Bankruptcy for Chicago Public Schools would not only be a long and complicated litigation process, but could cause a “death spiral” for the district, according to a group of panelists at a City Club of Chicago event Monday titled, Chicago Public Schools: Is Bankruptcy Inevitable?
Governor Rauner floated bankruptcy as a potential fix for Chicago Public Schools’ financial problems in April, but CPS would have several legal hurdles to jump before it could declare it is out of cash.
For starters, a municipality like CPS couldn’t file for Chapter 9 bankruptcy without state approval, according to panelist George Panagakis, a lawyer who deals with reorganizations, debt restructuring, and insolvency. But even if the state allowed CPS to file for bankruptcy, Panagakis says the school district would have to meet three eligibility criteria.
First, it would have to be insolvent in near-term cash flow. “It would have to be really really out of money,” Panagakis explained. Whether CPS could raise more revenue or make more cuts would have to be hashed out in court.
Second, the district would need a plan for how to get out of bankruptcy, either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.
And lastly, CPS would have to negotiate with a majority of its creditors to get a consensus that bankruptcy is the best step forward.
Getting legislation in place, then convincing a judge the district meets all three requirements would take a year or more to prove, Panagakis said, adding that filing for bankruptcy can be a useful way to create a forum as a last ditch effort to try to straighten out finances. He said talking about Chapter 9 is a good thing.
But Charles Burbridge, a deputy chief financial officer at CPS 20 years ago, called talk of bankruptcy a red herring, saying education policy and pension funding are the real issues.
“It’s reprehensible that the state would even consider bankruptcy,” he said, to applause from the crowd. “CPS is a creation of the state, the state controls almost every aspect of education… the state needs to step up and take responsibility for it.”
In an interview with the Tribune about the source of CPS’s budget woes, Burbridge, now head of the Chicago Teacher’s Pension Fund, talked about his part in contributing to the problem back in 1995. “We felt that we made good calls on the priorities…History may judge that we didn’t. Certainly good pension funding shows that we didn’t. But we thought we were doing good things.” He told today’s crowd the pension fund survived through World Wars and a Depression, but can’t survive without full employer contributions.
Panelist Troy LaRaviere, the principal of Blaine Elementary School, a self-described passionate defender of public schools, didn’t partake in the City Club’s lunch in solidarity with the hunger strikers for Dyett High School. He argued emotionally that blame shouldn’t rest entirely on Springfield’s shoulders, and read a prepared statement saying Mayor Emanuel’s allowed poor financial decisions to continue well into his administration.
“Pensions are not the source of our problem. This administration consistently misappropriated pension funds and then attempts to convince us that pensions themselves are the problem. That’s like a thief stealing your rent money and then attempting to convince you that the landlord is your problem.”
LaRaviere said reckless and corrupt city borrowing, a “parasitic private sector,” and state legislators that create a climate for “this kind of nonsense to happen,” are taking all of what little teachers have.
And then there was Jesse Ruiz, vice president of the Chicago Board of Education, who bypassed bankruptcy talk altogether and instead blamed Springfield for the district’s financial woes. “The fact of the matter is, state support for public education has been in decline,” he said. Chicago schools have taken a $100 million hit in this past fiscal year alone, Ruiz added.
Ruiz is now tasked with voting on CPS’s proposed budget, which includes a $450M gap that the district hopes Springfield will fill. CPS CEO Forrest Claypool has said there’s no Plan B in place if Senate President John Cullerton doesn’t pull through on the bill he is championing in Springfield to help give the district a break.
Just after the panel, the Civic Federation issued a press release urging the Board of Education to reject CPS’s budget, calling it irresponsible for the same reason one member of the crowd brought up: there’s no Springfield rescue yet. “This budget is yet another financially risky, short-sighted proposal and fails to provide any reassurance that Chicago Public Schools has a plan for emerging from its perpetual financial crisis,” the release said. You can read Civic Fed’s full report here.
Former CPS CEO Paul Vallas might’ve summed things up most succinctly when he said bankruptcy would be “the kiss of death for CPS,” not only because kids and teachers could flee to private and charter schools, decimating per-student funding. “The legal obstacles, the implications, the fact that the courts are going to force you to demonstrate that you’ve done everything that you could normally do in a normal political environment to resolve the issues before they declare bankruptcy, it’s just not an option just for those reasons alone. But it’s also not an option because who wants to send their kids to a bankrupt school district?”