Chicago Tribune (Sunday)

New CPS contracts rely on iffy funding

Mayor, district counting on money that may not be there after 1st year

- By Hal Dardick and Hannah Leone

Mayor Lori Lightfoot and Chicago Public Schools leaders have come up with enough cash to pay for the first year of new union contracts, relying on a couple of one-time windfalls to patch up the spending plan.

But for the next four years, they’re taking a bit of a leap by counting on money that’s not guaranteed to materializ­e. The district is banking on the state to keep its pledge to increase school funding, which can change year to year. CPS also is relying on its own ability to significan­tly raise property taxes, which assumes a healthy economy.

CPS officials said their revenue projection­s are based on historical trends and noted that the state is committed by law to increasing funding. The contracts “are responsibl­e and affordable based on conservati­ve assumption­s about our finances and anticipate­d revenue,” district spokesman Michael Passman said in a statement.

Wall Street, however, is worried about the state’s ability to keep increasing CPS funding by up to $70 million a year.

“Should Illinois’ own financial problems result in reduced (school) funding … the fiscal pressure (on CPS) could be immense,” Standard & Poor’s Global Ratings analysts wrote in a report.

Ratings agencies noted that

CPS is no longer mired in an immediate financial crisis, as it was before the state approved additional school funding in 2017. But S&P also pointed out the district’s finances are still precarious.

The district is working to build up adequate reserves, deal with growing teacher pension system debt and borrow less during the course of each school year to keep up with the bills.

As a result, S&P, Fitch Ratings and Moody’s Investors Service continue to list CPS bonds as noninvestm­ent grade — often referred to as “junk” ratings. That shows Wall Street has limited faith in CPS’ ability to pay its debts and means the district has to pay more to borrow money, compoundin­g its financial woes.

CPS’ financial challenges loom as the Chicago Teachers Union late Friday announced members had voted to ratify their contract. Although Lightfoot cast the tentative deal as a good one that was “in CTU terms, historic,” some union members have been critical of their leadership for not getting even more.

This year’s tab

To settle a two-week strike, CPS negotiator­s agreed to five-year contracts that were more costly than anticipate­d.

The contracts significan­tly boosted employee pay and committed the district to hiring more than 750 social workers, nurses, special education case managers, counselors and other support personnel over five years. CPS also agreed to set aside $45 million annually to reduce class sizes, support sports programmin­g and increase pay for veteran teachers.

The Service Employees

Internatio­nal Union Local 73, which represents custodians, security guards, special education classroom assistants and bus aides, already has ratified its contract. The CTU approved late Friday, and the Board of Education is scheduled to vote on both contracts Wednesday.

The additional contract costs for the current school year total $137 million: $115 million for the CTU contract and $22 million for the SEIU contract. In addition, the district has to pay $60 million or so in teacher pension contributi­ons that the city had been picking up, courtesy of Lightfoot’s proposed city budget.

CPS already included $89 million in its budget to cover higher personnel costs, but that amount now falls short of what’s needed under the tentative contract deals. To cover the rest, plus the additional pension costs, CPS is planning to rely mostly on two pots of money: an extra $66 million in tax increment finance district surplus funding freed up by the city, and $68 million saved by not having to pay teachers for six of the 11 school days lost to the strike.

Risks ahead

CPS still has to come up with money to cover the remaining years of both contracts. The CTU contract would run through the 2023-24 school year, while the backdated SEIU contract would expire a year earlier.

The district won’t be able to bank savings from strike days. And TIF surpluses could decline in the coming years, so the district can’t count on the same level of that money.

It can, however, be sure that the costs related to the new contracts will continue to rise. By the fifth year of the CTU contract, CPS will need $504 million more a year to cover the added costs. For SEIU, that cost will be at least $54 million. That comes to $558 million in additional costs by the 2024 budget year — about 8% more than the $7 billion the district spent last year.

In addition, CPS expects City Hall to continue to require the district to pay at least $60 million a year in pension contributi­ons that the city previously covered.

CTU says the city should resume covering the pension costs it made CPS pick up this year.

“This is something the city has structural­ly assumed the cost of for decades,” said Pavlyn Jankov, education policy analyst for CTU, referring to the pension costs. “They’re shifting that cost onto CPS. We think that should be turned around and put back into CPS.”

So where does the money come to pay for the next four years of the contract?

CPS officials say they can come up with all the money they need from two sources: a yearly boost in property taxes by as much as state law allows, and annual bumps in state school funding that lawmakers committed to two years ago. Maxing out property tax increases is expected to generate more than $100 million a year, and the state is supposed to chip in $60 million to $70 million more each year.

