Tensions are high in Chicago, where early voting is underway in a hotly contested mayoral runoff. Incumbent Lori Lightfoot was roundly rejected by voters in the first round of voting on February 28, leaving Brandon Johnson, a progressive school teacher and Chicago Teachers Union organizer, to square off with neoliberal favorite Paul Vallas, who was CEO of Chicago Public Schools (CPS) from 1995 to 2001. The race has grown tight in its final days, with Vallas polling at 46 percent and Johnson polling at 44. Johnson has recently garnered endorsements from Bernie Sanders, Elizabeth Warren and Martin Luther King III. Vallas has likewise racked up high-profile endorsements, such as the support of Illinois Sen. Dick Durbin and the Chicago Fraternal Order of Police. Vallas has pledged to “take the handcuffs off” of Chicago’s already notoriously violent police force, and Chicago Fraternal Order of Police President John Catanzara recently claimed that if Johnson wins, there will be “blood in the streets,” due to mass police resignations. Fear mongering about crime has been the crux of Vallas’s campaign, as he repeatedly accuses his opponent of planning to “defund the police,” despite Johnson’s insistence that he has no intention of doing so.
Johnson’s endorsement by Martin Luther King III, who praised Johnson as embodying the values of his late father, Martin Luther King Jr., offers a sharp contrast to the threats of blood in the streets made by Catanzara, who has defended the actions of January 6 rioters and compared vaccine mandates to the Holocaust. The contrast between the two endorsements provides a snapshot of the political moment Chicagoans are experiencing. Johnson’s mayoral run has been compared to the historic campaign led by Harold Washington, who became Chicago’s first Black mayor in 1983. Vallas entered the runoff as the frontrunner, but his campaign has been dogged by allegations that he was telling the truth in a 2009 interview when he stated, “I’m more of a Republican than a Democrat.” While Johnson has promised to tax the rich and equitably fund public schools, Vallas has stated that what he loves most about Chicago is that the city is the “Saudi Arabia of fresh water.” (Vallas might be disappointed to learn that Chicago’s water supply cannot be exported as freely as Saudi Arabia exports oil, given that, by law, any diversion of Great Lakes water from communities that are not a part of the Great Lakes basin must be approved by all eight Great Lakes states — Minnesota, Wisconsin, Illinois, Indiana, Michigan, Ohio, Pennsylvania and New York.)
Vallas has a reputation for favoring privatization and replacing public schools with charters. In a since-deleted tweet, Vallas recently asserted that Johnson, who serves on the Cook County Board of Commissioners, has “never run anything but a classroom.” But Vallas’s managerial experience has been the subject of criticism throughout the campaign. As longtime educator and writer Mercedes Schneider recently told TRiiBE reporter Jim Daley, “Wherever [Vallas] goes, he leaves and there’s questions, and a mess, and promises didn’t pan out.”
A recent report from the Action Center on Race and the Economy (ACRE), entitled “Passing the Buck: How Paul Vallas’s Toxic Deals Wreaked Havoc On Chicago and Philadelphia Schools,” was also critical of Vallas’s financial record as a CEO of public school systems. In the report, ACRE Co-Executive Director Saqib Bhatti writes that Vallas’s record in the Chicago and Philadelphia school systems “shows he repeatedly balanced his budgets by mortgaging the future.” In this interview with Truthout, Bhatti breaks down some of Vallas’s financial decisions and discusses why he believes the future of Chicago is at stake in this election.
Kelly Hayes: In your report, you quote the conservative-leaning Illinois Policy Institute as saying that the Chicago Public School system’s “problems began in 1995 when politicians started treating the pension system as a slush fund, draining billions of dollars from teachers’ retirements for political benefit.” What was Paul Vallas’s role in that raiding of the pension system?
Saqib Bhatti: Vallas played a key role because, as a CEO of [Chicago Public Schools] at the time, he played a role in really pushing for pension holidays, basically skipping pension payments. Pensions are deferred wages. Basically, when workers negotiate pensions, they agree to accept lower raises or lower wages to have part of their wage going to the pension so the pension fund can invest that and there can be money there to pay for their pensions when they retire. And so what that means is that every year there’s a portion that the district is supposed to pay into the pension fund, which is again the portion of the worker’s wages that is supposed to be going towards the pension funds.
And what Vallas started doing was, because the pension fund was so well funded — it was 100 percent funded — he started basically saying, “I want to use that money for something else to fill holes elsewhere in the budget.” And so they called it a pension holiday, which is a nice euphemism for saying we’re going to take money out of worker’s pockets and put it elsewhere. And so instead of finding other ways to balance the budget, whether it’s bringing new revenue or whatever else, he decided he was going to skip the pension payments. So they did that. He really pushed for that to be passed in Springfield [the state capital] because it was a change in state law that actually allowed them to do that. What we saw was that after that, basically, I mean starting in 1999, we sort of started the trend of pension holidays. There were pension holidays for 13 straight years. And at the end of that there was a $10 billion shortfall in the pension fund that had been 100 percent funded in 1999.
