Tag Archives: A.C. Advisory

Chicago Tribune scrutinizes CPS bond deal

The Chicago Tribune published an extensive, front page feature on the Chicago Public School District’s use of innovative borrowing strategies over the last decade, which appears to have backfired and inflated borrowing costs by $100 million.

Appearing in the Sunday print edition of the newspaper, the story centers around the district’s practice of issuing auction-rate bonds, paired with interest rate swaps, to reduce the cost of borrowing money. In contrast to more traditional, fixed-rate bonds issued by school districts and municipalities, the variable rate instruments were subject to future market conditions and in this case, ultimately moved against the district. Servicing the debt became more costly, and breaking out of the contract required large lump-sum payments.

Several academics, financial professionals and public officials contacted for the story said greater consideration should have been given to the potential risks involved. The district’s financial advisors who crafted the deals defended them, disputing the newspaper’s analysis that concluded that they cost the district $100 million.

A couple notes: first of all, reporters Jason Grotto and Heather Gillers did a great job with this story. It’s a serious, in-depth piece on a local topic of real civic importance, showcasing one of the strengths of newspaper journalism. That’s not to say I endorse every sentence or every shade of tone and nuance in the article, but that’s beside the point. The point is that this is important, engaging reporting. Definitely worth my Sunday subscription price.

Secondly, it should be noted that the district and its financial people weren’t crazy or irresponsible for considering the new type of deals that were being used more often during the early 2000s. Innovation occurs in the financial industry just like every other industry, and just because something is new and more complex, doesn’t mean it’s wrong or irresponsible.

Thirdly, that being said, I believe (and I think most reasonable citizens would believe), that a school district should generally take a conservative approach to resource management and financial planning. That might mean you don’t try to shake a point or two out of every deal, if it means incurring an unpredictable future liability stream.

Fourthly and finally, I thought that the reaction of the CPS advisors in response to this article was lacking, at least in terms of what was published. The competing analysis they submitted in response to the Tribune analysis omitted key information, leaving their defense of the deals less credible. Again, it’s not always wrong to take calculated risks, but if the deals don’t work out, just say that, rather than stretch or skew an analysis stating that they did.

But worst of all was Adela Cepeda‘s attempt to strike back at the newspaper for investigating the public school district’s finances. “I consider the slant of the reporters for this article to be absolutely biased and outright sexist,” she said in a letter to the Tribune. She also criticized the paper for consulting a New York firm to review their own analysis before publishing, only to then use a New York firm herself to submit her own analysis.

Cepeda earned an MBA at the University of Chicago, and was in banking for ten years, according to the article. She married into a politically connected family on the city’s South Side, and very shortly after forming her firm won contracts with CPS. Her partner, David Vitale, is a former Chicago Board of Trade president and currently serves as president of the school board.

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