Emanuel ‘not pleased’ with downgrade in CPS’ credit rating
BY FRAN SPIELMAN City Hall Reporter firstname.lastname@example.org September 28, 2012 9:46AM
Chicago public school teachers rally outside the Chicago Board of Education headquarters, 125 S. Clark st., on the first day of the strike. The corner of Clark and Adams. | Rich Hein~Sun-Times
Updated: October 30, 2012 6:06AM
Mayor Rahm Emanuel said Friday he’s “not pleased” that the Chicago Board of Education’s bond rating has dropped twice in less than three months, but he inherited financial and educational “deficits” and had to address the shortage in the classroom first.
“Kids are getting an additional hour and 15 minutes today and I had to take care of that first . . . I could not put the fiscal challenges ahead of our educational challenges,” Emanuel said of his signature plan for a longer school day.
“At the same time, I put a down payment on making sure our fiscal house got order. In the last 16 months, we’ve taken 16 percent of cost out of the system. We have more work to do. Yes, we had two [bond rating drops]. But, I want to repeat: this [teachers] contract is cheaper and more frugal by 40 percent while our kids’ educational time has increased by 30 percent.”
Emanuel said his handpicked school board has already cut $500 million out of the central office and more cuts are on the way to bankroll the new teachers’ contract.
Moody’s Investor Service lowered the bond rating to A2 from A1 on Thursday, practically guaranteeing CPS will pay higher interest rates in the future. Moody’s had already cut the CPS bond rating by one notch — from Aa3 to A1 — on July 10.
Thursday’s rating applies to all of the Board of Education’s $6.4 billion in outstanding general obligation debt. The back-to-back drops also mean the value of current bond holder’s bonds may drop, according to a Moody’s spokesman.
“The downgrade to the A2 rating reflects a weakened financial profile marked by the budgeted depletion of reserves to fund ongoing operations in fiscal 2013, an impending spike in pension payments following three years of legislatively-authorized pension relief and continued delays in intergovernmental revenues from the state,” the Moody’s report states.
Emanuel was quick to react Friday.
“I’m not pleased about what Moody’s said . . . I also have a responsibility to the kids . . . We were known as the city with the shortest school day and school year in the country where our educational goals were constantly coming up short . . . That was the first order of business. You have to make choices,” he said.
He added, “We faced two deficits on Day One. We have put in place an educational foundation that’s a breakthrough for the city. Other cities are now looking at it. And we will also deal with the fiscal situation. It was not created overnight. It won’t be fixed overnight. But, we will…right the ship.”
The $5.7 billion school board budget included a $41 million property tax increase, earmarked 2 percent pay raises for teachers and $76 million for charter schools and drained every last penny of reserves to do it.
The $40 million for teacher raises was subsequently diverted to hire 477 teachers needed to staff Emanuel’s longer school day so elementary school teachers don’t have to work a minute longer.
“When we entered the district, we were faced with both an educational and financial crisis, and while we are committed to tackling both at every turn, we have chosen to put our kids and their academic achievement first and not leave them behind,” CPS said in a statement released Friday.
Now, CPS must find a way to pay the $295 million, four-year cost of the new teachers contract that ended a seven-day strike.
To end the seven-day teacher strike — Chicago’s first in 25 years — district officials ultimately agreed to a 3 percent raise this school year but with other savings in the contract, this school year’s agreement is estimated to cost $74 million.
In addition, the deal drops a financial opt-out clause that allowed the system to rescind last school year’s negotiated 4 percent raise — a move that fueled intense teacher anger going into this year’s contract talks.
The plan is expected to include: four years of up-to-the-limit property tax increases for Chicago homeowners and businesses; closing scores of under-enrolled and under-performing schools; thousands of employee layoffs and more cuts to the central office.
Moody’s said the negative outlook “reflects our view that the district will be hard-pressed to make the budget adjustments necessary to close an estimated $1 billion budget gap for fiscal 2014. In particular, the duration of the recent CTU strike demonstrates that labor issues may continue to be a ratings factor.”
The report added, “We expect the district’s financial profile will remain challenged based on the expected narrowing of operating reserves in fiscal 2013 and a $1 billion budget gap for fiscal 2014, which we believe the board will have difficulty in addressing given limits on its budgetary flexibility.”
Before, during and after the strike, Emanuel has refused to say how he plans to pay for the teacher pay raises now that his handpicked school board has drained CPS reserves down to the last penny.
But, he has quietly reversed his $32.5 million plan to call a halt to the city’s longstanding policy of subsidizing pensions for non-teaching CPS employees.
Last year, the mayor propped up his first city budget by ordering CPS to reimburse the city for half of those annual pension costs — and to assume the entire, $32.5 million-a-year expense in 2013 and beyond.
To help wean the public schools off its pension dependency on the city, Emanuel declared a $60 million surplus in the city’s 159 tax-increment-financing (TIF) districts. CPS got $30 million of that money. The city got $12.5 million.
But mayoral spokesperson Kathleen Strand disclosed last week that this year’s pension payment already has been waived.
“Because of our reforms, spending controls [and higher-than-expected revenues], the city’s 2012 budget has yielded some additional surplus, so the $32.5 million was not needed,” she said then.
Asked whether Emanuel was prepared to continue the pension break, Strand said, “The mayor realizes the difficult challenges CPS faces with their budget. The city has its own fiscal challenges and the cost for CPS non-teacher pensions should ultimately be shifted to CPS books. But this needs to be folded into an ongoing larger pension discussion as both agencies are in need of substantial pension reforms.”
Contributing: Rosalind Rossi