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Emanuel’s short-term CPS fix? More borrowing

Chicago mayor Rahm Emanuel speaks at a news conference as Chicago Public Schools CEO Forrest Claypool looks on in his press office at City Hall in Chicago on Friday, April 28, 2017. (Chris Sweda / Chicago Tribune)

With Chicago Public Schools teetering on the brink of insolvency, Mayor Rahm Emanuel on Friday will call for the district to borrow hundreds of millions of dollars more to get through the school year and make a massive pension payment due June 30, sources familiar with the plan said.

The financial rescue is short term. Instead of announcing a long-term solution, Emanuel plans to wait for the waning days of the spring session to play out at the Capitol in the long-shot hope that lawmakers and Republican Gov. Bruce Rauner will reach a deal to send CPS more money, the sources said.

The state’s largest public school district finds itself strapped for cash after years of burning through savings, investment losses and skipping pension payments that have resulted in deep cuts and $9 billion in debt. Pushing the money woes to a crisis level: Rauner’s veto of pension money the district banked on in this year’s budget and the state’s failure to pay CPS hundreds of millions of dollars in grants on time.

On Friday, Emanuel administration officials will brief aldermen on steps to ensure "that classes stay open through June 30 and CPS makes its pension payment," city spokeswoman Molly Poppe said.

The district’s budget this year is short $129 million — even after CPS made late-year spending cuts in the wake of Rauner’s veto of $215 million in pension funding. On top of that, the state is behind in making grant payments of $467 million to the district, city officials say.

That leaves CPS with enough money to finish classes, but not enough to make the bulk of a required contribution of more than $700 million due June 30 to the Chicago Teachers’ Pension Fund. The rest would be paid later in the summer, after about $250 million from a new property tax increase is collected.

To fill the gap, CPS would borrow money both to make the pension payment and to keep CPS operations from shutting down after the end of the regular school year, sources familiar with the plan said. That borrowing, the terms of which were still being worked out Thursday, would be backed at least in part with future state grant payments.

The state, which has a $13 billion backlog of payments amid a long-running partisan budget stalemate, cannot pledge that it would even make a partial payment on the amount owed before June 30, said Abdon Pallasch, spokesman for Illinois Comptroller Susana Mendoza.

Although the state has been keeping up with general education funding payments to school districts across Illinois, the last quarterly grant-funding payment was made in December — for money due in September, Pallasch said.

In the unlikely event that the state does come up with enough money to make another payment to CPS before June 30, that would only be for about $129 million, he added. That’s CPS’ slice of the state’s quarterly payment to school districts, he said.

Even if Emanuel’s short-term plan is implemented and carries CPS through the summer, the district would still face a massive shortfall in 2018 absent some new source of revenue or infusion of cash from the state. The mayor is expected to unveil another plan to deal with next year’s finances, one that likely would include a tax hike, according to sources familiar with the mayor’s plans.

Emanuel spokesman Adam Collins did not respond to requests for details on the mayor’s borrowing plan, but in a statement he made note of the district working with lenders.

"After a lot of hard work by the CPS and city financial teams, and many discussions with their lending partners, tomorrow we will brief aldermen on the district’s finances and the financial plan for the remainder of the CPS fiscal year," Collins said in a statement.

Collins then echoed the repeated assertions of Emanuel and CPS CEO Forrest Claypool that Rauner was at fault.

"As hundreds of school superintendents across Illinois have done in recent weeks, we will also outline the importance of Governor Rauner finally proposing a budget that adequately and fairly funds education in this state," Collins said.

The governor’s veto of the $215 million for pensions came after the legislature did not pass a plan to address broader state pension woes. And CPS was in financial trouble long before financial gridlock beset the state after years of not making or short-changing pension fund contributions under former Mayor Richard M. Daley and Emanuel. State lawmakers allowed the city to skip the pension contributions.

As a result, CPS already is deeply in debt and has been assigned junk bond ratings by three major Wall Street debt ratings agencies. It currently has about $950 million in short-term debt and about $8 billion in long-term obligations.

Richard Ciccarone, president and CEO of Merritt Research Services, said CPS is likely to pay "a substantial penalty" in higher interest rates on any further short-term borrowing. "They’re waiting for a lot of money. … We do need a lasting solution in place."

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