(C) Common Dreams
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Paul Vallas Gave Wall Street Massive Amounts of Money as Chicago Schools CEO [1]
['Matthew Cunningham-Cook', 'David Broder', 'Alexander Zaitchik', 'Alex N. Press', 'Brandon Johnson', 'Jackson Potter', 'Alan Maass', 'Molly Gott', 'Derek Seidman']
Date: 2023-06
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When he led the Chicago school system, mayoral candidate Paul Vallas took actions that resulted in more than $1.5 billion being transferred out of the city’s budget-strapped public schools and to some of the wealthiest individuals and banks on the planet, a new report shows. Now, Vallas is in an election runoff against Cook County Commissioner Brandon Johnson to lead the city of Chicago, with big support from wealthy investors and other corporate interests — including from executives at law firms and banks that benefited from the controversial financing methods Vallas used as CEO of Chicago Public Schools from 1995 to 2001. With less than two weeks left before the April 4 election — which polls show is a tight race — Vallas has faced little scrutiny over his tenure as the Chicago Public Schools chief, even though he helped create a slow-moving financial disaster for America’s fourth-largest school system. With Vallas at the helm, Chicago Public Schools issued $666 million worth of so-called payday loan bonds, according to a report from the Action Center on Race and the Economy (ACRE). The interest payments on the bonds totaled $1.5 billion. A 2016 analysis from the Texas comptroller’s office found that the type of bonds Vallas issued can be three times more expensive than traditional bonds — meaning that Chicago Public Schools could have faced up to $1 billion in additional interest payments above a normal rate. That $1 billion is almost exactly the budget shortfall that former Chicago mayor Rahm Emanuel, the current ambassador to Japan, cited as justification to shutter fifty Chicago public schools a decade ago. Some of Emanuel’s largest donors, like Citadel hedge fund CEO Ken Griffin and executives at private equity firm Madison Dearborn Partners, are currently backing Vallas. “[Vallas] got Chicago Public Schools into really bad deals that we’re still paying for a quarter century after he left,” said Saqib Bhatti, the codirector of ACRE. “And the fact that his strongest base of support comes from Wall Street should in and of itself be a big red flag.”
“It Was a Gimmick” The criticisms of Vallas’s budget management center on two opaque areas of municipal financing: “capital appreciation bonds” and “interest-rate swaps.” Cities, states, and school districts routinely issue debt to pay for new infrastructure projects and to fund ongoing cash needs. For decades, municipal bonds were considered a plain vanilla sector of finance: municipalities would issue debt at a twenty- or thirty-year fixed interest rate, like a traditional mortgage. But starting in the 1990s, more exotic forms of financing came to the fore. One example of those exotic forms of financing was capital appreciation bonds. Called “the school district equivalent of a payday loan” by former California state treasurer Bill Lockyer, these bonds don’t allow borrowers to make any principal or interest payments for many years — as long as fourteen years in the case of Chicago Public Schools — allowing governments to defer payments and investors to compound their interest and thus earn huge interest rate payments. The report from ACRE found that Vallas issued $666 million in capital appreciation bonds during his tenure at Chicago Public Schools, resulting in $1.5 billion in interest payments — an effective interest rate of 223 percent on bonds issued to fund general operations of the school district. Financial firms involved in the marketing of the capital appreciation bonds included Goldman Sachs, Bank of America, Lehman Brothers, and the Royal Bank of Canada. “As a policy, I thought [capital appreciation bonds] was a bad idea,” Lockyer, who was California’s treasurer from 2007 to 2015, told us. “Bonds ought to pay for the project that’s contemplated. . . . Interest charges are fine. But building in capital appreciation bubbles seemed to me to be a bad idea.” Capital appreciation bonds were routinely marketed on assumptions of higher property values in the future due to the improved public services funded by the bonds. That optimistic modeling, in theory, justified the years of delayed payments, which allowed the bondholders to capitalize interest. “To tie it to some speculative increase in local property values just doesn’t make sense,” said Lockyer. “I do give [the municipal finance industry] credit for always figuring out a new clever scam, but that’s what I thought it was. It was a gimmick that allowed them to claim that the costs of the bond were going to be significantly less than the workout justified.” Citing Lockyer’s concerns, California cracked down on capital appreciation bonds in 2013.
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[1] Url:
https://jacobin.com/2023/03/paul-vallas-chicago-schools-loan-bonds-interest-rates-wall-street
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