Illinois governor eyes blocking Chicago school debt

By Karen Pierog
Republican Bruce Rauner smiles after winning the midterm elections in Chicago, Illinois, November 4, 2014. REUTERS/Jim Young

By Karen Pierog

CHICAGO (Reuters) - Illinois Governor Bruce Rauner said on Monday the state has the power to block any debt offerings by financially distressed school districts, including the cash-strapped Chicago Public Schools (CPS), which has been dependent on borrowing to fund operations.

The Republican governor last week launched a financial probe of the nation's third-largest public school system through the Illinois State Board of Education. Rauner, who has called for a state takeover of the school district, said the board has the legal authority to block borrowings by districts found to be in financial duress.

“The state board has never chosen to do that for the city of Chicago. I hope that never becomes necessary. But we’ve got to be ready to take action,” Rauner told reporters.

Rauner's office pointed to a provision of the school code that it says applies to CPS. The provision prohibits the sale of bonds, notes or other debt by a district certified to be in financial difficulty until a financial plan is approved by the state board of education.

CPS Chief Executive Forrest Claypool contended that the authority Rauner seeks to exercise does not apply to CPS, according to a school district spokeswoman.

CPS is struggling with a $1.1 billion structural budget deficit, caused largely by escalating annual pension payments that will reach $676 million this fiscal year. The district's efforts to gain an additional $480 million in state dollars to pay its pension bill have become entangled in an ongoing impasse between Rauner and Democrats who control the legislature.

To keep operating in anticipation of $1 billion in property tax revenue next month, CPS turned to short-term borrowing and a $725 million bond sale earlier this month for cash flow. The district said it plans to seek additional short-term borrowing authority from its governing board in the future.

Rauner said accusations by Chicago officials that he attempted to derail the Feb. 3 bond sale by pushing for a state takeover or possible bankruptcy for CPS were "completely false."

Skittish investors demanded hefty yields for the "junk"-rated bonds, which will cost the district nearly $1.9 billion to pay off by 2044.

(Editing by Matthew Lewis)