The Chicago Tribune's analysis of bond market borrowing by Chicago Public Schools has been causing quite a stir. Heather Gillers and Jason Grotto, the reporters on the story, lay out what they found, and why they believe the CPS borrowing strategy championed by School Board President David Vitale, who at the time was the chief administrative officer at CPS, will end up costing the cash-strapped school district millions. The Chicago City Council debates whether or not CPS can recover the millions lost in bond deals.

Chicago Tribune: Risky bonds prove costly for Chicago Public SchoolsChicago Tribune: Banks kept CPS in shaky bond marketChicago Tribune: Illinois lawmakers opened door to risky CPS bond deals

The Chicago Tribune series begins with the arrival of David Vitale at Chicago Public Schools. The former vice chairman and director of Bank One Corporation joined CPS in 2003 as senior advisor to the chief executive officer, who was Arne Duncan at the time, working pro bono. In May 2003, Vitale expanded his role to become chief administration officer and presided over the bulk of auction-rate deals.

In the mid-1990s, CPS used bonds that carried the same fixed interest rate over decades in order to pay for school construction, according to the Chicago Tribune. In the late 1990s and early 2000s, the district began considering issuing bonds at floating rates, or a variable interest rate that moves up and down with the rest of the market, in order to continue its campaign to build and renovate schools.

In March 2003, State Sen. John Cullerton, who is now the Senate president, sponsored legislation, which was drafted by an attorney at an Illinois bond law firm, that would give Illinois school districts and smaller towns express permission to make auction-rate deals with banks. The bill passed 102-13 in the House and 48-9 in the Senate. The law went into effect March 5, 2004.

CPS began borrowing money cheaply by issuing auction-rate bonds, or a debt security with an adjustable interest rate that is determined via a modified Dutch auction and fixed term of 20-30 years, paired with derivative contracts starting in 2003.

View a timeline of CPS bond deals detailed in the Tribune’s analysis.

According to the Chicago Tribune analysis, CPS’ decision to use auction-rate bonds likely to cost them roughly $100 million over the life of the deal as compared to using fixed-rate bonds. CPS and A.C. Advisory, who advised CPS on the bond deals, disputes the Tribune’s analysis and claim the deal was good for CPS.

CPS spokesman Bill McCaffrey issued the following statement:

Since 2007, CPS has not entered into any new swaps and continues to monitor carefully the risk exposure of its swap portfolio, including the possibility of termination. Swaps have saved Chicago Public Schools more than $30 million in interest costs compared to the cost of comparable fixed-rate bonds that would have been issued at the time.

A.C. Advisory was also contacted for comment and has yet to respond.

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