Finance – Chicago Public Schools in the Capital Markets

If someone were to ask me for the names of public finance professionals that I respect the most, Jim “Built By Bonds” Lebenthal would be high on my list. Folksy as this may seem, Lebenthal was one of those rare individuals who actually lived his ideals. Many people will remember him as a champion of infrastructure investment, wandering around cities in commercials pointing out important public works that municipal bond investors had funded.

This is what made Lebenthal such a fantastic role model — for him,

investment was inextricably coupled with civic pride. In Lebenthal’s world, investors and taxpayers form a partnership. Investors transfer their capital to governments and, in exchange for a fair interest rate, those governments construct projects generations will enjoy and that make their local economies strong. School buildings where children would be educated. Waterworks that would provide the public with safe, potable water. Roads, bridges, and transit systems that promote commerce.

And if you ever had the chance to listen to Lebenthal speak, his enthusiasm for infrastructure investment was contagious. You would walk out of the room thinking, this is what will distinguish the United States as one of the great civilizations in history. Like Rome or Athens, we are a brave race that buildsgreat things, which in turn allows us to do great things.

I think most of the municipal bond market reflects the partnership between investors and taxpayers that Lebenthal envisioned. However, there have been some significant bond deals in recent years that one can only describe asantisocial in nature. Rather than contributing to a community flourishing, the investors in these deals are profiting from a community’s decline. Rather than forming a partnership, investors and taxpayers develop an antagonistic relationship.

The fact that these deals have predictably negative

outcomes has stirred a political debate over how investors should be treated when those predictably negative outcomes materialize. Historically, honoring commitments to bondholders has been regarded as one of governments’ top priorities. But should that remain the case in the context of these non-traditional bond transactions, especially when doing so jeopardizes a government’s ability to provide essential services? Which is more enforceable — financial contracts or the social contract?

With that preamble, let’s talk about Chicago Public Schools (CPS) and what an antisocial bond offering looks like.