The Chicago Teachers’ Pension Fund, it was 100 percent funded, so it went from one of the best-funded pension funds in the country to one of the worst. Now it’s less than 50 percent funded. And in fact, over the past 10 years, the budget crises we saw every single year at CPS, a big piece of that was that they had to then play catch up on the pension. And 2013 is when they finally started paying back into the pensions. And so it meant that now they had to try to make up that $10 billion shortfall. And so there were massive, massive pension payments that were due, but that was because we had skipped payments for so many years, which is a trend that Vallas started and pushed for in Springfield.
Pension holidays are legalized wage theft. It’s like they’re borrowing against the teacher’s wages in the future. But then they try to come in and say, “Well, we can’t afford these payments or we just want to cut the pensions.” Well yeah, that’s just wage theft. This is money that they’ve already done the work for and didn’t get paid. It’s like instead of putting it into the worker’s savings account, you decide to put it into your own account and then say, “Well, too bad that’s not there in the savings account.” It’s just highway robbery.
Vallas also took out $666 million in loans that have been likened to payday loans due to extraordinarily high interest rates. Can you explain what capital appreciation bonds are and why these loans were so harmful to Chicago students?
So capital appreciation bonds have been likened to payday loans because the interest rates, as you said, end up being extraordinarily high. And so, on the $666 million in debt that CPS took on under Vallas using these capital appreciation funds, the interest is $1.5 billion and that’s extraordinarily high.
And the reason is that the way capital appreciation bonds work, it’s similar to a negative amortization mortgage, which I now realize is a term that meant something to people like 10 years ago that probably doesn’t as much anymore. But it’s basically a loan where you don’t have to pay principal or interest for many, many years. And in fact, it’s not just that you don’t have to pay principal and interest — you’re not allowed to pay principal or interest for many, many years. And so, in the case of Vallas’s bonds, there’s one loan [on] which we didn’t pay anything for 14 years, another one for 11 years, another one for eight years. And the thing is that that whole time the interest is compounding. So the outstanding principal actually gets bigger and bigger.
And so that’s the real issue with this: at the end, you basically end up then in the last few years of the bond, the rest of the remaining term of the bond, you then have to make up the payments you skipped on the front end. Those payments are quite large, but they’re even larger because the interest has compounded this whole time. So it’s a great way for politicians or a school district or school superintendent or CEOs to kick the can down the road because it means that while they’re going to be in office, there’s no payment. They love that they don’t have to worry about paying anything while they’re in office. But it’s a ticking time bomb down the line.
In the case of the three capital appreciation bonds that Vallas took out, this $1.5 billion in interest on $666 million in principal, over the life of the bonds, that comes to an interest rate of 223 percent, which is extraordinarily high.
Vallas also made some questionable decisions around variable rate bonds that cost Chicago millions. Can you explain how those deals played out?
Prior to the late 1990s, school district, cities, and states basically only entered into fixed rate bonds. It was just similar to a fixed rate 30-year mortgage, which is a fixed rate loan where you know what the interest rate is going to be every year. You lock it in, so you can budget for it, you can plan for it. But one of the gimmicks that came out in the late ‘90s, and that really sort of became a big thing throughout the aughts was this idea that, well, if you take out a variable rate bond, you can save some money. Yes, there’s the risk that the interest rates shoot up later. But one, you’re banking on the fact that if the rates shoot up, you’re not there. And secondly, the idea is that you get savings in the short term. But most people still thought that was too risky.
It’s interesting that Vallas actually entered into his variable rate bonds in 2000. The way to offset the risk of interest rates shooting up, what sort of sold as an insurance policy against rising interest rates by banks, is this thing called an interest rate swap. But what the swap actually is, it’s just a bet on which way interest rates are going to go. I think it was 2002, there was a law that was passed at the state level that permitted interest rate swaps. And they sort of let school districts enter into interest rate swaps. In 2003, that’s when that was passed. [But] Vallas’s deals were passed even before that fig leaf was there as insurance. And so it means that they actually weren’t protected initially, even with an interest rate swap. But, by 2007, the bonds had a variable interest rate.
Arne Duncan, when he was the CEO of CPS and Vallas’s successor, he entered into these swap deals to mitigate the interest risk. I mentioned that banks advertise swaps as an insurance against rising interest rates. After the 2008 financial crisis, the Federal Reserve slashed interest rates near zero as part of the bank bailout. And that ended up making these deals fall on the taxpayers, because suddenly they had to pay banks much, much more money than the banks were paying them back on the interest and they were not able to refinance the loans into lower interest rates because of prepayment penalties.
Ultimately, the swaps linked to Vallas’s deals ended up costing CPS $32 million. Half of that was just sort of normal swap payments and the other half was in termination penalties. Because when CPS got a credit rating downgrade in 2015, that actually triggered a termination clause, which meant that the banks could force termination on the swaps, which they did. That ended up costing $32 million. And that was actually an even bigger deal when Vallas was in Philadelphia after Chicago. He led the Philly school district into a whole series of swap deals, in doing a bunch of variable rate bonds and swap deals. And in the end, those swaps cost Philly $161 million. Philly had to terminate all but one of those swaps, and so they paid $72 million in just swap payments, but then $90 million in termination penalties.
