Chicago School District Financial Crisis: What Does It Mean?

Chicago Public Schools (CPS) is a district in serious financial crisis. Here is how Chicago Catalyst describes what happened last week: “Chicago Public Schools announced Wednesday that it would cut $200 million in spending for the coming school year by eliminating 1,400 positions, leaving special education vacancies open and cutting stipends for elementary school sports coaches, among other reductions.”

Here is some background.  The Chicago school district, where our current U.S. Secretary of Education Arne Duncan served as CEO from 2001 through 2008, is important for several reasons. Chicago is the nation’s third largest school district, a district coping with the issues that most seriously challenge urban schools these days—concentrated poverty, intensifying racial segregation, and inadequate state funding to address well-documented problems arising from widespread concentrated poverty.  In its new report that compares school funding across the states, the Education Law Center gives Illinois an “F” in the category of state school funding distribution: Illinois is described as “regressive”—providing less funding overall for its high-poverty school districts.  In its most recent report on overall school funding, the Center on Budget and Policy Priorities explains that Illinois is one of the states where state funding for schools remains below what it was in 2008, prior to the Great Recession—9.3 percent below its 2008 investment in inflation-adjusted dollars. And the Chicago schools have been the laboratory for “portfolio” school reform based on the expansion of school choice—closure of neighborhood schools, expansion of charter schools, and private contracting.

How did today’s financial crisis arise for Chicago’s schools?  Actually, it wasn’t sudden, explains Chris Fusco, reporter for the Sun Times:  “Over the past two decades, the nation’s third-largest school system has dug itself a massive financial hole by repeatedly borrowing money—from lines of credit to bonds to risky interest rate ‘swap’ deals—even as it skipped payments to the Chicago Teachers’ Pension Fund…. CPS still owes billions on borrowing deals dating to the mid-1990s, when then-Mayor Richard M. Daley took formal control of the school system, which then began renovating and building schools using borrowed money.  After Emanuel took office in 2011, the school board continued to borrow, including a bond deal of nearly a half-billion dollars this spring.  Those bond sales, in March and April, allowed CPS to refinance debt and repay a line of credit used to finance construction projects that brought air-conditioning, computer science labs and other improvements to schools the past two years… The more the district turns to the bond market, though, the more fees it must pay to banks, financial advisers and other borrowing professionals.”  The Sun Times reports that $18.1 million in fees has been paid to financial and legal firms since 2011.

The immediate crisis last week arose when the state refused to let CPS delay and renegotiate a payment that had come due to its teachers’ pension program.  The Chicago Tribune reports that the district made the payment it owed—$634 million—but will have to impose austerity measures as a first step to improving its overall finances: “CPS has yet to finalize a budget for the fiscal year that began Wednesday.  Last year’s operating budget totaled about $5.8 billion and the district in 2014 employed about 40,000 workers.”

Things won’t turn around immediately, however, despite cuts that will inevitably hurt the classroom. Although politicians in Illinois are blaming the pensions that have over the years been negotiated in good faith by the teachers’ union, the real problem has been politicians who have deferred required payments into the pension system and who have then borrowed from the pension fund to pay operating expenses while continuing to defer repayment of the loans. After making its payment of $634 million to the teachers’ pension fund last week, CPS turned around and requested a loan from the pension fund.  Crain’s Chicago Business explains: “In one bizarre note, officials confirmed that CPS has asked for what amounts to a $500 million loan from the Chicago Teachers’ Pension Plan—the agency that just got the $634 million that triggered the current crisis. The loan technically would be a deferral of additional payments required later this year, with CPS promising to pay it back with interest in fiscal 2017.”

As part of a solution, Mayor Rahm Emanuel has asked the state to pay a greater share of teachers’ pensions and tried to shift the blame to teachers by demanding that they substantially increase their own contributions to their pensions.  According to the Chicago Tribune, Mayor Emanuel has also pledged to restore a dedicated property tax levy for teacher pensions, a levy that would, according to Emanuel raise $175 million annually.  Such a tax existed before 1995, when it was eliminated by Mayor Richard M. Daley.

The Chicago Teachers Union has put together a thorough analysis that counters some of the rhetoric coming from the mayor and school administrators, who claim to have been saving money by reducing significantly the costs for school administration in recent years: “But we can see that despite its narrative of increasing supports and delegating control to the schools, CPS continues to invest in departments to implement its top down agenda.  The Office of Strategy Management was newly created in 2012, and was budgeted for just under $1 million this fiscal year.  Combined with other rearranged departments involved in standardized-testing (Department of Assessment), expanding school choice (Innovation and Incubation), and test-based management of schools (Accountability), CPS now budgets a total of $6.1 million just for the position salaries across these departments.  Departments with similar functions in 2011, including New School Development, the Office of Performance, Office of Student Assessment, and School Demographics and Planning, budgeted a total of $5.5 million for position salaries…  As they have rearranged network offices numerous times, a notable trend is that more of the salaried positions across those offices are for upper and middle management.”

The Chicago Teachers Union report scathingly criticizes the false economies of a vast increase in contracting-out of services once performed by school employees: “The $260 million three-year contract with Aramark for custodial services has already gone $22 million over budget in its first year,” leaving schools poorly served and even without adequate bathroom supplies for the children.  “The $20 million no-bid contract for SUPES was approved even though a principal training initiative was already in place through the Chicago Leadership Collaborative.”   CPS has increased the outsourcing of school nursing services, “reaching over $30 million in FY 2015.  CTU nurses have reported that nurses from the temporary staffing agencies have not shown up for work… (O)utsourced services only create another managerial obstacle for schools to navigate—instead of a dependable resource.”

According to the Sun Times, “CPS’ credit rating has plummeted to ‘junk’ status, forcing up interest rates on its most recent bond sale.”