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Chicago School District’s Financial Chicanery

November 28, 2014

Yves Smith wrote a post today about an investigative report recently completed by the Chicago Tribune describing the adverse consequences of the Chicago School District’s decision to “…obtain $1 billion of needed ten-year financing not through the time-and-tested route of a simple ten year bond sale but the supposedly cost-saving mechanism of issuing a floating-rate bond and swapping it into a fixed rate.”  While the technical flaws inherent in this decision by the school district are dense and arcane, it appears that MANY school districts and public entities fell prey to the use of questionable investment tools. Here’s Smith’s overview:

What is important about this story is that the CPS’ sorry experience has been replicated at state and local entities all over the US and abroad, yet remarkably few have been willing to sue. In some cases, it’s likely that rank corruption was involved, that the consultants hired to vet the deal were cronies and not up to the task, or worse, that key people at the issuer were overly close to the banks involved. In other cases, officials are afraid of banks, that if they sue them, they’ll be put on a financing black list and will have trouble fundraising. That’s nonsense by virtue of how competitive and fee-hungry bank are. And the more government authorities that got the nerve to sue, the less noteworthy any particular case would be.

Smith then summarizes the Tribune’s findings, which indicate that the Chicago school district experienced every problem in the highlighted phrase above. And here’s what is maddening about this:

  • Mayor Emmanuel’s unwillingness to sue the banks will shift the blame to the school district in the same way victims of predatory loans are blamed for their gullibility in accepting liar loans from banks.
  • The school district will be required to make budget cuts to offset the revenue lost as a result of financial mismanagement… and the budget cuts will affect the children in the schools while the banks who made the loans will be held harmless
  • The involvement of investors who make contributions to political campaigns and stand to gain if more for-profit charter schools open is suspicious.
  • It appears that these financial decisions were made during Duncan’s tenure as CEO of the CPS… a link that Smith did not make but which is not lost on many education policy wonks like me.

From my perspective, this is yet another example where de-regulation failed, where banks take the risk and taxpayers pay the price, and government takes the blame.

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