The Chicago Public Schools ended the week no closer than it started to answering the question of how or if a scheduled pension payment will be made.
The Board of Education Thursday abruptly pulled from its agenda a planned vote on the district's amended budget and intergovernmental agreement with the city on a Municipal Employees' Annuity and Benefit Fund pension payment.
The payment is supposed to cover school district employees covered by MEABF, a city employee pension fund.
Chicago Mayor Brandon Johnson — who appointed a majority of the school board — wants the district to make the payment, which would help him deal with the city's budget gap.
"I'm going to remain optimistic and positive that the board recognizes its responsibility" to pay for both collective bargaining agreements and the MEABF payment, Johnson added. "Clearly, my administration is committed to helping this body of government become a successful body of government… We expect people to do what they said they would do."
But the largely junk-rated district is not legally responsible for the payment, said Joe Ferguson, president of the Civic Federation of Chicago, an independent research organization that analyses the finances of Chicago and Illinois goverments.
He said the best option for the district now "in terms of signaling to the finance markets that CPS is operating in accord with its budget without taking on any additional debt" is to let fall on the city the problem Chicago created for itself when it assumed CPS would make a disputed MEABF payment CPS has no legal duty to pay.
"The best option for the district is to not make the payment, which it is not obligated to make… and to simply utilize the funds that are available," Ferguson said. "That can be coupled with cuts of some sort or an attempt to slow-roll other expenditures in the budget if additional money is needed."
Into the mix was added a report by the firm Baker Tilly, dated March 17 and commissioned by Board of Education President Sean Harden, a Johnson appointee.
It outlined three paths forward for the board. One would require current year budget reductions. Another would involve additional tax increment financing surplus from the city. and a third calls for debt restructuring through refunding current outstanding issuances, issuing taxable alternate revenue bonds to refinance debt, or issuing taxable alternate revenue general obligation bonds.
On the third path, the report stressed that the board should consult its own municipal advisor before proceeding, and noted that those taxable bonds would carry higher interest costs than tax-exempt bonds and could contribute to future budget shortfalls.
A debt restructuring, which Chicago's Chief Financial Officer Jill Jaworski pushed at
"The Baker Tilly report was fair in its assessment of the challenges in executing that kind of debt refinancing," he said. "But I also think it was a little understated in terms of just how challenging the credit market conditions are at the moment and how challenging they are going to become in the very near future."
The Federal Open Market Committee has backed away from further cuts to the benchmark fed funds rate, and Trump administration tariff and federak spending turmoil has unsettled the markets.
"It's going to depend on market conditions in a way that past refinancings have not," Marlowe added. "And I think that given the turbulence in the capital markets, there's a chance that the refinancing might be less effective than CPS might like and possibly even ineffective."
The board's task now is "choosing the least bad option," Marlowe said. "None of them are good."
The refinancing option could even make the problem worse, depending on how the market timing goes, he said.
On the positive side, the Baker Tilly report did not include the option of taking out a short-term loan, which Marlowe said would likely have forced rating agencies' hands.
"That's not to say that the options that the report mentioned won't [lead to a downgrade]," he said. "But it won't be as mechanical a relationship… as it would be if they had done that short-term [borrowing] option."
At a press conference Tuesday, Mayor Brandon Johnson criticized CPS's failure to account for costs from collective bargaining agreements with unions.
The mayor also emphasized his own teaching experience and noted he's the only Chicago mayor to "block elevators and [go] on a hunger strike" to defend keeping schools open. "No one is going to question my commitment to public education," he said.
Harden, the school board president, said Thursday that the votes on the amended budget and the intergovernmental agreement were being called off because the district is very close to an agreement with the Chicago Teachers Union in ongoing contract negotiations. Board member Ellen Rosenfeld told the meeting Thursday that board members had received no notice of the abrupt reversal.
"There are two major things that I think [the reversal] signals, but we're all reading into opaque space here," Ferguson said. "Quite clearly, the votes didn't exist to get that amendment passed, and that's significant. … The 'no' votes have probably solidified into a very firm bloc given all that has been revealed."
Ferguson said the question now is whether a collective bargaining agreement can be reached, presented to delegates for a vote and then approved by the board in time for the city to close out its books on March 31, by which time it needs to know if CPS is making the disputed MEABF payment or not.
The logical path forward, he said, would be for Harden to somehow tie the union contract vote, the intergovernmental agreement vote and the amended budget vote together, forcing a difficult choice for board members who had previously been leaning toward "no."
If that isn't approved, the city still needs time to go before the City Council and seek authority to draw upon reserves or make some other fiscal changes, Ferguson said.
As for the the debt refinancing that would make it possible to make both the collective bargaining agreement payments and the MEABF payment, Ferguson acknowledged Baker Tilly identified tools available to the district.
"It is less than clear whether those tools are truly available legally, and they have made it clear that separate and apart from the legal availability, there will be adverse financial consequences for CPS because it's taking on more debt" at a moment of extreme fragility, he said.
"Are we talking about refinancing at a lower rate?" he asked. "Understanding that we are already dealing with debt that likely was issued with the district in junk status, getting a better rate at this particular moment without extending the term is unlikely."
Marlowe noted that "it's all the same property tax base" at the end of the day.
"We can make these distinctions between the city and CPS as operating entities, but… you have to think of it as an integrated whole," he said. "The governance problems have been there for a long time, but have now been brought out in the open in a very visible way."
Added to the equation are recent changes at the federal level, including the Trump administration's attempt to abolish the Department of Education, which mean the city and CPS especially will have fewer resources to work with.
"Given the governance relationship between CPS and the city, the mayor has to be a central player in that story, but… it's very difficult for him to play that honest broker role, even if he's being genuine [in trying], which I really do believe this mayor is. That's virtually impossible to do given his origins" as a teacher and CTU organizer," Marlowe said.
"Somebody's going to blink, somebody's going to capitulate, and then that will be the starting point for a more lasting governance relationship," he said.
Both
S&P assigns the Board of Education a speculative-grade rating of BB-plus with a stable outlook. Moody's assigns the board a rating of Ba1, one notch below investment grade.
Fitch Ratings gives the board an issuer default rating and unlimited tax general obligation bond rating of BB-plus and a dedicated capital improvement tax bond rating of A. The outlook is stable.
KBRA rates CPS GO bonds either BBB or BBB-plus, depending on whether the bonds have a special revenue bond legal opinion attached. The outlook is negative.
