Under fire, Emanuel defends ‘payday loan’ plan to borrow $389M for CPS
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Under fire for authorizing a “payday loan,” Mayor Rahm Emanuel on Friday defended his plan to let the Chicago Public Schools borrow $389 million secured by late block grants owed by the state.
“You have a situation…created by the state of Illinois to create a maximum amount of pressure on the public schools, specifically Chicago,” Emanuel said.
“It’s a short-term solution to a short-term problem created consciously, woefully by the governor to create political pressure. That’s how we’re handling it. That’s the most appropriate way to deal with it.”
Aldermen don’t see it that way. They likened it to the skipped pension payments that got CPS into this mess and Emanuel vowed to end.
“Daley didn’t pay pensions. This is borrowing instead of not paying. You’re still robbing Peter to pay Paul and putting a Band-Aid on it,” said South Side Ald. Anthony Beale (9th).
“We’re borrowing money hoping that, eventually, the state comes through. If the state doesn’t come through, we’re gonna be in worse shape tomorrow than we are today. It’s gonna cost to borrow money. Taxpayers are still losing.”
Ald. George Cardenas (12th), former chairman of the City Council’s Hispanic Caucus, said CPS needs “real solutions”—not financial Band-Aids.
“This payday lending stuff just has to end. We should have moved over some TIF funds to help CPS in the interim instead of more borrowing and more interest costs they don’t have,” he said.
Ald. Brian Hopkins (2nd) acknowledged that, “Payday loans are desperate acts.” But, he said, “We are in a desperate moment with CPS. No one likes this, but no one had a solution. We can express our anger, but our backs are against the wall. We have to keep the schools open and we have to make a pension payment.”
The decision to add $389 million to the $950 mountain of short-term debt the broke school system already owes will allow CPS to make it through the school year and still make a $721 million payment to the teachers pension fund due on June 30.
The source of the borrowing has not yet been determined, nor has the interest rate. That must wait until the borrowing goes out to bid. The maximum interest rate allowed by state law is nine percent.
Chief Financial Officer Carole Brown said the short-term loan will be limited to $389 million because the school system’s “lending partners” were willing to finance only about “85 percent of the outstanding receivable” of state grants. The rest will come from savings generated by mid-year budget cuts, Brown said, with a hazy explanation that raised more questions than it answered.
CPS spokeswoman Emily Bittner could not provide an accounting of the district’s cash flow but said “we have enough cash to finish the school year and make the pension payment ”
Brown even had a new name for the latest financial rabbit to be pulled out of the hat to postpone the day of reckoning at CPS — and it sounded a whole lot better than “payday loan.”
She called it a “grant anticipation note” and likened it to “what thousands of vendors in the state have been doing all year” because Illinois is not paying its bills.
Civic Federation President Laurence Msall agreed that there are “few choices left given the deadlock in Springfield” that has dragged on for two years. But he still wasn’t happy about this one.
“Borrowing against uncertain and late categorical funding from the state … may allow the district to remain open through the end of the school year and make its statutory pension payment, but it will come at a heavy price, both in terms of a high borrowing cost and the reputation of CPS. Worst of all, it does not help with the Chicago Public Schools’ budget shortfall next year and will, indeed, make it worse,” Msall said.
Matt Fabian, a partner at Municipal Market Analytics, said 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 short-term money it needs.
He suggested the city either borrow the money for CPS or raid the tax-increment-financing (TIF) surplus yet again, just as Emanuel did to the tune of $87.5 million to stave off another teachers strike.
“That’s a better option than paying 8.5 percent interest and taking more risk. There’s no reason to assume that the state grants are gonna be provided anytime soon,” Fabian said.
“The problem for Chicago and CPS is that the state is simply not going to help or the state is unwilling to help. So, the city and the school district need to work out plans of their own. Because they continue to rely on the state, they keep winding up in this same situation.”
Fabian urged Emanuel to move quickly to identify a permanent, local source of revenue for the Chicago Public Schools.
“Speaking for Wall Street, the street is impatient to get to a full-funding scenario. Investors want the long-term solutions produced in the short-term. As far as figuring out what taxes to raise and what spending to cut, full speed ahead,” he said.
The Chicago Sun-Times has reported the mayor is considering taxing high net-worth individuals, downtown businesses or both to generate the $400 million-to-$600 million needed to put CPS on more solid financial ground.
“That is one of the easiest things for Chicago to tax because they have had strong growth downtown. That would seem one of the more resilient areas of the economy to tax. It’s not unreasonable to look there first,” Fabian said.
“There isn’t much tax capacity in the neighborhoods and, from a national perspective, Chicago’s economy is very healthy. So, it could handle a higher tax burden, especially downtown.”
Emanuel wants to wait until the end of the General Assembly’s spring session before determining how large a hole he needs to fill.
The next “pressure point” is around July 4, when principals need to be told how much money will be available for their individual schools, City Hall sources said.
Pressed on whether the mayor was committed to fill whatever hole that remains after the Illinois General Assembly adjourns with local taxes, Brown said: “The mayor is committed to maintaining the academic gains and progress that CPS has achieved under his leadership. And I will leave it at that.”
The Chicago Teachers Union also likened the borrowing to a “payday loan” that will take years to pay off at the expense of “school communities.”
“Instead of taking advantage of unused tax increment financing (TIF) funds or undoing a corporate tax break that the city can ill-afford, the mayor’s solution to CPS debt is to increase that burden through predatory loans from the same banks and investors that helped cause this problem,” the union wrote in a statement.
Contributing: Lauren FitzPatrick