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Wednesday, January 27, 2016 8:45 PM

Chicago Board of Education Yanks $875 Million Bond Sale Over 7.75% Yield; Five Questions for Chicago

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On Wednesday, the Chicago Board of education pulled the plug on a proposed $875 Million Bond Sale.

Facing hefty yields, the financially ailing Chicago Public Schools (CPS) postponed Wednesday's planned $875 million bond sale and will evaluate the timing on a day-to-day basis, a school official said.

The nation's third-largest public school system is struggling with a structural budget deficit of at least $1 billion. Its fiscal woes led Illinois Governor Bruce Rauner and Republican lawmakers last week to push for a state takeover and potential bankruptcy for CPS - moves that were quickly shot down by Chicago Mayor Rahm Emanuel, who controls the school system, and leaders of the Democratic-controlled legislature.

A pre-pricing marketing scale circulated by underwriters on Tuesday for the "junk"-rated general obligation bonds showed yields topping out at 7.75 percent with coupons of 7.25 percent for bonds due in 2041 and 7 percent for bonds due in 2044. That yield indicated a so-called credit spread over Municipal Market Data's benchmark triple-A yield scale of as much as 506 basis points.

That spread was wider than the 464 basis-point spread the school system's 19-year bonds were fetching in secondary market trading last week.
Five Questions for Chicago

  1. Will the yields be any lower tomorrow? Next week? Why?
  2. How the heck is the school district going to close a hole of at least $1 billion?
  3. Will Emanuel push for yet another massive tax hike just to pay teacher pensions?
  4. How can another tax hike do anything but postpone the problem?
  5. Since the most likely outcome is bankruptcy, why was the yield offering so good?

Reflections on Bankruptcy

In regards to question number five, 7.75% seems very attractive given the high likelihood those bonds will soon be worthless.

Heck, even 10% would be a bargain for the city and a horrid deal for the bondholders.

But that's not the way markets work. No one thinks bankruptcy is coming until it's a few weeks away. And of course, for bankruptcy to be possible, the Illinois legislature has to approve it.

Governor Bruce Rauner needs to hold firm until Emanuel begs the union-controlled Illinois legislature to pass a municipal bankruptcy bill.

"I'll Be a Better Mayor"

In his mayoral victory speech, Emanuel promised "I'll Be a Better Mayor".

Stepping back, recall that Emanuel defeated Cook County Commissioner Jesus "Chuy" Garcia in a runoff on April 7, 2015.

In debates ahead of the runoff, Emanuel said Garcia's promises would require tax hikes to fund them. Emanuel called tax hikes failed "politics of the past."

Emanuel forgot to say he would undertake the same failed measures as Garcia, only much bigger.

Six months later, Emanuel passed the largest property tax hike in Chicago history. And in the understatement of the year, Emanuel commented "It's Not a Piece of Art".

With that I have one final question for the mayor.

Bonus Question

Hello Rahm, when will you put city taxpayers and the good of the city itself ahead of the unions and your perpetual reelection campaign that's currently nothing but lies and deceit followed by monstrous tax hikes?

Mike "Mish" Shedlock

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