What do you get when you hire a banker to run the school board of the nation’s third largest school district?
Apparently, if you’re Chicago you get hundreds of millions of dollars thrown away on bad deals with other bankers while failing to provide even the most basic of resources for students who need it most.
That’s the story being told in an extraordinary series of Chicago Tribune reports on Chicago Public Schools’ decision to enter into up to $1 billion in risky bond loans pushed by board president David Vitale, a team of consultants and banks hungry to turn a profit on CPS’ need to refinance debt.
It’s a long, complex and downright scandalous story. And it all comes at the expense of the very students whose future CPS is supposed to protect.
In as few words as possible, the story goes like this: more than a decade ago, Chicago school officials—including Vitale, a former head of the Chicago Board of Trade with a long history as a banking executive—bet heavily on a series of exotic bond deals they believed would save the district money in the long term. These deals relied on unconventional borrowing strategies, including interest rate “swaps” and auction-rate securities, that depended on almost everything going right in the bond market for CPS to actually save money.
Yet in making the deals, critical information about the risks involved were either overlooked or deliberately kept in the dark by a series of paid consultants, bank counterparties and CPS officials themselves.
As a result, CPS is expected to pay an estimated $100 million more in today’s dollars than had it continued to rely on more traditional fixed-rate bonds. That’s $100 million that could have been used to keep open shuttered schools, hire teachers and staff, pay for upkeep on school buildings, reduce the system’s overall deficit or simply invest in the future of Chicago public school students.
Worse, the Tribune series is filled with the kind of bad judgment calls, personal and professional hubris, lack of transparency and missing accountability that proves CPS failures weren’t the result of a simple mistake or the outcome of unforeseen market conditions.
From 2003 to 2007, the district issued $1 billion worth of auction-rate securities, nearly all of it paired with complex derivative contracts called interest-rate swaps and “swaptions”, according to the Tribune. By 2008, the district was carrying $1.8 billion in floating rate bonds, accounting for more than 40 percent of CPS’ total outstanding debt.
Yet, no one at CPS can say who came up with the idea of entering into the swaption contracts—one of the riskiest deals on the table—for example. Records show no public debate on swaptions before the board authorized their use. Further, the board unanimously approved other contracts with blanket terms that didn't even specify the exact costs involved.
Worse, the district’s agreement “jacked up the costs of refinancing the bonds in the future and left the district unlikely to benefit if rates dropped”—the very reason why variable rate swap contracts are supposed to be attractive.
For his part, Vitale was seen as a cheerleader for the use of such risky contracts, citing his own banking experience as a hedge against the deals going bad. “I have 30 years in the business” Vitale told the Tribune. “I’m not a neophyte.”
Yet the board relied heavily on the advice of consultants such as A.C Advisory, who failed to provide a compete rundown of the risks or potential costs involved, preferring instead to paint the rosiest possible picture of the deals’ future. When asked about the discrepancy between her firm’s findings and the Tribune analysis, president and founder Adela Cepeda called the Trib reporters “biased and sexist” and continued to insist CPS got a good deal.
While all of this was going on, of course, CPS was starving it’s neighborhood schools of the resources they needed to serve their students. Today, because of budget shortfalls, the system has closed 50 schools outright and can’t even provide librarians, arts education, gym teachers or even toilet paper for its students.
Even as Rahm Emanuel’s poll numbers continue to sink in light of Chicagoans’ anger of how the mayor handles issues like public education, the truth is that come election time, nothing is likely have been done in response, no matter how scandalous the story. This is Chicago, after all, and Vitale and the rest of the board will remain in their positions because of their close ties to the mayor.
That means that while the Tribune expose is likely to raise some eyebrows and even generate some negative publicly, no one is likely to pay a cost—professionally or politically—for such a massive failure on the part of the CPS board’s financial dealings.
Except, that is, the children CPS is supposed to be watching out for.