When Being Tough Isn't Enough: Latest City Credit Downgrade Challenges Conventional Wisdom

Chicago and its already financially beleaguered public school system (CPS) could end up subject to over $200 million in penalties after a credit downgrade, last Friday. Two weeks ago, Moody’s Investor Service reduced their rating on CPS’ debt.

Late last week, a second Wall Street bond-rating agency, Fitch Ratings, followed suit and downgraded the district’s credit score, leaving it at just above junk-bond level, potentially triggering penalties that Fitch said could total $263 million, but that CPS officials say would be $228 million. CPS, like the city, had agreed to so-called swap deals financial institutions which require that certain credit levels be maintained.
When those credit levels are not maintained, termination clauses can kick in, resulting in hundreds of millions of dollars in penalty fees. The city as a whole has already fallen below their swap deal required credit score thresholds, but Mayor Rahm Emanuel has avoided triggering massive penalties by re-negotiating the termination levels for all but one of the city’s swap deals.
According to a report from the Chicago Sun Times, CPS spokesman Bill McCaffrey has said that the school district is also in talks with lenders to renegotiate the terms of its deals, in order to at least temporarily delay the huge penalty fees.
Even without these possible fees of over $200 million, CPS is already in plenty of trouble. The school district has a projected budget deficit of over $1 billion for the next school year.
Increased property taxes, an unprecedented level of shuttered schools and some administrative cost-cutting by the Emanuel administration couldn’t close the budget gap. In their report, which downgraded CPS’ credit rating, Fitch warned that the district also wouldn’t have the money in their reserves to pay possible penalty fees.
What’s more, Fitch predicted that changes needed for CPS to pay such fees would have further negative impact on schoolchildren. The Fitch report predicted that in just over two years, CPS’ reserves will “likely be depleted,” and that “Options within the board’s sole control are limited, and Fitch believes meaningful solutions would have a notable impact on educational programs.”
To pile on, Emanuel and the CPS will have to work out another contract with city public school teachers when their current contract runs out on June 15. The Chicago Teachers Union (CTU) went on strike in 2012, and though a short contract between the city and the teachers was eventually worked out, tensions between Emanuel, his administration and the union have remained high.
President of the CTU, Karen Lewis, was planning to challenge Emanuel for the mayor’s seat before a battle with cancer took her out of the running. The CTU is supporting Emanuel’s runoff opponent Jesus “Chuy” Garcia, in her absence.
During the campaign for the April 7 election, much has been made about Garcia’s cozy relationship with unions like the CTU. How could Garcia be expected to be “tough” with unions during contract negotiations and thus be a responsible steward with the city’s money, the logic went, when he is so heavily supported by them in this race?
The Fitch report included an assessment that challenges that conventional wisdom that a mayor needs to have an antagonistic relationship with labor unions in order to be financially responsible.
In fact, according to the Wall Street agency, Mayor Emanuel’s poor relationship with the teacher’s union is part of why CPS’ credit rating was downgraded, and the city’s finances further imperiled.
CPS’ high pension liability was certainly reason for the credit drop, but so was what Fitch’s analysts called the city’s “poor labor history.”
Perhaps it is time that we realize working well with others is just as important as being “tough” with them. If the Emanuel-directed CPS’ “poor labor history,” is hurting the district, the city and its children, perhaps Garcia can make the case that his positive relationship with the CTU and other labor can be an asset for Chicago. 
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