General News | May 2002 Issue
View Substance chart on frozen saleries & ballooning debt
How Vallas, Board mortgaged the future of Chicago children
By Leo Gorenstein
By the time this school year ends, the Chicago Board of Education will have spent more than $100 million that used to be only earmarked for the schools and its classrooms and will have spent it instead to pay off long term debt. Money that once was only to pay for teachers, books, educational support staff and other expenses that are part and parcel of educating children is now going to pay debt and will continue to do so into the future, according to school board officials.
This shifting of money from the classroom to debt repayment won’t stop at the end of the 2001-2002 school year. According to a written response by the school board to questions submitted by Substance, the board will take an average of $120 million a year from the classroom and use it for debt repayment over the next 30 years. [Substance asked for an interview with school board financial staff, but said we would take a written response if that is all we could get. Top school board officials continue to avoid direct interviews with Substance staff].
The new Chicago plan results in a 30-year total of $3.6 billion that will go from the fund that pays for the school room to the fund that pays off long-term bond debt.
In the past, the Chicago Board of Education never used these education funds to pay off long-term debt. According to Joseph Monahan, who was the controller at the board from 1983 to 1992, money to pay off debt came from the bond and interest fund.
“ We never took money from operating funds to pay debt,” he said. By law, bonds issued by the school board are secured by state aid. If that fails the board must levy enough property taxes to cover its debt. Other informed observers of Illinois school financing were also surprised at the Chicago school board’s unusual use of funds earmarked for education in this manner.
Rather than levy taxes specifically designated to pay debt, the Chicago Board of Education has chosen to take operating funds. In fact, according to the responses to Substance questions and public budget documents, the board plans to repay close to half of its 30-year $7.8 billion scheduled principal and interest payments with operating funds.
The board’s response to Substance reported that $3.6 billion of the total $7.8 billion the board owes in principal and interest payments will come from operating funds.
“ Total debt service payments (principal and interest) over the next 30 years to retire this $4.0 billion [the principal only] debt will come from the following sources: PPRT [Personal Property Replacement Tax] payments $2.041 billion; Reserve [surplus Education Fund money] $49 million; and Education Fund $1.521 billion,” the written response to Substance’s questions stated. The school board did not identify all those who participated in the drafting of the response.
For this school year, according to the board response, at least $103 million will come from operating expenses: $58.3 million from PPRT; $44.9 million by the Education Fund; and some of the rest will be paid by “surplus reserve” which could also come from operating funds.
The rest of the debt, about $4.1 billion, would be paid by sources, some old and some new, that have traditionally been used to pay off debt. These include about $3.8 billion from three sources: the Public Building Commission (PBC), the School Finance Authority (SFA), and the City Intergovernmental Agreement (IGA) Levy. The last $.34 billion of this $4.1 billion piece will come from state revenues.
In order to raise its bond ratings and sell these bonds that resulted in the $7.8 billion debt, the Chicago Board of Education over the past four years has taken a number of steps that not only raised its bond rating, but has kept millions of dollars out of the classroom.
High bond ratings: good for investors but for schoolchildren?
According to Standard & Poor’s (S & P), one of the three major bond rating services in the U.S., the Chicago Board of Education has raised its bond ratings in a number of ways. One of these ways is that the board backed up its tax levy powers with PPRT funds. In a June, 2000 report issued by Standard & Poor’s about a $100 million board bond issue, S & P reported, “Since 1995, the board has issued $800 million in unlimited tax GO [general obligation] debt alternately secured by personal property replacement tax (PPRT) revenue…”
View Substance chart on 30 year school debt balloon
But the same S & P report made it clear that there are other reasons which are the most important reasons for higher bond ratings. These are the changes from the 1995 Amendatory Act that gave the board unilateral power over its employees and their unions.
The three Wall Street bond rating agencies are all private corporations. Standard & Poor’s is a division of McGraw-Hill, Inc., which also published Business Week, McGraw Hill educational textbooks, and many standardized tests. Moody’s Investors Service, a division of Moody’s Corporation, was born in September 2000 when Moody’s split off from Dun & Bradstreet. Fitch Ratings is the third service. Higher bond ratings result in lower interest rates, and large lenders refuse to lend money to governmental agencies with very low (“junk”) credit ratings.
In order to raise the Chicago Board of Education’s bond ratings, the Wall Street bond rating agencies assured that former schools Chief Executive Officer Paul G. Vallas would cooperate in cost reductions if necessary. Vallas stated that he had the power to lay off teachers and other staff if necessary to cover budget shortfalls. This would be done by increasing class size.
In a section discussing the 1995 Amendatory Act enacted by the Illinois General Assembly that granted the board new powers, S & P wrote, “But perhaps most importantly, the Act excluded certain matters as subject to collective bargaining, including decisions to contract-out services and decisions to reduce workforce or change class sizes, class staffing, schedules, and calendar hours.”
The S & P report listed other factors that related to the board’s ability through the Act to use classroom funds for debt or unilaterally cut its operating expenses.
“The Amendatory Act contained numerous provisions that enhanced the Board’s financial and operational flexibility. The Act consolidated seven separate tax levies into a single educational operating levy, giving the board greater flexibility is setting spending priorities…changed the funding requirement for the Public School Teacher Pension and Retirement Fund…”
In another part of the June 2000 report, S & P summarized the factors that they considered good, and most important, for investors.
“With its new found powers generated by the Amendatory Act and the leadership of a new proactive management team, the board entered into four-year contracts with all unions, representing 46,000 employees at 3.000 %-3.375% annually, about half the previous three-year contracts. (This contract was due to expire in June 1999 but was extended an additional four years at annual rates between 2% - 3%.) Perhaps most significantly, the board achieved the exclusion of certain matters as subject to collective bargaining: decisions to reduce workforce; decisions to change class size, class staffing, schedules, and academic calendar hours; and decisions to contract out services (privatization). These abilities have been crucial in enabling the board to command its financial fate.”
