor and governor are notified and they, along with the General Assembly, could craft a financial oversight "solution" specific to CPS.
Madigan's office issued the opinion in response to an inquiry from state Rep. Barbara Flynn Currie, majority leader and chairwoman of the House's Education Task Force, as to whether the district could be blocked from borrowing.
Concerns over ongoing market access could have driven steep short-term rates up even higher from the 3.25% paid on several recent transactions. Market worries over the credit forced the district to pay an 8.5% yield on its recent $725 million sale. The bonds are now trading at 90 cents on the dollar, or a 7.84% yield, according to buyside sources.
The district's current budget relied on $480 million of additional state help, a request that has failed to make headway at the capital as Rauner and the General Assembly's Democratic majority remained locked in state budget impasse. Rauner is promoting state oversight and possibly bankruptcy as solutions for the district.
The opinion comes as the district was dealing Friday with a one-day teacher's strike. The Chicago Teacher's Union called it an "action day" to promote the need for equitable state funding, but the district considers it an illegal strike with the two sides locked in negotiations over a new contract with a potential strike looming next month.
The opinion references Currie's letter which appears to have stated that CPS was struggling to establish a new line. "The Chicago board currently plans to establish a line of credit to address a cash flow shortage," it reads. "However you have indicated that CPS has encountered difficulties in doing this based upon the governor's contention that the state board the authority to block any debt offering."
The Illinois state board said in a statement after that Madigan opinion was released that it would "continue to review all of its options," making it unclear as to whether the Rauner administration would drop its position. Several sources said the opinion would help clear the district's path to securing short term lines but that a statement from the board or Rauner agreeing to drop the threat in the wake of the opinion would fully resolve the issue.
