Gov. Bruce Rauner has threatened Chicago Public Schools with bankruptcy and though the proposal he championed via Republican lawmakers is unlikely to pass, if it did, the state’s largest school district would make history.
No major public school district in the country has gone bankrupt.
Should Rauner succeed in changing Illinois law, CPS could be in for a laborious and expensive process that surely would involve more wholesale cuts, all overseen by a federal judge who’d be working in unchartered territory in Illinois.
Cities and other public entities are governed by Chapter 9 of the federal bankruptcy code, which helps municipalities restructure their debts.
“All legal proceedings stop. Everything goes before the judge,” said Saqib Bhatti, a fellow at the Roosevelt Institute, who directs the progressive ReFund America Project and has examined Detroit’s bankruptcy, the largest American city to declare a financial bust.
Union contracts could be voided. Pension payments also could be reduced.
“When you file bankruptcy, there’s a stay on all of your bills” such as payroll and supplies, Bhatti said. “The bankruptcy judge can then authorize which get paid.”
Someone new needs to run the show.
Michigan’s governor put an emergency manager in place. Illinois Republican leaders have said that Rauner’s appointed State Board of Education would replace Chicago’s Board of Education with a new authority to run CPS until the district straightens out its finances, if one of their bills passes. One leader said that proposed board would have expertise in finance and education and some members would be “local.”
Eventually, an elected school board could be installed, something Emanuel critics — including the Chicago Teachers Union and Raise Your Hand — have advocated for years.
Then the board has to come up with a proposal to restructure CPS. Creditors enter into negotiations. The judge gets final approval.
Unlike other types of bankruptcy that deal with individuals or companies, in Chapter 9, the judge cannot amend or adjust the plan, or write a new one altogether, Bhatti said.
“The judge can only vote it up or down,” he explained. “The reason for that is the judge is not the elected official. The idea is that the power’s supposed to remain with the people [so] it can’t be the judge’s plan.”
Cassie Creswell, a Raise Your Hand board member, feared that Chicago has to take the plan seriously “because it happened in Detroit,” though it requires unwilling powerful Democrats to change their minds. “But pushing this as a possibility makes less drastic things, that are still unpalatable, more possible.”
In Detroit, the creditors came first, and the lawyers running the bankruptcy were also paid all along, which raised a stink in the Motor City, Bhatti said. That left less money for city operations.
“Ultimately it makes sure there’s an ordered restructuring so the creditors can be repaid. When you see that happen, you see a complete gutting of services,” he said.
In Illinois, the state constitution requires the government to make pensioners whole. Bhatti wondered whether that rendered all talk of municipal bankruptcy moot.
“If Chapter 9 opens the door for pensions to be gutted, and if the constitution doesn’t allow for pensions to be gutted, does the constitution allow Chapter 9?”