THE WATCHDOGS: CPS’ pain is these firms’ gain

Struggling to make payments for pensions and pay down billions of dollars in debt, the Chicago Public Schools last week announced 1,050 layoffs and $200 million in spending cuts to keep the school system afloat.

But while taxpayers and students may suffer, a select group of business people have profited from the Chicago Board of Education’s decisions to keep borrowing to pay its bills.

Dozens of financial and legal firms have been paid $18.1 million in fees from CPS borrowing and debt-refinancing deals since 2011, according to records obtained by the Chicago Sun-Times.

Many of the firms making money from CPS’ borrowing have done similar work for other governments, too.

Their fees on CPS bond deals typically amount to less than 1 percent of the money borrowed, which is in line with fees on state of Illinois and other government bond sales. Still, that usually adds up to seven-figure fees on each CPS deal, given their size.

Over the past two decades, the nation’s third-largest school system has dug itself a massive financial hole by repeatedly borrowing money — from lines of credit to bonds to risky interest rate “swap” deals — even as it skipped payments to the Chicago Teachers’ Pension Fund.

The school board tapped some of that borrowed cash and dipped into its savings to make a state-mandated $634 million payment Tuesday to the pension fund.

That prompted Mayor Rahm Emanuel on Wednesday to announce what he described as “intolerable” and “unconscionable” job and spending cuts for the coming school year. Emanuel has blamed lawmakers in Springfield for letting CPS skip making pension payments between 1995 and 2005 and then enacting a law in 2010 that now requires huge payments to the retirement fund for teachers and administrators.

But CPS’ penchant for borrowing also appears to be a big part of the problem, according to the school system’s latest annual financial report. Over the next several years, its principal and interest payments on its debts, plus its pension costs, are expected to top $1 billion a year. That amounts to about one-sixth of CPS’ most recent annual operating budget.

CPS still owes billions on borrowing deals dating to the mid-1990s, when then-Mayor Richard M. Daley took formal control of the school system, which then began renovating and building schools using borrowed money.

After Emanuel took office in 2011, the school board continued to borrow, including a bond deal of nearly a half-billion dollars this spring.

Those bond sales, in March and April, allowed CPS to refinance debt and repay a line of credit used to finance construction projects that brought air-conditioning, computer science labs and other improvements to schools the past two years. School officials have said the line of credit has allowed them to cut interest costs by about $10 million since 2013 by not having to sell bonds at the outset to pay for those projects.

The more the district turns to the bond market, though, the more fees it must pay to banks, financial advisers, lawyers and other borrowing professionals.

Of the $18.1 million CPS has paid in bond-related fees since 2011, nearly half of that went to underwriting companies including J.P. Morgan Securities, Cabrera Capital Markets and Goldman Sachs.

In all, 21 companies shared in a total of nearly $4.4 million in fees from the $478.1 million in CPS bond sales this spring. Among them:

• Katten Muchin & Rosenman, a law firm that was paid $300,000. Daley, who endorsed Emanuel’s successful re-election bid this year, is “of counsel” at the firm, whose attorneys have contributed $61,100 to Emanuel’s campaign fund since 2010. The law firm has been working on CPS bond deals for at least a decade, records show.

• Loop Capital Markets, one of five financial firms that shared in $2.4 million in underwriting fees. Loop Capital’s share totaled about $180,000, according to Kourtney Ratliff, a partner with the firm, which is headed by James Reynolds Jr., an Emanuel appointee to the boards of World Business Chicago and the Illinois Sports Facilities Authority. “We’re one of the largest underwriters of municipal bonds in the country,” Ratliff says. “We’ve been underwriting for the city for many years, well before Mayor Emanuel.”

• Thompson Coburn, a law firm that was paid $350,000. Its partners include Illinois Senate President John J. Cullerton, D-Chicago, one of Emanuel’s closest allies in the Illinois General Assembly. A spokeswoman for Cullerton says he played no role in his law firm getting the bond-related business from CPS.

• Quarles & Brady, a law firm that was paid $300,000. The firm and its attorneys have given $4,500 to Emanuel’s campaign fund. “All of these contributions were within legal limits and were not related to Quarles & Brady LLP being selected as bond counsel in the referenced transaction,” says Debi Miller, the firm’s spokeswoman.

Those that have worked on other CPS borrowing deals include:

• Peralta Garcia Solutions, headed by Leticia Peralta Davis, who ran the Metropolitan Pier and Exposition Authority under former Gov. Rod Blagojevich. The firm has been paid a total of $300,000 as a financial adviser on two deals.

• Mayer Brown, a law firm whose attorneys have contributed $69,750 to Emanuel’s campaign fund. Mayer Brown was paid $175,000 for legal work on a $109 million bond sale in 2012.

Adam Collins, an Emanuel spokesman, says there is no connection between the awarding of CPS bond work and contributions to the mayor’s political fund.

“These firms have done this type of work with the city and with sister agencies for years, in some cases for decades,” Collins says. “Beyond that, to the question of CPS borrowing, sister governments are separate legal entities and decide for themselves which firms to use on their bond transactions.”

The mayor has been trying to broker a solution to CPS’ financial problems amid chaos in the school system:

• Little over a month ago, Barbara Byrd-Bennett resigned as CPS’ chief executive officer amid a federal criminal investigation into a $20.5 million, no-bid principal-training contract.

• CPS’ credit rating has plummeted to “junk” status, forcing up interest rates on its most recent bond sale.

• And school leaders are in negotiations with the Chicago Teachers Union, whose contract expired Tuesday.

Emanuel’s ideas for for fixing CPS’ financial mess include raising city property taxes by as much as $225 million, providing that the teachers union and lawmakers in Springfield buy into a “grand bargain” that would involve teachers absorbing the full freight of their 9 percent pension contribution — CPS now picks up all but 2 percent of that — and the state paying a share of city teacher-pension costs.

Union leaders on their website are calling that proposal unfair, accusing Emanuel of blaming the school system’s financial woes “on modest teacher pensions which it has refused to fund, while debt payments to banks and usurious interest rates are paid unfailingly without a whisper of dissent.”

Contributing: Dan Mihalopoulos