Mayor Rahm Emanuel agreed Tuesday to cover up to $80 million in security costs for the Chicago Public Schools and predicted that he could assume that annual burden “without a citywide tax increase.”
The Chicago Public School budget assumed $269 million in help from the city, but that was before a hard-fought school funding compromise that will provide a $450 million windfall for CPS.
The bill signed by Gov. Bruce Rauner also authorizes a $125 million property tax increase for teacher pensions — on top of the $250 million increase imposed last year.
Sources said all of those measures have reduced the remaining gap that must be filled to roughly $125 million.
On Tuesday, the Emanuel administration disclosed plans to fill that hole without “a citywide tax increase.”
The Chicago Sun-Times has reported for months that Emanuel was considering raising taxes on downtown businesses, high net-worth individuals or a combination of the hole to put CPS on solid financial footing.
But, the Springfield windfall let the mayor and aldermen off the hook.
“With historic school funding reform now the law in Illinois, and with the state of Illinois now covering some of the costs of Chicago teacher pensions for the first time ever, CPS’ financial outlook has improved dramatically,” Emanuel’s communications director Adam Collins wrote in an email.
“While the final numbers are still being run from the bill, the city will build into its 2018 budget support for $70-80 million in CPS school security costs. The City will work with CPS to eliminate the remaining gap, which is between $40-$50M, in the weeks and months to come though we fully expect CPS will see savings from interest and through refinancing debt. CPS will also continue to make further administrative efficiencies such as procurement rebates and additional Medicaid revenue.”
In a follow-up phone call, Collins refused to say how a city grappling with its own $114.2 million shortfall that does not factor in the steep cost of a police hiring surge, police reform and new contracts for 90 percent of all city employees could assume another $80 million in security costs.
But, said, “Overall, the city budget will be balanced without a citywide tax increase.”
Other sources said the $80 million in security costs were likely to come from the windfall generated by Emanuel’s plan to refinance up to $3 billion in debt in a way that could dramatically reduce interest rates.
On Wednesday, Emanuel plans to formally introduce his plan to take advantage of the new financing vehicle authorized by the General Assembly.
The deal that ended the marathon state budget stalemate authorized Chicago to set up a “special-purpose corporation” as a vehicle to borrow money to finance city projects.
The Emanuel administration intends to put state sales tax receipts into that corporation, then borrow against it at a dramatically reduced interest rate — anywhere from 1.75 percentage points to 3 percentage points lower than Chicago taxpayers pay now.
A 3-percentage-point reduction in borrowing costs would save the city $30 million a year on every $1 billion borrowed.
Chicago has $10 billion in outstanding general obligation debt backed by property taxes. Roughly $2.3 billion of that borrowed money can be refinanced early, without penalty, in the next two or three years.
In addition, the city will refinance roughly $515 million worth of sales tax bonds, because “the new financing structure will work best if the city does not have any other bonds pledged to those revenues,” officials said.
The savings to taxpayers is expected to be “much more significant” than routine refinancing because bonds issued under the new structure would have a “significantly higher rating.”
That’s because the legislation allows the city to “isolate revenues from the rest of the city’s corporate fund,” and thereby shields investors from the threat of being dragged into a bankruptcy proceeding.
“Bond holders have greater protection that those revenues will first go to them to pay that debt service and then go to the city for general use. Bond holders … and the rating agencies like this structure. That gives it a better rating and a lower interest rate,” a top mayoral aide told the Sun-Times on the day Emanuel outlined the borrowing plan for investors.
Chicago’s junk bond rating has already saddled taxpayers with tens of millions of dollars in penalties and added borrowing costs.
Late Tuesday, Moody’s Investors Service reaffirmed the junk bond rating it alone has applied to Chicago’s debt along with a “negative outlook” that threatens to set the stage for a further reduction in the next 12-to-24 months.
Chicago is “very heavily leveraged by debt and unfunded pensions,” Moody’s said.
“The city recently applied its broad taxing authority to raise new local revenue and accelerate pension funding, but new taxes remain far from sufficient to arrest growth in unfunded pension liabilities,” Moody’s said.
Citing the city’s “very close governance and political ties to the fiscally weak CPS,” Moody’s said,
“The negative outlook reflects the expectation that immense tax base leverage and growing costs will remain an ongoing source of pressure on the City of Chicago that could weaken its long-term credit quality. Heightened fiscal distress at CPS could also be a source of credit strain on the city to the extent it results in a further burden on Chicago taxpayers.”
The Emanuel aide said the new financing scheme — already used in New York City, Philadelphia and Washington D.C. — could pave the way for the city to raise a bond rating that now ranges from BBB-plus to junk with Moody’s Investors.
“As early as late October, the city will plan to refinance existing sales tax debt and existing expensive [general obligation] debt with this significantly cheaper corporation debt,” said a briefing paper distributed to aldermen.
“This refinancing is expected to save the city millions of dollars per year in debt service costs and help alleviate the city’s GO debt burden. Over the long term, it is expected to result in ratings upgrades for the city’s GO credit.”
The decision to assume up to $80 million in CPS security costs marks an abrupt about-face on the issue for Emanuel.
From 2009-2011, CPS paid the Chicago Police Department $8 million annually to station two police officers at every high school for the eight-hour school day. That broke down to roughly $80,000 per school.
Former CPS Chief Administrative Officer Tim Cawley called it a “sweet deal” that did not reflect the actual cost of police services and supervision that, for years, approached $25 million or roughly $250,000 per high school.
Shortly after taking office, Emanuel stripped teachers of a previously negotiated, 4 percent pay raise and used the $80 million in savings to pay the Chicago Police Department retroactively, going back to 2009.
That helped the mayor solve the city’s budget crisis because it was roughly $70 million more than CPS had originally agreed to reimburse the city for police services in schools. “It’s the right thing to do. We owe them,” Cawley said at the time.
The increase in costs prompted CPS to more closely examine whether it needed two police officers in every high school all day long.