{"id":1036495,"date":"2023-03-24T11:40:16","date_gmt":"2023-03-24T11:40:16","guid":{"rendered":"https:\/\/jacobin.com\/2023\/03\/paul-vallas-chicago-schools-loan-bonds-interest-rates-wall-street\/"},"modified":"2023-03-24T11:40:16","modified_gmt":"2023-03-24T11:40:16","slug":"paul-vallas-gave-wall-street-massive-amounts-of-money-as-chicago-schools-ceo","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2023\/03\/24\/paul-vallas-gave-wall-street-massive-amounts-of-money-as-chicago-schools-ceo\/","title":{"rendered":"Paul Vallas Gave Wall Street Massive Amounts of Money as Chicago Schools CEO"},"content":{"rendered":"\n \n\n\n\n

Chicago mayoral candidate Paul Vallas helped create a financial disaster as head of Chicago Public Schools, making bond deals worth $666 million \u2014 whose exorbitant interest payments to Wall Street are now robbing the city\u2019s school system. <\/h3>\n\n\n
\n \n
\n Paul Vallas, Democratic mayoral candidate for Chicago, during an interview in Chicago, Illinois, on March 16, 2023. (Christopher Dilts \/ Bloomberg via Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

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\u2019s budget-strapped public schools and to some of the wealthiest individuals and banks on the planet, a new report shows.<\/p>\n

Now, Vallas is in an election runoff against Cook County Commissioner Brandon Johnson<\/a> to lead the city of Chicago, with big support from wealthy investors and other corporate interests \u2014 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.<\/p>\n

With less than two weeks left before the April 4 election \u2014 which polls show is a tight race \u2014 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\u2019s fourth-largest school system.<\/p>\n

With Vallas at the helm, Chicago Public Schools issued $666 million worth of so-called payday loan bonds, according to a report<\/a> from the Action Center on Race and the Economy (ACRE).<\/p>\n

The interest payments on the bonds totaled $1.5 billion. A 2016 analysis<\/a> from the Texas comptroller\u2019s office found that the type of bonds Vallas issued can be three times more expensive than traditional bonds \u2014 meaning that Chicago Public Schools could have faced up to $1 billion in additional interest payments above a normal rate.<\/p>\n

That $1 billion is almost exactly the budget shortfall that former Chicago mayor Rahm Emanuel, the current ambassador to Japan, cited<\/a> as justification to shutter<\/a> fifty Chicago public schools a decade ago. Some of Emanuel\u2019s largest donors, like Citadel hedge fund CEO Ken Griffin and executives at private equity firm Madison Dearborn Partners, are currently backing Vallas.<\/p>\n

\u201c[Vallas] got Chicago Public Schools into really bad deals that we\u2019re still paying for a quarter century after he left,\u201d said Saqib Bhatti, the codirector of ACRE. \u201cAnd the fact that his strongest base of support comes from Wall Street should in and of itself be a big red flag.\u201d<\/p>\n\n \n\n \n \n \n

\u201cIt Was a Gimmick\u201d<\/h2>\n \n

The criticisms of Vallas\u2019s budget management center on two opaque areas of municipal financing: \u201ccapital appreciation bonds\u201d and \u201cinterest-rate swaps<\/a>.\u201d<\/p>\n

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.<\/p>\n

One example of those exotic forms of financing was capital appreciation bonds. Called<\/a> \u201cthe school district equivalent of a payday loan\u201d by former California state treasurer Bill Lockyer, these bonds don\u2019t allow borrowers to make any principal or interest payments for many years \u2014 as long as fourteen years in the case of Chicago Public Schools \u2014 allowing governments to defer payments and investors to compound their interest and thus earn huge interest rate payments.<\/p>\n

The report<\/a> 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 \u2014 an effective interest rate of 223 percent on bonds issued to fund general operations of the school district.<\/p>\n

Financial firms involved<\/a> in the marketing of the capital appreciation bonds included Goldman Sachs, Bank of America, Lehman Brothers, and the Royal Bank of Canada.<\/p>\n

\u201cAs a policy, I thought [capital appreciation bonds] was a bad idea,\u201d Lockyer, who was California\u2019s treasurer from 2007 to 2015, told us. \u201cBonds ought to pay for the project that\u2019s contemplated. . . . Interest charges are fine. But building in capital appreciation bubbles seemed to me to be a bad idea.\u201d<\/p>\n

