March 17--As Chicago Public Schools' money troubles worsen, students and their families face increasing uncertainty. Dozens of classroom staff were laid off last month after the school district cut principals' second-semester budgets. A strike is looming as CPS prepares to slash teacher benefits.
But if the school district ever comes up short on its debt payments, the investors who bought CPS' bonds can rest assured they will get what they are owed -- straight from Chicago taxpayers.
The school district's bond contracts include a little-known provision that would trigger a property tax increase if CPS fails to pay. The county clerk would deliver that additional revenue directly to a bank -- much the way a creditor might garnish an individual's wages.
"Citizens don't know the extent to which their own assets are pledged to pay bondholders," said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.
Had CPS secured voters' approval before issuing its bonds, the district would have a dedicated stream of property tax revenues available to pay off the debt. But for 20 years Chicago school officials have avoided holding referendums by promising to use an existing revenue source to make debt payments: mainly the per-pupil education funding the district gets from the state. Property taxes serve as a backup.
With this type of borrowing, called an alternate revenue bond, the pledged revenue stream usually covers the debt payments and the backup option isn't called upon.
"It rarely means additional burden on the property taxpayers, and that's true throughout the U.S.," said James Spiotto, a Chicago-based lawyer and expert on government debt who has testified before Congress about municipal bankruptcy.
Indeed, in a statement responding to Tribune questions, the district noted that "CPS has used alternate bonds since at least 1997 and has never failed to make a debt service payment."
But some analysts believe the district's ongoing cash crisis makes that scenario more likely.
Last month CPS struggled to scrape together enough money for a $474 million payment on its $6 billion debt load. To come up with the money, the district had to borrow about $200 million -- a deal that initially stalled for lack of investors and finally got done less than two weeks before the Feb. 15 due date.
To reassure prospective investors, CPS Treasurer Jennie Huang Bennett explained in a January online presentation that if the school district were unable to make a debt payment, "the taxes are then extended and collected for the benefit of bondholders."
The cost to homeowners and businesses could be steep.
As an example: If the school district had been unable to make last year's debt payment in February 2015, this year's taxes would have increased by $725 for the owner of a $250,000 home, according to calculations performed by the Cook County clerk's office in response to Tribune questions. If CPS had come up $200 million short that same year, the same homeowner would have paid an additional $188.
Moody's Investors Service viewed CPS' Feb. 15 debt payment as so uncertain that when the money arrived on time, Moody's made it the top story in its weekly public finance newsletter.
"Had the district not made the deposit (or made a partial deposit), the total debt service cost (or insufficiency) would be placed on the tax rolls of Chicago residents," Moody's noted.
Back-door referendums
Governments that lack home-rule power, such as school districts and small towns, typically hold referendums before issuing debt. That forces public officials to earn voters' support for their spending plans and creates a dedicated stream of new tax dollars to make the annual bond payments.
But state law also allows those governments to circumvent referendums by pledging a revenue stream other than property taxes to pay off the debt -- a method CPS has used to borrow billions of dollars.
A government issuing these alternate revenue bonds can conduct what bond contracts call a "backdoor referendum." Public officials announce the deal in local newspaper ads and need to hold a referendum only if someone objects and collects about 100,000 signatures in 30 days.
Giving creditors the ability to trigger a tax hike if the alternate revenues come up short is a standard provision in the bond contracts.
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