With a nearly empty rainy day fund, a bond rating on the edge of junk status and a new round of teacher contract negotiations underway, Chicago Public Schools has no clear way to fill its projected billion-dollar budget hole.
After decades of poorly planned borrowing and delaying pension payments, the district faces crushing bond and pension debts that are diverting more and more funding away from its educational mission.
District leadership is in flux as schools chief Barbara Byrd-Bennett last week took a leave an absence in the face of a federal investigation into a $20.5 million no-bid contract given to one of her former employers.
This will be the third straight year that CPS has been dealing with untenable pension payments. The district is running out of easy fixes. And this budget crisis is playing out against the backdrop of Gov. Bruce Rauner’s efforts to tame public employee pensions and deal with powerful unions.
Rauner and Mayor Rahm Emanuel are at odds about what to do.
Emanuel wants the state to cover the bulk of the schools’ pension contribution, noting that city taxpayers contribute to suburban and downstate teacher pensions. Rauner says that won’t happen and that CPS “could end up needing to go bankrupt.”
Without a massive cash infusion from Springfield, CPS faces a range of unappealing options.
The district could seek legislators’ permission to wring new revenues from city and state taxpayers. School officials could try to delay paying pension debts yet again, either by borrowing or seeking another so-called pension holiday. Or — through a range of cuts, savings, borrowing, penny pinching and draining the rainy day fund — the district might be able to get through another year and again put off addressing the crisis.
Analysts and advocates say CPS’ final approach to its fiscal problems will likely have to braid together a combination of those options.
“Chicago is going to have to pull rabbits out of several hats to fill its projected budget deficit,” said Robin Steans, executive director of the Advance Illinois education advocacy organization.
The past few years have already seen thousands of layoffs at CPS, and more cuts will likely be a part of any plan forward. But no matter how much the district carves out of its budget of almost $6 billion, it probably won’t be enough to solve its projected $1.1 billion deficit.
All of the choices CPS has are politically difficult and would likely face obstacles. Here is a look at the options.
Bring in more tax money
Increasing CPS’ yearly intake of city property tax or state income tax revenues could substantially address the problem, though officials have so far lacked the political will to do that.
One option would be a temporary or permanent increase in CPS’ restrictive tax cap, an idea entertained in 2013 by Emanuel’s school board president, David Vitale.
The 2-decade-old property tax cap limits the amount CPS can raise taxes annually to either the rate of inflation or 5 percent, whichever is less, a particularly restrictive provision with inflation at historic lows.
When asked in 2013 whether the district was pursuing legislative efforts to increase property taxes beyond the limit, Vitale told the Tribune that CPS officials had “proposed ideas down in Springfield.” Emanuel said it was too early to discuss the idea, and nothing came of it.
The district could levy taxes above the cap without a statutory change if voters approved the idea, as often happens in suburban districts.
CPS also could benefit from changes in the way the state distributes K-12 education funding.
A bill introduced by state Sen. Andy Manar, D-Bunker Hill, proposes a new funding formula that could increase CPS’ allocation by as much as $141 million, according to an analysis by the Illinois State Board of Education, based on 2014 data.
But the senator’s bill would also shrink other districts’ slice of the pie. The bill has not made it out of a legislative committee.
Borrow
Other governments — including the state of Illinois’ — have bought themselves time to address pension debts by borrowing. The district could issue pension obligation bonds to fill pension funds with borrowed money and allow the government to postpone payments — at great expense.
But that approach “really just treats the symptoms,” said Richard Ciccarone, president and CEO of the municipal bond analysis firm Merritt Research Services.
CPS also could take yet another so-called partial pension holiday, lowering next year’s pension payment in exchange for a promise to pay more down the road. Years of such holidays pushed through Springfield by Mayor Richard M. Daley are the main reason CPS’ payment for pension and retirement benefits spiked by $365 million in 2014 and continues to climb.
But a more recent attempt at a partial pension holiday for CPS — put forward by Emanuel in 2013 in an effort to avoid that 2014 jump — fell apart after then-Gov. Pat Quinn threatened to veto the bill. Rauner would likely be even more resistant.
Put off hard decisions
Since the pension holiday ended in 2014, the district has relied on reserves — as well as a one-time accounting maneuver to change its fiscal calendar — to cover its escalating pension payments.
But the district still expects to have $227 million left in reserves at the end of this year, plus another $174 million available from a debt service fund, according to a presentation made this month to bondholders. The district also told investors it has access to $500 million in short-term credit that can be used for operating funds.
Emptying out the rainy day fund and maxing out its credit could help CPS balance its budget for one more year.
Certain moves by the city also could help CPS eke out some savings.
From 2012 through 2014, the district received $30 million a year collected from tax increment financing districts that the city designated as “surplus.” In 2009 the district got a historic $140 million in TIF surplus funds. Because of how taxes are collected in arrears, the city could still declare a TIF surplus for 2013.
