How Would CPS Bankruptcy Work?

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Gov. Bruce Rauner on Thursday doubled down on his calls for bankruptcy protection for Chicago Public Schools. The troubled district is facing a $1 billion deficit, but bankruptcy is something that has rarely ever happened with a school district in recent American history. Just how would it work, and is it even possible?

Rauner told reporters that he will not support a “bailout” of CPS from the state, and that he believes bankruptcy could be the answer to what ails the district.

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“They could reorganize their debts and contracts in front of a judge. That’s not a terrible thing. It wouldn’t have to result in any layoffs. They would just make things more affordable,” Rauner said. “Local governments, municipalities, water districts, school districts have done it. It’s been done and it may help CPS get through this crisis.”

As to how exactly the process would work: the district would go before a bankruptcy judge with all of its creditors – such as people who hold debt, and pensioners, etc. – and all parties would have to work out a path forward, establishing essentially who gets paid what. It isn’t the judge that would unilaterally determine that.

The negotiations could get contentious, especially with retirees and how ironclad the state constitution is on the protection of pensions. The Better Government Assoication told “Chicago Tonight” that CPS could actually come out in worse shape than it entered. That’s because the purpose of bankruptcy is to make sure creditors are paid as much as they can get out of it – the whole purpose of educating children could get lost in the mix. It also means CPS may never have future access to capital markets.

Another expert told us that only two school districts, and very tiny ones at that, have gone through Chapter 9 bankruptcy in the last 60 years, and he says it was not a successful endeavor.

The General Assembly would have to pass a law to allow CPS to go bankrupt, something that is highly unlikely to happen.

The governor also said that a deal on a stopgap budget that would fund critical services through January. The House and Senate announced Thursday they will be back in session next Wednesday and could possibly vote on a deal. But other lawmakers believe the House Democrats may propose their own stopgap with a lot more money for CPS in it. That’s something the governor has vowed not to support.

Follow Paris Schutz on Twitter: @paschutz

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