And so this trend of variable rate bonds more broadly was just really a problematic one. CPS entered into lots and lots of swaps. And really, that all started with Vallas taking us into a variable rate debt.
And all of these financial missteps generated losses that were ultimately used to justify austerity measures. Can you say a bit about those dynamics?
During [Mayor Rahm] Emanuel’s term, we saw the largest set of school closings in the history of the country (at the time), with 50 school closings in one year. We saw cuts to lots of other programs. Budget cuts were being used to justify taking away contractual raises that were already in teacher’s contracts. We saw a whole bunch of things that basically really were a result ultimately of the bad decisions that were started while Vallas was “fixing the school district.” The combination of the toxic swap deals he took out, the combination of the pension holidays, all those things really were ticking time bombs that really, really led to real hurt in the community long after Vallas was gone. And so, the 50 schools closed in particular, it’s just a really, really painful moment that the city has yet to really recover from.
In your report, you wrote, “Chicago mayors like Lori Lightfoot, Rahm Emanuel, and Richard M. Daley have a long history of making short-sighted decisions that helped them fill budget holes but cost taxpayers dearly in the long run. Whether it was the privatization of the city’s parking meters or scoop-and-toss financing schemes, Chicagoans are still paying for their reckless decisions.” As a Chicagoan, I couldn’t agree more. Can you speak to this neoliberal cycle of privatization and how it hurts everyday people in Chicago?
With neoliberals, there is this idea that we need to “fix” Chicago, and “fixing” Chicago means making it attractive to wealthy white people and major corporations. And what that means is we’re going to not do what needs to be done in terms of raising progressive taxes or making people who live in wealthier parts of the city — or corporations that set a base in this city — we’re not going to make them pay their fair share to actually fund investment throughout the city. Instead, we’re going to invest everything we can in just the downtown or the north side or the South Loop, West loop, ignore and completely disinvest from the South and West sides. And in doing that, we’ll figure out whatever we can do, whatever gimmicks we can come up with, to try to balance our budgets, but without doing the thing that needs to be done, which is progressive taxation.
And so we end up doing things like the disastrous parking meter deal, that overnight saw parking meter rates just [jump] from … I forget what they even were. But what I can tell you is when I go to other cities now, I smile when I have to look, “Oh, only 25 cents.” I feel happy putting money into this meter because in Chicago in places, it’s eight bucks per hour. It’s been disastrous and it’s a deal for which Mayor Daley basically used all of the city’s money for it and the city is left locked in the deal for 75 years where we’re forgoing these revenues.
We do things like the proposed privatization of Midway Airport, which thankfully hasn’t actually gone through. The privatization of CTA [Chicago Transit Authority] payments, the Ventra card disaster. But also things like red light cameras and speeding cameras … lowering the speed threshold in which we’re giving tickets so that we’re actually hitting Black and Brown folks the hardest in terms of people. Or especially with where they’re largely concentrated, [we’re] hitting Black and Brown folks hardest and hitting people who can least afford to pay them. We’ve really doubled down on this idea of making it hard to be poor in this city by increasingly relying on fines and fees, whether it’s raising the fees for city stickers for your car or all these cameras and various other things.
And we’re doing the automatic property tax increase every year linked to inflation that Lori Lightfoot did. Okay, we can do these things, but doing these things actually hit the people who already live here. They hit the families that actually already live in Chicago, particularly those with less disposable income. But what we’re not doing is increasing progressive taxes. We’re taking away the corporate head tax, which Rahm Emanuel did, which taxed large employers, or employers with more than 50 employees, a nominal tax that they paid so that among other things, accounted for the fact that a lot of suburbanites commute into the city and don’t actually pay into the property tax base. We’re not looking to add things like a financial transactions tax. We’re still doling out TIF [tax increment financing] subsidies to major corporations that make promises around job creation, but either fall short of those promises, or just like Boeing, leave once those tax breaks expire.
And so I think that this is sort of the key thing when I think about the neoliberal politics for the past, really my entire life living in Chicago. We have these mayors who’ve been obsessed with trying to figure out how to attract the kind of people they wish lived in Chicago instead of taking care of the people who actually live in Chicago.
What’s at stake in this mayoral election?
I think this election is really about the future of the city. We’ve seen over the last 12 years a forced exodus of Black families from the city. We’re seeing the cost of housing skyrocket. We’re seeing really troubling trends about which way the city is headed. We’re seeing City Hall throwing money at the police department, even though it’s clear that that hasn’t made us any safer. At the same time that we sort of talk about a public safety crisis and violent crime, every single year that I’ve been following it, we’ve only actually increased the police budget. And so clearly, if we’re increasing the police budget and crime still continues to be a problem, then clearly that’s not working.
And so I think ultimately, this election’s about what kind of city we’re going to live in. Are we going to have investments and the types of things that actually make Chicago a welcoming place, a place where Black and Brown folks can thrive? It’s about the type of city we’re going to live in and it’s about the future for our children and future generations. Is it a city that ultimately is for working people, a place where people who actually make the city work can afford to live, or is it a place that’s just a playground for the wealthy?