The School Reform Board’s capital program has a new head of steam. After stumbling last spring with state legislators, who rejected a variety of funding proposals, the board worked with its boss, Mayor Richard M. Daley, to tap the city’s financial resources. In a first, the city will sell bonds to raise another $800 million for school construction projects.
In keeping with past practice, the new bond sale won’t raise overall taxes for schools. When the Daley-chaired PBC was in charge of school construction, new bonds had to await the retirement of old bonds so taxes wouldn’t rise. (See Catalyst, December 1991.)
Under the new arrangement, interest payments will be deferred until bonds sold previously by the Chicago School Finance Authority and Public Building Commission (PBC) are retired in 2009.
Currently, the Finance Authority is collecting $90 million a year and the PBC is collecting $49 million a year to pay off those bonds. “The idea is to take those dollars that are freed up and apply them to debt service on a new bond issue,” says city Chief Financial Officer Walter Knorr.
However, taxpayers will pay more in the long run. Though details on the new bond issue are still being worked out, the board will have to borrow enough money initial estimates run as high as $1.2 billion not only to generate $800 million for repairs but also to cover interest payments for the next 12 years. Typically, bond sellers “capitalize the interest” to delay interest payments for only a year or two.
City and school officials argue that delaying the bond sale would cost more, too, since repair bills would continue to mount.
“You are adding to your debt, but that debt allows us to do some building and avoid greater debt down the line,” says Ald. Patrick O’Connor (40th). “It’s like going to the store and buying a suit [on sale] and saying, ‘I saved $100.’ Well, you spent $500, but if you had to buy the suit anyway, then you saved $100.”
An ordinance setting up the partnership was introduced in the City Council Sept. 10. Ald. O’Conner, who heads the council’s Education Committee, and Ald. Edward Burke (14th), who is Finance Committee chairman, will preside over hearings that address the proposal. A vote could come in early October.
The plan may also involve restructuring the payment schedule on the board’s existing $850 million in debt, which it raised in two previous bond sales.
Knorr accompanied School Chief Executive Officer Paul Vallas and the board’s financial advisors on a recent trip to New York to present the bond plan to bond rating agencies. The initial response was positive.
“We’ve been favorably impressed over the past couple of years,” says Jeffrey Pangor of Standard & Poor’s. “The strides the board has taken to restore financial integrity and educational opportunities have been impressive.”
Bond analysts did caution the city and board about spreading payments beyond 30 years, and to watch the city’s overall level of debt, which is steep and will influence the city’s credit rating.
The new city-school plan is in lieu of an arrangement the Reform Board had sought with the Finance Authority. The board wanted to take over the authority’s residual bonding power, but the General Assembly refused to pass the required legislation. By hammering out a financing plan of its own, the board saves a political chit for other legislative battles, including school funding reform.
The proposed partnership with the city puts the board on track to complete $1.4 billion in approved projects. Rehab and construction needs have been pegged at twice that amount, though.
“The board is committed to doing whatever is necessary to complete all phases of the capital program,” says Phillip Jackson, chief of staff to Vallas. “There is as much as $3 billion in need out there. That’s what our target is.”