Chicago Public School System Threatens Massive Tax Hikes Via “Backdoor” Bond Guarantee

The Chicago Public School (CPS) system is bankrupt in every way but the final declaration. That declaration is a foregone conclusion, and bondholders will take it on the chin.

CPS Treasurer Jennie Huang Bennett disagrees with my assessment. So does Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.

For her part, Bennett explained in a January online presentation that if the school district were unable to make a debt payment, “the taxes are then extended and collected for the benefit of bondholders.”

Fabian, Bennett, and others think “backdoor” tax guarantees hidden in bond offerings mean Chicago taxpayers will necessarily have to pony up if the school district defaults.

One side is wrong. Which side is that?

Let’s dive into this debate with a look at the Chicago Tribune article If CPS ever misses a debt payment, property owners would see taxes jump.

If the school district ever comes up short on its debt payments, the investors who bought CPS’ bonds can rest assured they will get what they are owed — straight from Chicago taxpayers.

The school district’s bond contracts include a little-known provision that would trigger a property tax increase if CPS fails to pay. The county clerk would deliver that additional revenue directly to a bank — much the way a creditor might garnish an individual’s wages.

“Citizens don’t know the extent to which their own assets are pledged to pay bondholders,” said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.

Last month CPS struggled to scrape together enough money for a $474 million payment on its $6 billion debt load. To come up with the money, the district had to borrow about $200 million — a deal that initially stalled for lack of investors and finally got done less than two weeks before the Feb. 15 due date.

To reassure prospective investors, CPS Treasurer Jennie Huang Bennett explained in a January online presentation that if the school district were unable to make a debt payment, “the taxes are then extended and collected for the benefit of bondholders.”

Back-door referendums

Giving creditors the ability to trigger a tax hike if the alternate revenues come up short is a standard provision in the bond contracts.

“It is a method that allows taxpayers to be on the hook for bonds they did not approve in a referendum,” said Richard Ciccarone, president and CEO of Hiawatha, Iowa-based Merritt Research Services.