Chicago Public Schools, or CPS, needs to issue $875 million in long-term bonds to help the district avoid bankruptcy – but on Jan. 27, the school district backed out of the planned sale. The district announced that it has postponed the bond sale and will assess the situation on a day-to-day basis.
The failure to issue the bonds means the district has to postpone the refinancing of several debts. According to CPS, $340 million of the total borrowings will be dedicated to refinancing old debt, and nearly $90 million will go toward paying off other short-term loans. The district plans to use nearly $400 million to pay for capital projects.
Pressure on CPS’ finances has already led to multiple credit downgrades, pushing the school district deep into “junk bond” status. Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings have all recently downgraded the district’s $6 billion debt to four steps below investment grade.
CPS’ poor credit rating means the city will pay a penalty interest rate over and above what government entities with good credit ratings pay – not unlike the punishing interest rates that people with poor credit scores are forced to pay.
CPS’ new bonds were expected to pay approximately 7.75%, an interest rate 5 percentage points higher than the rate at which AAA-rated government entities borrow. Despite that massive premium, investors failed to bite.
The higher interest-rate penalty on CPS debt will dramatically increase the district’s interest payments. CPS has tripled its debt to $6 billion since 1998. That penalty rate means each $1 billion in new debt or refinancing will cost CPS an additional $500 million in interest costs over a 10-year period (assuming a 10-year average life for the bonds).
If the district is unable to restructure much of its outstanding liability, CPS could default, leading to even more pink slips for teachers and pain for the nearly 400,000 children in the district.
The district’s problems have prompted Illinois Gov. Bruce Rauner, state Sen. Christine Radogno, R-Lemont, and state Rep. Jim Durkin, R-Burr Ridge, to call for a plan in which the state schools superintendent would name a new independent authority to replace the CPS board. The new authority would be able to restructure debt and negotiate collective-bargaining agreements.
CPS may eventually get the buyers it needs for its bonds.
But there is a tipping point – when rates get too high, it means the borrower can’t repay.