While the S & P report claims that board policies are good for financial investors, the question is: Are these policies good for the education of Chicago’s schoolchildren?
Will there be money for the classroom in the future?
Former board controller Joseph Monahan, continued his career as a financial chief of a suburban school district after leaving the board in 1992. He retired a few years ago after a career in public school finances. Monahan told Substance: “They might have just mortgaged the future in the sense that they have taken part of what would ordinarily be used for Education Fund expenditures. It might be that the kids of the future are paying for the schools of today.”
Monahan pointed out that the average $120 million-a-year from the operating fund could, for example, pay for about 2400 teachers.
The Chicago Board of Education had a different official response when asked if it had mortgaged the future of Chicago school children by allocating PPRT and other Education Fund money to pay off long-term debt.
The board answered in its written response in part: “It is important to have school buildings which are properly maintained, structurally sound and technologically enhanced. CPS [Chicago Public Schools] has been faced with overcrowding and new construction needs.
“ Major improvement in school buildings can be achieved only by making the commitment to devote an appropriate amount to the capital infrastructure needs of the schools. CPS has made efforts to minimize debt service payments from operating funds and instead issue debt supported by city and state revenues. In spite of the major capital work the CPS has done, the total debt service payments represent less than 5% of the CPS annual operating budget…”
Total debt service, according to the board is less than 5% of the operating budget. Total debt service this year is $238.7 million, and $238.7 million is enough to pay about 4500 teachers the average salary currently earned by Chicago teachers.
Will Duncan continue the policy?
“CPS still has an estimated $2.0 billion in unfunded capital needs,” the board declares in its written response to Substance. The board further in the response that they are trying to obtain money from both the state and federal governments to help pay for the above-mentioned capital needs. But, so far, the board under Duncan has clearly shown its intent to continue the policy of paying off long-term debt with traditional classroom money such as PPRT.
In its written questions to the board, Substance stated that PPRT was intended for Education Fund usage — not to pay debt — and asked the board why PPRT was being used to pay debt. The board wrote: “PPRT is used for educational support. Education requires not only good instruction, but also well-functioning buildings with new computer technology and an environment that is conducive for learning. CPS has tried to improve all aspects of education for the sole purpose of improving student performance. Issuing debt to improve school buildings is for education.”
As reported in Substance, since November, 2001 the board has also taken the $49 million surplus from the Education Fund this year to pay off debt. Further it has indicated that it will not pay the $49 million back for use in the schools and that it could take surplus from the Education Fund again. [See Substance, April 2002.]
According to several sources, very few school systems are using PPRT or other operating funds to pay long-term debt.
Is it legal and does anyone else use PPRT and other operating funds to pay off debt?
Gary Ey, director of the Illinois State Board of Education’s (ISBE) finance office said, “I do know other districts use state aid to pay off some debt. Basically it’s sort of insurance, like a revenue bond. The only disadvantage is you’ve obligated state aid to pay off debt. It’s a business decision.”
Both Monahan and Lutaf Dhanidina, a former director of the Chicago schools department of financial planning and budgeting until 1994 and, like Monahan, a finance chief of a suburban district until a few years ago, didn’t know of any school districts that used these type of funds to pay debt.
“ I know that school districts would sometimes use revenue from general state aid as tax anticipation warrants, but I don’t know of any districts that use PPRT to pay debt,” Dhanidina told Substance. Both Monahan and Dhanidina said that the Chicago schools never used operating funds to pay debt while they were at the Chicago Board of Education. Since neither worked for districts that used operating expenses to pay debt, neither had ever faced the question as to whether the use of operating funds for debt was legal or not.
The use of PPRT to pay debt seems to be legal. According to Chuck Joyce, an administrator in local government affairs at the Illinois Department of Revenue, there aren’t many restrictions on municipalities in the use of PPRT. “I do know there are quite a few [municipalities] using PPRT to pay debt,” he said.
The board in its response to Substance’s question about the legality of using PPRT went further than Joyce.
The Substance question was: “Before 1995, the CPS never used PPRT to pay off debt. Since 1996, General Obligation bonds have been sold with the intention of using PPRT to pay for them. Was a law changed allowing the CPS to use PPRT to pay off debt?”
Despite Monahan’s and Dhanidina’s knowledge that the board never used PPRT or other operating funds to pay off debt while either of them were at the board (a period of time extending from the 1970s to 1994), the current board claimed that the practice predates it.
The board answered the question as follows: “The law as it exists allows CPS to use PPRT for debt service. Most local governments in Illinois, including CPS, have used PPRT for debt service for more than twenty years.”
According to Ey, PPRT went into effect January, 1980.
Monahan pointed out that the board got in trouble by borrowing against future revenues in the sense of tax anticipation warrants in the late 1970s. The bankers at the time foreclosed on the board, even though the banks had condoned the practice for some time, and the board ended up under the financial thumb of the School Finance Authority [See Substance issues late 1979 through 1980] until the 1995 Amendatory Act ended the oversight powers of the SFA. The financial crisis of 1979 started what was — at the time — huge debt for which Chicago taxpayers are still paying about $82 million a year from a special tax imposed to support borrowing done by the SFA in 1980 and 1981 (See the first line of your tax bill if you are paying taxes on a home in the City of Chicago).
Despite the fact that the $82 million SFA debt ends in 2009 and the board included the SFA debt as part of their $7.8 billion total debt, the projected board’s 2010 debt is over $77 million more in 2010 than in 2009.
The board in its current budget projects total debt service of $180.0 million in 2009 and $257.6 million in 2010.