Get help from the state
Emanuel would like to see the state cover much of the district’s projected 2016 pension payment of roughly $700 million, arguing that Chicago taxpayers pay twice for pensions — through local CPS property taxes and through state income taxes that help fund pensions in other districts.
Emanuel’s campaign staffers in March pegged the hoped-for contribution from the state at $520 million. But with the state facing its own pension-fueled budget crisis, such a windfall is unlikely. Rauner pooh-poohed the idea last week in remarks to group of school superintendents, declaring that “the taxpayers of Illinois are not going to bail out the city of Chicago.”
Seek bankruptcy protection
Rauner wants to give CPS and other governments the authority to declare bankruptcy, which a bill sponsored by Rep. Ron Sandack, R-Downers Grove, would do. The bill remains in committee.
Only about half of states authorize local governments to file for bankruptcy, and half of those place restrictions on that ability. Even in states where bankruptcy is allowed, it is extremely rare.
The idea opens a new front in Rauner’s offensive against organized labor — specifically teachers unions. The governor pitched the idea at a luncheon last week for the Chicago Public Education Fund, a philanthropic group that he belongs to along with billionaire investor Ken Griffin, U.S. Commerce Secretary Penny Pritzker and members of the Chicago Board of Education.
“Bankruptcy code exists to help the organizations that get into financial trouble. There’s a reason we have bankruptcy codes,” Rauner said. “Now, insiders in our system currently have made bankruptcy in government units illegal because some people never want to have to restructure contracts that are out of control.”
Legal hurdles and a lack of political will on the local level to stamp the bankruptcy label on CPS lengthen the odds for a bankruptcy case. Such a move would require approval by a court and would represent a major blow to Emanuel. The mayor has repeatedly rejected the idea.
For a governor resistant to tax hikes, it’s easy to see how bankruptcy might look like an appealing solution to CPS’ budget troubles, said Rodney Estvan, education policy analyst for disability advocacy group Access Living.
Illinois’ constitutional protection for pension benefits makes it nearly impossible to shrink the district’s pension liabilities. Courts are considering whether to throw out benefit-reducing changes to other city and state pension plans. A 2014 push by the Emanuel administration to make similar changes at CPS failed to gain steam in Springfield.
Some analysts wonder if simply giving the school district the authority to declare bankruptcy is an effort by the governor to make those benefits more vulnerable and therefore help CPS officials win concessions from Chicago Teachers Union leaders.
In addition to the ongoing fight over pension liabilities, union and district leaders are at the bargaining table to hash out a new contract. The last contract was reached only after a seven-day teachers strike.
“The governor is trying to use the leverage he has at his disposal to get people to behave differently,” said Tim Knowles, chairman of the University of Chicago’s Urban Education Institute. “You have to assume that the union doesn’t want to find that its contract is null and void, and the city and the school district don’t want to spend the next few years navigating Detroit-style proceedings at the expense of children.”
What would happen to CPS’ pension and other debts in the event of bankruptcy is far from clear.
In Detroit, which emerged from bankruptcy at the end of last year, pensioners received about 60 percent of the value of their pension claim. Investment banks party to Detroit’s derivative contracts received only about 30 percent of the value from those deals.
CPS, which is negotiating to avoid $228 million in penalty payments related to its derivative contracts, would theoretically have more money for education if it broke free of those liabilities. But the long-term cost of declaring bankruptcy would far outweigh any short-term gains, said Michael Pagano, dean of the University of Illinois at Chicago’s College of Urban Planning and Public Affairs.
“Imagine the district needing to borrow money in the future,” Pagano said. “Are you going to trust a school district that has not honored its commitments in the past?”
Install emergency oversight authority
Even some of the fiercest critics of CPS’ financial management are calling for solutions that stop short of bankruptcy. The budget watchdog Civic Federation opposes Sandack’s bill, telling lawmakers at a March hearing that “we do not see bankruptcy as the best way forward for distressed municipalities in Illinois.”
The group, whose board includes Ciccarone and national bankruptcy expert James Spiotto, is instead advancing a proposal that would place governments in financial crisis under the control of a state panel.
The panel would help with money management calculations such as what services are affordable and whether to increase taxes or sell off assets. The Civic Federation supports allowing governments to declare bankruptcy only if the panel deems it necessary.
“Municipal bankruptcy comes with devastating and long-lasting economic and quality-of-life consequences,” Civic Federation President Laurence Msall testified before a state House judiciary committee, according to copy of his prepared remarks. He noted that bankruptcy comes with high legal costs, makes borrowing more difficult and has been linked to poorer government services.
Ciccarone called bankruptcy “the nuclear option.”
“It’s like you don’t want to say divorce when there is marital strife,” he said, “because it may work more as a self-fulfilling prophecy rather than as a deterrent.”
CPS has been under the state’s emergency oversight before. In 1980, after the district deteriorated into financial crisis, the General Assembly created the Chicago School Finance Authority to supervise schools.
The arrangement lasted until Daley took over the district in 1995. Right away he sought permission from Springfield to divert school district money slated for pensions to other purposes. That same year, the district took its first partial pension holiday.
