Could a State Takeover Help Chicago’s Struggling Public Schools?

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Chicago’s public schools are in trouble. Nearly $6 billion in debt, the district staved off immediate financial collapse this month only by selling $725 million in bonds to Wall Street at an unusually high interest rate. Meanwhile, thousands of protesters organized by the Chicago Teachers Union clogged streets in the Loop during the evening rush hour last week, demanding higher salaries, greater contributions to pension and health-care plans, and a cap on charter schools. Chicago Public Schools is the third largest district in the nation.

In response to this crisis, Illinois Governor Bruce Rauner proposed a rather extreme remedy: a state takeover of the city’s public schools. The move—which could ultimately be rejected by the Democratically controlled legislature—would involve taking control from local education and political leaders over some, or even all, schools in the district. Eleven states, most of them led by Republican governors, have similarly passed or debated legislation to create state-run school districts in the past year, including Michigan, Arkansas, Nevada, and Wisconsin. But research and past experience show that takeovers by themselves are not a cure all for the problems faced by struggling urban schools.

More here.

12 thoughts on “Could a State Takeover Help Chicago’s Struggling Public Schools?

  1. Cranberry, that is a spectacular piece! the phrase I am going to quote to my Chicagoan bro-in-law is “Chicago officials, market professionals, and money managers are engaging in a giant gang rape of taxpayers in this instance. And they are shocked, shocked that they are the only ones who care about whether or not they get repaid?”
    I like the old Herb Stein remark, too: “If something can’t go on forever, it won’t.” We are nearing the end of the track for a lot of gravy trains, pensions which have been set by statute to levels which can’t be supported by taxes which current workers are ready to pay.
    My impression of CPS is: piñata being looted by its employees, who have only the most minor interest in whether the children in fact get educated. So from that point of view, something like the post-Katrina takeover of N.O. schools seems justified. Will it work? Damned if I know, but it does seem that SOMETHING has to be done, not bump along as before.

  2. After the Cranberry contribution, here’s another, by Walter Russell Mead: http://www.the-american-interest.com/2016/02/09/flints-not-the-only-city-with-a-water-problem/

    His view is that there’s been a lot of irresponsibility on the part of local officials because they are focusing on what’s fun – “…People love innovation and new ideas. City officials are constantly talking about exciting new projects and about taking on new responsibilities—even though they have yet to master the really important responsibilities they already have. When the water pipes aren’t safe, you probably shouldn’t be launching some kind of complicated zero-carbon initiative. When the public schools are failing and you’ve got near-unemployable, semi-literate teens pouring out of your schools, this may not be time to make an Olympic bid that will chew up the city’s resources and disposable income for years to come…”

  3. One of the reasons the pension issue is such a big deal is that public employees in Illinois do not participate in social security. So they have nothing else (the pensions look less generous when you take this into account, compared with other states — Illinois and a number of other states negotiated an opt out when social security was extended to public employees (so that the state would not have to pay as much to its employees pensions).

    I don’t know why any Governor would want responsibility for a school district that he has no expertise and limited control over, even if it were ‘run by the state’. Not saying it would be bad (things are dire as it is), but does he really think the state has the requisite knowledge, and the civil servants the requisite skills, to improve on the status quo, let alone turn it around?

    1. Yes, I think this does not get nearly enough attention: the people on pensions don’t get any Social Security. As a professor at a state university, I am not contributing (and am not allowed to contribute) to Social Security. This is true even though I am on a “self-managed” plan – that is, I do not get a pension or Social Security, but both the university and I contribute to accounts (Fidelity, or whatever you pick) that I chose myself. They created this option to ease the burden on pensions, and in recent years have pushed to convert entirely to self-managed plans. So my own retirement funds are 100% dependent on the market. (I had to make a decision about this when I was first hired as a temporary employee – it is a one-time decision that you are never allowed to change no matter what happens.)

      You could argue that the state made a very bad deal in agreeing to pensions at the current level – and especially the automatic cost of living adjustments – but there are a lot of people who worked for the state for 30 or 40 years or whatever on the assumption that they’d get a certain amount of money when they retired. It was an astoundingly stupid approach, in retrospect, but it’s what we’ve got.