Neither is a sure thing, however.

The state’s property tax cap law limits annual CPS property tax hikes to 5% or the rate of inflation, whichever is lower — plus any additional taxes that can be collected from newly constructe­d buildings just placed on the tax rolls.

In addition, CPS charges a separate property tax dedicated to teacher pension fund contributi­ons that is not subject to the those limitation­s. It’s set at a fixed rate, meaning the district can collect even more money when city property values rise substantia­lly.

But all that anticipate­d growth in property tax money could go by the wayside if there’s a significan­t economic downturn that suppresses property values, dampens inflation or both. In the aftermath of the Great Recession, CPS property tax collection­s declined by $110 million in school year 2010-11, according to the district’s budget reports.

Relying on state government historical­ly hasn’t always panned out for CPS. When state finances are tight, school funding increases tend not to be as big. Currently, the state is grappling with a host of financial issues that include a bill backlog of more than $6 billion and a rising pension debt that now tallies nearly $134 billion.

Gov. J.B. Pritzker hopes to address the state’s financial woes — and keep up with the state’s commitment to increased education funding — by enacting a graduated income tax with higher tax rates on individual­s and joint filers whose income tops $250,000. Voters will decide that question in November 2020. If voters reject it, the state’s ability to keep its commitment­s could be imperiled.

The Civic Federation budget watchdog group identified another uncertaint­y related to state funding. If enrollment continues to decline, as it has in recent years, and city property values continue to rise, CPS’ level of state funding could decline.

That’s because the state

CPS has to come up with money to cover the remaining years of both contracts. The CTU contract would run through the 2023-24 school year; the backdated SEIU pact would expire a year earlier.

uses enrollment figures and property values to gauge how much each school district can afford to pay for education costs. If a district has fewer students, and more property wealth to tax, the state figures it can pick up more of its own tab.

CPS, however, maintains that it would keep the highest level of state funding “in the years ahead.”

The Lightfoot administra­tion tried to put the contract costs in perspectiv­e. Jennie Huang Bennett, the city’s chief financial officer and CPS’ former top financial official, said “$100 million on the scale of a $6 billion (day-to-day operating) budget is really not a lot for them to find.”

In addition, the district also is looking for ways to cut costs, said Bennett, who noted the unusually long length of the five-year contracts allows CPS to plan further into the future.

Other challenges

Although the 2017 state school funding revamp pulled CPS away from the brink of insolvency, the district’s finances are still shaky — as evidenced in its junk bond ratings.

For most of the current school year, CPS will have “a negative cash position,” according to a Civic Federation’s analysis. That means the district will have to use its line of credit to keep up with paying its bills — a frowned-upon financial practice that’s akin to a family using the credit card to pay for everyday essentials, like groceries.

Meanwhile, CPS has relied heavily on long-term borrowing in recent years to build new schools and fix old ones. That debt now stands at about $8.4 billion, and more borrowing is anticipate­d this year.

The cost for paying down that long-term debt now runs about $700 million a year, and it’s expected to grow to more than $800 million over the next eight years, according to CPS budget documents.

Also growing is the district’s debt to the Chicago Teachers’ Pension Fund, which stands at a recordhigh $12.2 billion. The retirement fund has less than half of the amount of money it needs to pay for future retiree benefits.

The shortfall means CPS is making about $120 million of its yearly pension contributi­ons out of funds that would otherwise go to classroom education. The special property tax dedicated to pensions, coupled with increased state help, isn’t expected to cover the district’s entire pension tab until 2031. Grappling with all of that will be even more difficult now that the contracts call for the district to spend more money than it had anticipate­d.

“The structural gap created by the contract is not insurmount­able, in our opinion, but will make producing structural­ly balanced budgets even more difficult over the next five years,” S&P concluded. “The ability of the district to continue to improve is financial standing in fiscal years 2021-2024 is uncertain.”

CTU maintains that the district can afford the costs of the new contract, noting the pledged increases in state funding and contending that the city could free up even more tax increment money.

“The big picture is that the mayor has options to give CPS a lot more,” Jankov said.

 ?? BRIAN CASSELLA/CHICAGO TRIBUNE ?? Mayor Lori Lightfoot arrives with CPS CEO Janice Jackson to make a statement about the Chicago Teachers Union strike on Oct. 29 at City Hall.
BRIAN CASSELLA/CHICAGO TRIBUNE Mayor Lori Lightfoot arrives with CPS CEO Janice Jackson to make a statement about the Chicago Teachers Union strike on Oct. 29 at City Hall.

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