Chicago's South Side College May Go Broke Over State Budget War

  • Chicago State University may run out of cash within months
  • Record stalemate holds up aid that's lifeblood of the school

A university in Chicago’s South Side is on the brink of running out of money as soon as March because of Illinois’s budget impasse, providing the most prominent example yet of the consequences of the seven-month political standoff.

Chicago State University, a 5,200-student institution founded in 1867, is considering drawing up a financial exigency plan, equivalent to college bankruptcy, as soon as next month, according to Tom Wogan, a spokesman. The move would be a first step to keep the school afloat as it hemorrhages cash to cover the loss of state funds. All options are on the table to get through the current semester, including missing payments on $12 million of outstanding tax-exempt bonds, he said.

The school, with a 70 percent black student body, would become the most visible casualty of the stalemate between Republican Governor Bruce Rauner, a former private-equity executive, and legislative Democrats, with leaders from Chicago, over a spending plan for the year that began July 1. While other public universities can draw on endowments or raise funds from alumni as the impasse persists, that’s not the case at Chicago State, whose students count on federal and state grants.

“A place like Chicago State University doesn’t have the same political clout of other institutions,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management, which oversees $5.9 billion. “They serve a segment of the market that’s often overlooked, and some of the people who can benefit the most from a higher education degree. It’s a completely different -- and completely vulnerable -- business model.”

Chicago State is situated at the crossroads of financial and political pressures. Illinois, which provides much of its funding, is the worst-rated state in America, and the university’s potential insolvency comes as Mayor Rahm Emanuel is battling controversy over police shootings of unarmed black teenagers.

Chicago State is among colleges nationwide that are grappling with limits on their ability to raise tuition as the pool of graduating high-school seniors shrinks and students balk at taking costly loans. About two-thirds of its students are from Chicago or the surrounding area. It ranks highest among Illinois colleges in awarding bachelor’s degrees to black students in the physical sciences and health professions, according to its website. About 70 percent of attendees relied on financial aid in 2013.

Enrollment Tumbles

The university’s 2015 enrollment was down 29 percent from four years earlier, according to financial documents. It had a $5 million endowment as of June 30, compared with $2.3 billion at the University of Illinois, the state’s flagship college, financial documents show. The amount of state grant money flowing to Chicago State students jumped to $6.2 million in 2014 from $210,000 in the previous fiscal year.

Chicago State has been footing the bill for the state’s Monetary Award Program grants for the last two semesters, Wogan said. That can’t go on past March, when operational funds will run out based on current trends, he said. The university is considering steps including taking out a bank loan, though that would require legislative approval, Wogan said.

“The looming closure of CSU reinforces unacceptable inequities in our schools and continues to shortchange children of color,” Shari Runner, president of the Chicago Urban League, a civil rights organization that promotes educational equality, said in an e-mailed statement. “It is unacceptable that, under the threat of displacement, our African-American youth have to carry the burden of indecision in Springfield.”

Governor Rauner said Thursday that he cares about the students who “are being failed by Chicago State University,” saying they might be better off receiving state money to pick their own school.

“They have been abusing taxpayer dollars, wasting money and doing self-dealing for years,” he said about the university at a press conference. “For them to all of a sudden go, ‘Hey, we’re sort of more broke than most,’ while they’ve been throwing money down the toilet, you know what, let’s have some standards.”

Financial Escape

To stay open, the university board would have to declare fiscal exigency next month so it has more flexibility to adjust contracts and potentially bond payments, Wogan said. Louisiana State University contemplated such a step because of proposed budget cuts in 2015, which led it to scrap a municipal-bond deal because of a buyers’ revolt.

“If we can’t make payroll and we can’t do a number of other things, everything about the university’s functions are at risk,” Wogan said. “The biggest short-term concern right now is operation funds to get through the semester and get through the fiscal year.”

Chicago State in 1998 issued $25.7 million of tax-exempt bonds, of which $12 million is outstanding. MBIA Inc.’s National Public Finance Guarantee Corp. insures the issue, which is otherwise unrated, data compiled by Bloomberg show. Debt due in December 2023 last traded in August at 109 cents on the dollar to yield 4.2 percent, about twice the yield of top-rated securities.

The Illinois universities with ratings from Moody’s Investors Service have seen their grades tumble along with the state’s. In October the company lowered Western Illinois, Eastern Illinois and Governors State by two steps to Baa3, one level above speculative grade. Others were also cut, though retain higher ranks.

Yet it’s Chicago State that’s been the most vocal in calling for immediate action from Illinois officials. And some bondholders say the school is too important to be ignored.

“This is exactly what municipal bonds are designed to finance: Chicago State is clearly serving a very important public-policy need in Chicago,” said Barnet Sherman, who manages the $347 million TIAA-CREF Tax-Exempt Bond Fund from Charlotte. It held about $2 million of Chicago State bonds as of Nov. 30, Bloomberg data show.

“Many of these students are first-time college attendees or parents going back to school, trying to get an education, trying to improve their educational and economic circumstances,” he said. “Maybe common sense returns and this matter resolves itself.”

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