      I haven’t read the article yet, but the idea of giving the state or the Governor of Illinois any more responsibility for anything seems absolutely insane.

  4. “does he really think the state has the requisite knowledge, and the civil servants the requisite skills, to improve on the status quo, let alone turn it around?”

    Given that the current governor is an R, and Chicago is a D stronghold, add in the Rs’ long-standing penchant for using teachers’ unions as punching bags (rhetorical and otherwise), and I’m not sure that Harry’s question is the one guiding state decision-making.

  5. When you’re taking on debt to pay the interest on previous borrowing, you’re in an unsustainable cycle.

    The 8.5 percent yield for bonds due in 2044 with a 7 percent coupon was slightly below the 8.727 yield for 21-year bonds in the municipal market’s last big junk bond sale – a $3.5 billion Puerto Rico issue in March 2014.

    But the school district’s so-called credit spread over the market’s benchmark triple-A scale was wider at 580 basis points versus 514 basis points for Puerto Rico in 2014, indicating investors are demanding a stiffer penalty from the Chicago Public Schools (CPS).

    “It’s a Puerto-Rico grade yield and clearly signals that the district is on an unsustainable path,” said Matt Fabian, a partner at Municipal Market Analytics.http://www.reuters.com/article/us-chicago-education-bonds-idUSKCN0VC1XG

    That means the Chicago Public Schools is seen by investors as a worse credit risk than Puerto Rico. Puerto Rico is bankrupt–the only question is the degree of bankruptcy.

    At 8.5 percent yield, the investors would recoup their investment in about 12 years. The bonds run for almost 30 years. It would be a fine investment for them, if the CPS stay solvent. However, the math shows there’s a good chance the district will not be able to pay back the loan.

    It’s a very risky investment. The people paying for that investment likely have no idea they’re invested. Some may have their pension money tied up in such investments. After all, many pension funds are budgeting for high returns–much higher than treasuries. 30 year treasuries are paying 2.61 percent today.

    Bankrupt school districts are not fun. Look at all the stories out of Philadelphia for what happens to education in that case.

    AND, the district’s pension fund has been badly managed. The Chicago Board of Education didn’t contribute any money at all to the pension fund for administrators, teachers and other CPS employees for a full 10 years between 1995 and 2005. http://chicago.suntimes.com/the-watchdogs/7/71/612451/watchdogs-generous-benefits-one-part-state-city-pension-mess

      1. I’m thinking I shouldn’t have gotten into the state takeover bit for that article and just focused on the disasterous state of the chicago public schools. 6 billion in debt. That’s huge.

        I got Ian’s stomach bug yesterday. I made edits on an article that’s coming out today on my iphone in bed. I hope it doesn’t suck.

      2. I assume they thought any problems could be ironed out by gifts from the city or state? Searching for Chicago debt and Illinois debt showed that at this point in time, there’s no free cash in government. Every level is heavily indebted.

        This report is for 2014 (released 2015): http://www.statedatalab.org/state_data_and_comparisons/detail/illinois. Burden per taxpayer, once all available state resources are used: $45,000.

        Mind you, that’s two years ago, and they’ve kept on borrowing.

        Rauner’s been in office since 2015. The latest news reports he has the power to stop the CPS from borrowing again–which the schools want to do. http://news.yahoo.com/illinois-governor-eyes-possibility-blocking-chicago-school-debt-175544373–business.html

        This is not the only city or state facing enormous pension debts.

  6. The shoes have begun to fall: http://www.zerohedge.com/news/2016-08-27/illinois-taxes-rise-500-million-after-teachers-pension-fund-cuts-returns-assumption-

    From my naive perspective, the assumption of a 7% return is still very optimistic. The governor’s reaction is like complaining that objects don’t remain floating in the air when nudged off a table.

    This is only one pension fund, in one state. Many, many others are facing the same issues. Solvency seems to be, ah, close to a trick of the light.

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