CPS' financial straits cost taxpayers with sharply higher interest rates on bond sale

The Chicago Public Schools — already facing a federal criminal investigation of its CEO and a projected $1.1 billion budget deficit next school year — now must pay a price for those problems through higher interest rates on a new $300 million bond deal.

The rates lured investors to buy the bonds, which CPS says it will use to pay off recently completed construction projects. But they also mean Chicago taxpayers will pay more over the life of the borrowing deal, financial analysts said Wednesday.

The main bond issue — for $280 million to be repaid over 25 years — took place Tuesday in three phases. The interest rates CPS had to pay to borrow the money through the bond deal ranged between 5.25 percent and 6 percent, according to the federal Municipal Securities Rulemaking Board.

That came after Fitch Ratings, a Wall Street bond-rating agency, downgraded the Chicago Board of Education’s credit rating last month three notches, leaving it just one notch above junk status, and after school officials last week disclosed there is an ongoing federal investigation involving CPS chief executive officer Barbara Byrd-Bennett.

To entice investors in the face of those troubles, most of the bonds were sold at a discount, with investors paying about 96 cents on the dollar.

Financial analysts said the school system’s bleak financial picture clearly hurt CPS. The bond market was pricing similar deals with better-rated governments at almost half the rate CPS is paying, according to data provided by the Thomson Reuters Municipal Market Monitor.

Brian Battle, director of trading for Performance Trust Capital Partners, a Chicago firm that analyzes bonds for investors, said the district’s poor credit rating meant the interest rate on the deal was much higher than it would have been for a government selling bonds with a higher rating.

“If we were a good borrower, we would have paid at 3 percent,” Battle said. “The penalty is big on a percentage basis.”

Still, he said CPS got a “pretty good deal” thanks to generally low interest rates.

Battle said CPS and the city of Chicago have a difficult time in the bond market because of their budgetary problems and also the state government’s financial straits.

“It doesn’t help CPS that it’s an entity within the state of Illinois,” he said. “All borrowers in Illinois pay what you could call a penalty rate. Our financials aren’t that great, and we have a pension problem that hasn’t been addressed.”

Michael Passman, a CPS spokesman, wouldn’t talk about how much the credit-rating downgrade affected interest rates, saying, “It is impossible to speculate what our rates would have been under different circumstances.”

News that the bond sale had been completed drew cheers at Wednesday’s school board meeting, during which Ginger Ostro, CPS’ chief financial officer, said investors still have confidence the district can right its financial ship.

The bond sale “was a success because we had nearly 100 investors who were interested in purchasing our bonds,” Ostro said. “In fact, they were interested in buying more bonds than we had available, about 1.7 times the $300 million that we had offered.

“And the interest rate was good as well, about 5.5 percent for the 25-year term. This shows that investors do have confidence in CPS and in our ability to repay our debts.”

The bond sale will allow CPS to repay a line of credit that financed construction projects the past two years that brought air-conditioning, computer science labs and other improvements to schools. School officials say 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.

On Friday, Byrd-Bennett took a paid leave of absence from her post as the school system’s chief executive as school officials disclosed the federal investigation into a $20.5 million, no-bid contract with SUPES Academy, a company Byrd-Bennett formerly worked for.

At Wednesday’s meeting, the Chicago Board of Education suspended the contract with the north suburban company.

That investigation is only one of the problems CPS is facing. Risky interest-rate swap deals have put the school system in a position in which investment banks could demand payments totaling more than $200 million on just two days’ notice because of the downgrade in the credit rating.

CPS’ payment into the city teacher-pension fund totals $700 million this year — compared to $200 million during the 2012-13 school year. CPS officials hope lawmakers in Springfield will take steps to help them address the projected $1.1 billion budget shortfall in the next school year.

“We’re working diligently to prepare a financial plan for you for [the next school year], but ultimately it will have to wait until we have a better sense of what we can count on from Springfield in order to resolve our $1.1 billion deficit,” Ostro said.