A week after temporarily halting a critical borrowing deal, the cash-strapped Chicago Public Schools returned to Wall Street on Wednesday — but paid a huge price for the delay.
CPS initially planned to issue $875 million in bonds on Jan. 27, but officials said they put off going to market because some buyers wanted more time to consider the deal.
On Wednesday, the amount CPS is borrowing was scaled back dramatically to $725 million. And instead of the 7.75 percent interest rate offered to buyers of the tax-exempt bonds last week, CPS promised them a higher yield of 8.5 percent, sources said.
During the past week, the teachers union rejected a contract offer from CPS, while Gov. Bruce Rauner said the state was getting ready to take over the city’s school system.
Although Rauner has said CPS could go bankrupt, that would require a change in state law — and leaders of the Democratic Legislative majorities in Springfield say there is no support for it.
Sources in Mayor Rahm Emanuel’s administration described the 8.5 percent interest rate as a “Rauner premium.” Rauner on Wednesday denied timing his remarks to hurt the CPS bond deal.
But analysts said calling the rate a “Rauner premium” wasn’t an unfair characterization.
Matt Fabian, a partner at Municipal Market Analytics, said the higher yield was a “direct consequence of having pulled the deal last [week] and the governor threatening to take over CPS and force it into bankruptcy.”
Asked how CPS would have to make up for reducing the size of the bond issue, Fabian said, “They’re going to have to borrow the money from somewhere else, get a loan from the city, get whomever they owe money to restructure the payments or, ultimately, raise property taxes.”
Money from the bond deal will reimburse the school district’s operating fund for capital improvements that have already been made and refinance more than $200 million in debt “to provide immediate budgetary relief,” CPS officials said in a statement.
Other financial moves they hoped to make will be postponed, officials said.
“Borrowing money was never a decision that we took lightly and though some wanted our efforts to fail, CPS needed to move forward in order to keep our doors open so we could educate our children,” Ron DeNard, the district’s senior vice president for finance, said in a statement.
Combined with $100 million in spending cuts announced Tuesday and other recent cost reductions, DeNard said, the bond deal “will produce sufficient proceeds to mitigate our cash flow challenges through the end of the fiscal year” — at the end of June.
A debt service payment due on Feb. 15 will be made, officials said.
Civic Federation President Laurence Msall said CPS CEO Forrest Claypool will have no choice but to wield the budget ax yet again.
The $100 million in cuts came after the Chicago Teachers Union’s 40-person bargaining unit unanimously rejected a new four-year contract that would have given teachers small annual pay raises, frozen the number of charter schools and ruled out layoffs in exchange for teachers picking up their full, 9 percent pension payments.
“This buys them a little time, but it doesn’t close their budget hole,” Msall said. “They have promised to spend more than they have in available revenue. They will either cut some more or run out of money to make basic service payments unless they find new revenue or get some relief from the state, which doesn’t appear likely.”
Msall said the 8.5 percent interest rate is the “highest we’ve seen in many years.” It’s particularly surprising because it comes in a “low-interest rate environment,” he said.
But Wall Street agencies have downgraded CPS debt repeatedly, to the point where the school district’s bonds are deemed junk.
The yield offered by CPS is three times what a top-rated government would have to pay.\
“Taxpayers will be paying hundreds of millions in interest costs that will not be available for classrooms and other school resources in the future,” Msall said.
In a legal disclosure filed for potential bond buyers on Tuesday, CPS officials listed the litany of recent problems involving Rauner and the CTU.
“It’s a panoply of bad news that just keeps coming for Chicago Public Schools and their financial situation,” Msall said. “It’s a horrible warning sign to CPS, the city, the park district and other non-investment grade units of government as to what the cost will be for future borrowings.”