Chicago Public Schools borrow $275 million at sky-high interest rate

The Chicago Public Schools will pay 6.39 percent — an extraordinary interest rate by short-term lending standards — to borrow $275 million it needs to make a mandatory payment for retiree pensions before a June 30 deadline.

That’s more than four times the interest rate a typical government would pay on the same borrowing deal, financial experts say.

It’s yet another sign of the dire financial condition of the nation’s third-largest public school system, which for months has had a “junk” credit rating from Wall Street financial institutions.

CPS officials secured the $275 million on Monday from J.P. Morgan. It’s the final chunk of cash needed to make the $721 million payment for teacher pensions that’s due at the end of the month, senior vice president of finance Ron DeNard said in a statement.

An additional $112 million that’s needed to fund district operations will be borrowed separately.

After fielding three competing bids, CPS chose J.P. Morgan to provide the so-called “grant anticipation notes,” which will be backed by state block grant money CPS is entitled to — but has yet to receive — in the ongoing budget stalemate. The interest rate will fluctuate monthly.

Matt Fabian, a partner at Municipal Market Analytics, said the 6.39 percent interest rate is about 4.5 percentage points “more than a ‘regular’ issuer would pay, but CPS left ‘regular’ two years ago.

“CPS has no regular market access so the price they pay to borrow is always the product of negotiation,” he added.

Mayor Rahm Emanuel has argued that CPS has no choice but to borrow its way out of the financial mess in Springfield that’s affecting school districts statewide.

“You have a situation . . . created by the state of Illinois to create a maximum amount of pressure on the public schools, specifically Chicago,” Emanuel has said. “It’s a short-term solution to a short-term problem created consciously, woefully by the governor to create political pressure.”

“We are saddened that the Chicago Public School district is trading its future financial health for another short term easy fix. It has no one to blame high interest rates on other than the decades of mismanagement that created this crisis. The Governor is hopeful that the General Assembly will spend the next week focused on passing a truly balanced budget that will help school children across our state, including those in CPS,” Gov. Bruce Rauner’s spokeswoman Eleni Demertzis said in an emailed statement.

Fabian has suggested that CPS is already the “main risk to the city from a triage perspective” and, therefore, the city would have been better off “giving” the district the money it needs to get through the school year and make the pension payment.

The city, he’s said, either could borrow the money for CPS or raid the tax-increment financing surplus yet again. “That’s a better option than paying [exorbitant] interest and taking more risk,” Fabian said last month.

The mayor is considering taxing high net-worth individuals, downtown businesses or both to put CPS on more solid financial ground. But the mayor is determined to wait until the end of a special Legislative session next week before determining how large a hole he needs to fill — especially if a larger school-funding solution for Chicago and other school districts can be reached.