The Case of the Missing Millions

Chicago's shaken school system clutches at solvency

As the outspoken, well-tailored $82,500-per-year superintendent of the nation's third largest school system, Chicago's Joseph Harmon was a favorite in the Gold Coast parlors of the city's business elite. In four years on the job his scrappy resistance to busing in the racially divided system, now 80% nonwhite, won him praise from whites--and steady criticism from minorities and the Federal Government. But when Hannon recently telephoned to talk about the schools with his friend Don Reuben, a well-connected local lawyer and adviser to Chicago's Mayor Jane Byrne, he got a chilling message. "Things had changed," Hannon recalls being told. "He said if I had anything more to say I'd better have my attorney handy."

What mainly had changed was that Hannon and his aides had just been accused of multimillion-dollar mismanagement. By Byrne's estimate, Hannon's administration had allowed the school's red ink to soar to $500 million, while claiming the deficit stood no higher than $43 million. "They sat there and lied to me," said Byrne, recalling a recent upbeat discussion of school finances with Hannon and his aides. "I don't think anybody with half a brain can mistake the difference between $43 million and $500 million." That was a puzzling claim, since Byrne herself was confusingly mixing together two separate problems--last year's operating deficit of $43 million, and estimated total indebtedness to bondholders and others.

Like many other inner-city school systems, Chicago's has long lived with deficits caused by expensive "special education" programs, as well as soaring payroll and energy costs and time lags in getting reimbursements from state and federal governments (such government payments make up 60% of Chicago's $1.4 billion annual budget). Chicago's schools began to lose their delicate financial balance after plans unexpectedly fell through last month to borrow $124.6 million by selling financial notes to banks and other investors. Analysts at Moody's Investors Service, which rates the quality of investments like the school board notes, gave the notes only a low, "MIG-4" rating. Reason: the board planned to use some of the money to repay other borrowings, made in 1978. But the board had pledged to repay the 1978 notes from its own revenues, not by additional borrowing. Said one Wall Street analyst: "They naively thought the market wouldn't react negatively to the change."

Since there were no takers for the school board's $124.6 million in notes, Hannon asked Mayor Byrne to provide a city guarantee for the school board's financing. The mayor, concerned about the city's own credit rating, stalled and appointed a task force of bankers and lawyers to study the matter. Curious about the unexpected pinch, the Securities and Exchange Commission quietly began an inquiry into possible investor fraud in past sales of school notes.

Faced with all this, Hannon stunned the city, and the eleven-member school board, by handing in his resignation. The board had just renewed his four-year contract in September, but he was "tired," he said. He proposed a dramatic $70 million budget cut requiring the elimination of 1,700 jobs and the scaling down of programs for the disadvantaged. Two days later longtime School Board President John Carey also resigned, and left town on vacation, offering no explanation. After lengthy meetings with Mrs. Catherine Rohter, Carey's replacement as school board president, two of Hannon's top financial officials resigned. Mrs. Rohter let it be known that she had been unable to obtain an accurate fix on school finances, despite round-the-clock investigation by a high-priced firm of accountants. Even so, depressing details began to dribble out: to meet expenses, administrators had failed to set aside $15.9 million in federal withholding taxes due the Federal Government and $5.3 million in teachers' pension funds and annuities. "This money belonged to our employees," said Mrs. Rohter, "and the board members are extremely concerned."

With Christmas looming, the shaken school system seemed to be lurching toward a payless payday for 50,000 employees. But at the last moment temporary help came--from Illinois Governor James Thompson and Mayor Byrne. The rescue package calls for $200 million in loans, guaranteed by the city, to give Chicago's board time to come up with a long-term solution to the school system's financial woes--which will almost certainly require tax increases. In effect, Mayor Byrne explained, the school board was in receivership and the city was the credit holder.

But just why, and how much, Chicago's schools had gone into the hole, by week's end nobody could tell. Current deficit estimates still began at Joe Hannon's original $43 million. But tallies of total indebtedness to bondholders and others ran as high as $700 million. There was plenty of blame for everyone, though. Hannon; the mayor, who should have seen the problem coming; and the school board's finance committee, which did not even meet between January 1978 and March 1979, owing to "personality conflict," as one member recalls. Why did the board fail to slam on the spending brakes sooner? Says Board Member Patricia O'Hern: "They also gave financial reports to our auditors. Now if one of the big eight auditing firms couldn't see what was going on, how could I? I'm just a housewife."

This file is automatically generated by a robot program, so viewer discretion is required.