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.<\/p>\n

\u201cTo tie it to some speculative increase in local property values just doesn\u2019t make sense,\u201d said Lockyer. \u201cI do give [the municipal finance industry] credit for always figuring out a new clever scam, but that\u2019s 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.\u201d<\/p>\n

Citing Lockyer\u2019s concerns, California cracked down on<\/a> capital appreciation bonds in 2013.<\/p>\n\n \n \n \n

\u201cThey\u2019re Unpredictable\u201d<\/h2>\n \n

Vallas also oversaw bond deals that led to costly interest-rate swaps.<\/p>\n

Interest-rate swaps involve a municipality initially issuing variable-rate debt, like a variable-rate mortgage, and then \u201cswapping\u201d the debt for a fixed interest rate in a transaction with a bank.<\/p>\n

Under Vallas in 2000, Chicago Public Schools issued $303 million in variable-rate debt, some of which was later subject to interest rate swaps that cost the city\u2019s schools $32 million, according to the ACRE report.<\/p>\n

Interest-rate swaps have been a subject of enormous controversy in Chicago, with routine<\/a> protests<\/a> at banks and financial firms that profited from the deals. Those protests were often led by the Chicago Teachers Union (CTU), which is backing Johnson, a teacher and former CTU organizer, in the mayoral race. In total, all of the swap deals initiated by the school district \u2014 not just under Vallas\u2019s watch \u2014 have cost the city\u2019s schoolchildren $508 million, said Bhatti at ACRE.<\/p>\n

When Vallas was the superintendent of the School District of Philadelphia from 2002 until 2007, Vallas made $691 million in swap deals, with the total cost to the school district being $162 million, the ACRE report found.<\/p>\n

Jack Wagner, a former auditor general of Pennsylvania who routinely audited swap deals, told us that the swaps were too risky and that they should be banned.<\/p>\n

\u201cWith concern in the banking system again, there is greater potential that certain entities that are involved in interest rate swaps could be subjected to losses,\u201d Wagner said. \u201cThe big issue there is they\u2019re unpredictable. And unpredictable financial sources should not be part of public money because obviously you are gambling with public money. And it\u2019s very difficult to understand swaps, let alone follow them.\u201d<\/p>\n

Those concerns were echoed by Joe Fichera, a former Wall Street executive who has studied interest-rate swaps.<\/p>\n

\u201cMost municipalities don\u2019t have the in-house expertise to evaluate swaps, so they have a swap advisor who only gets paid if a deal gets done,\u201d he noted.<\/p>\n

\u201cYou\u2019re taking on multiple risks that you may not be able to manage,\u201d Fichera continued. \u201cThe unwinding of swaps creates enormous payments that you have to fund, which shows the kinds of risks you have. The structure is built for the bank, not the government, because the banks are smarter.\u201d<\/p>\n

Vallas has received $5,000 in campaign cash from Allan Muchin, whose firm Katten Muchin did legal work<\/a> on some of the capital appreciation bonds, as well as $5,000 from Paul Crimmins, a partner at Mayer Brown, which also<\/a> did legal work on the bonds.<\/p>\n

Additionally, Vallas has received $1,000 from an executive at the Royal Bank of Canada, the bank that did<\/a> the Chicago Public Schools swap deal which emerged from the variable-rate debt issuance overseen by Vallas.<\/p>\n

\u201cThe absurdly complicated deals that were so ruinous for Chicago\u2019s and Philadelphia\u2019s public schools were the emperor\u2019s new clothes of public finance,\u201d said former Democratic representative Brad Miller of North Carolina, a critic of Wall Street municipal finance deals. \u201cVallas thought he was in the small circle of sophisticates who understood the deals and the emperor\u2019s new clothes were beautiful. When the deals went to hell, the Wall Street banks told everybody that the deals were great but they just got unlucky, and Vallas believed that too.\u201d<\/p>\n\n \n \n \n\n \n \n

You can subscribe to David Sirota\u2019s investigative journalism project, the\u00a0Lever<\/i>,\u00a0here<\/a>.<\/p>\n\n\n\n

This post was originally published on Jacobin<\/a>. <\/p>","protected":false},"excerpt":{"rendered":"

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\u2019s 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 [\u2026]<\/p>\n","protected":false},"author":138,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1036495"}],"collection":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/users\/138"}],"replies":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/comments?post=1036495"}],"version-history":[{"count":1,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1036495\/revisions"}],"predecessor-version":[{"id":1036496,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1036495\/revisions\/1036496"}],"wp:attachment":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/media?parent=1036495"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/categories?post=1036495"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/tags?post=1036495"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}