$70,000 a day in interest — the cost for Chicago Public Schools to borrow $387M
In two separate deals with JPMorgan, CPS borrowed $387M to make a teacher pension payment at end of June and as a result of the deal, will accumulate at least $7M in interest.
Just in time for a June 30 payment deadline, Chicago Public Schools borrowed $387 million from JPMorgan, $275 million at a 6.39 percent interest rate, and $112 million at an even higher 6.41 percent interest rate, according to the Chicago Sun-Times. CPS will use this money to fund pensions.
With such a high rate, CPS is set to accumulate $70,000 in interest every day until at least September 29, according to the Chicago Tribune’s report of the deal with J. P. Morgan. That means CPS will end up paying a minimum $7 million in interest, or $70,000 daily.
CPS has been paying interest rates similar to those seen during the 2008 financial crisis, according to BloombergMarkets. In March, the rates jumped to a maximum 9 percent from 4.64 percent and have stayed there, gathering interest on CPS’s $167.5 million of adjustable-rate bonds.
This loan was taken as part of a $721 million pension payment due to CPS teachers’ pension system at the end of June, according to Reuters. The total pension debt accrued by CPS has swelled to $10 billion, according to a January 2017 report by the Commission on Government Forecasting and Accountability.
CPS’s bond rating has been junk since 2015, but in September 2016 Moody’s Investors Service dropped the district’s bond rating further with a B3 rating, according to the Chicago Tribune. That rating, indicative of the nearly $10 billion the district owes in pensions alone, makes borrowing money very costly.
Chicago Mayor Rahm Emanuel announced the district’s last-minute funding plan in May, detailing a desired $389 million short-term loan to get CPS through the end of the school year. CPS had hoped to gain $215 million through a bill passed by the Illinois General Assembly in November 2016. However, Gov. Bruce Rauner vetoed it.
In a divided Springfield, Chicago schools’ financial troubles have been a contested part of the “grand bargain,” as every version of the Senate’s financial plan has included a multimillion-dollar CPS bailout. One of the most recent education reform proposal included an annual $140 million CPS bailout.
Rauner and more than two dozen House Republicans showed support for legislation that included money for CPS as part of a compromise plan announced in March, but no deal was reached before session ended. The General Assembly is now in a 10-day special session with the aim of passing a financial plan before Illinois enters its third fiscal year with no budget, though lawmakers have spent less than 100 minutes total in special session through the first six days.
CPS’s problems with underfunded pensions are only one example of the state’s larger pension crisis. Illinois would be wise to adapt alternative 401(k)-style plan retirement plans for state workers as proscribed in the Illinois Policy Institute’s Budget Solutions 2018.