Chicago Public Schools approves budget, Civic Federation warns of challenges

The Chicago Public Schools board of education unanimously approved the $9.9 billion fiscal 2025 budget Thursday. 

The vote came on the heels of a report from the Civic Federation of Chicago, a nonprofit fiscal watchdog, that warned the budget "presents a temporary solution to a long-term structural financial problem." 

The budget represents an increase of roughly $500 million over the previous fiscal year, driven mostly by growth in the district's capital budget, according to a presentation by Chief Budget Officer Michael Sitkowski to the CPS board. That includes $8.4 billion for the operating budget; $611 million for the capital budget, funded largely through bonds; and $817 million for the debt service budget. 

Sitkowski told the board Thursday the district's debt is all fixed-rate, but because of a lack of dedicated revenue sources, roughly 20% of the district's state funding goes toward debt service.

CPS has about $9.3 billion of outstanding long-term debt. The 2025 plan includes $817 million in appropriations for long-term debt service payments.

It also budgets for $10.5 million in interest costs on short-term borrowing — $9.5 million of that for interest payments on tax anticipation notes, payable from education fund real estate property taxes levied by the board — to generate cash flow during the next fiscal year, according to the proposed budget.

The budget relies on the final $233 million tranche of federal COVID relief funds and other one-time revenue sources to close a $505 million deficit. 

"The plan as presented manages to close [the] budget deficit through a series of strategies, including operational reductions and efficiencies, without resorting to irresponsible fiscal practices, like issuing debt to fund operations or depleting reserves," the Civic Federation report notes.

However, in addition to relying on one-time money, the nonprofit added, the budget is "contingent upon outstanding collective bargaining negotiations currently estimated to cost $128 million, and a decision on how much CPS will reimburse the city of Chicago for non-teacher employee pensions. The city had been counting on a reimbursement of $175 million." 

The Civic Federation warned that the district's projected budget deficits over the next five fiscal years of over a half-billion dollars do not account for additional salary and personnel costs, "which signals even larger structural deficits ahead." 

"Assuming 4% raises for teachers and principals, as well as a $175 million contribution from CPS to the city's pension fund for municipal employees, the FY2026 deficit could increase to $933 million," the report added.

The 2025 budget plans for an additional 513 teachers and 337 school support staff, including paraprofessionals, special education classroom assistants and restorative justice coordinators. 

Civic Federation President Joe Ferguson said the staffing increases exacerbate the district's budget gap just as the federal relief is about to dry up.

"The proposed [staffing] increases against the backdrop of a larger budget deficit raise the question of whether fiscal capacity and sustainability allow for this," Ferguson said. "Compared to many of its peers, CPS used a higher percentage of its federal COVID-era funding for operations, including a substantial expansion of staff and programming, thus applying a temporary revenue source for expansion of continuing operations ... CPS has substantially raised salaries and benefits for thousands of new teachers and staff — the equivalent of having used a tax return to put a down payment on a house with a mortgage it can't meet."

Fitch Ratings last October rated the district's unlimited tax general obligation bonds BB-plus and affirmed its BB-plus issuer default rating and A rating on dedicated capital improvement tax bonds. The outlook is stable.

"The buildup of reserves since 2018 is a key credit strength for the Chicago Board of Education, though continuing to patch the budget with one-time monies for recurring spending will exacerbate the budget's structural imbalance, making a future drawdown on reserves more likely," said Fitch Director Ashlee Gabrysch.

Kroll Bond Rating Agency assigns a BBB rating to the board of education's fiscal 2022 and 2023 general obligation debt and a BBB-plus rating to its capital improvement tax bonds, with a stable outlook. Moody's Ratings in January upgraded the board of education to Ba1 from Ba2. The rating outlook is positive.

And S&P Global Ratings assigns a BB-plus long-term rating to the district's general obligation debt and alternate revenue source bonds. The outlook is stable.

S&P Director Ying Huang declined to comment directly on the reported suggestion of Chicago Mayor Brandon Johnson's administration that CPS borrow $300 million for operating costs, but said S&P generally views debt issued for operating purposes negatively, "as it's not a sustainable approach to achieve or maintain structural balance and will exacerbate the issuer's debt burden."

As for the use of federal relief funds to balance the deficit, she said, "the board's ability to scale its operations to match expenditures with available revenues and manage the size of short-term borrowing will be critical in avoiding potential downward rating pressure."

In a January credit opinion, Moody's noted the district ended fiscal 2023 with no tax anticipation notes outstanding. However, CPS still has very low liquidity relative to its peers, the rating agency said, especially in the general fund — and that's the biggest constraint to its credit profile.

"The district will continue to use TANs because cash balances are not high enough to maintain cash flow when the district is awaiting its second installment of property taxes," the rating agency said. "The district deposits funds with the bond trustee three to 18 months in advance of debt service payment for the following year. This deposit is the primary reason why available general fund net cash is much lower than operating fund net cash position, which includes the funds on deposit with the trustee."

The district's 2025 budget also marks a shift from student-based budgeting — in which dollars follow students, who are weighted based on demographic characteristics — to a fully need-based funding model, which offers additional resources for schools with greater need.

A working paper from the Federal Reserve Bank of Chicago last September found student-based budgeting created an expenditure gap that benefited students from low-income families, with external fundraising by affluent districts offsetting the difference. The student-based approach "resulted in greater equity in school funding, with relatively more funds being directed toward schools serving higher shares of low-income students," the paper's authors wrote. 

But at the meeting Thursday, board member Michelle Morales referred to a vicious cycle in which under-resourced schools had lost enrollment, causing them to bleed even more funding. 

Illinois public schools that serve low-income populations face greater funding challenges than their peers in other states. A 2018 report by The Education Trust, a Washington, D.C.-based nonprofit dedicated to equity in education, found that Illinois and Missouri had the most regressive funding gaps in the nation between districts serving the most and fewest students in poverty. 

In those two states, the report noted, "the highest poverty districts receive at least 15% less state and local funds than the lowest poverty districts."

Illinois also had some of the lowest district revenues derived from the state, ranking 42nd out of the 46 states included in the nonprofit's analysis, ahead of only Pennsylvania, New Hampshire, Nebraska and South Dakota. (Alaska, Hawaii, Nevada and Vermont were excluded, due in part to revenue tabulating differences.)

The CPS presentation notes the district's "structural budget issues remain moving forward due mainly to a lack of adequate and equitable funding from the state." 

Over half (59%) of the district's operating revenue comes from local sources: property taxes, personal property replacement taxes and tax increment financing surplus. The state contributes 25% of operating revenues, including evidence-based funding and categorical grants. The federal government chips in 16% of operating revenues, but federal relief funding ends September 30.

The presentation points out the state treats CPS differently than every other district in the state on teacher pensions — it funds teacher pensions for others but provides 35% of pension funding for CPS — and argues that "$1.1 billion in additional funding would be available if the state fully funded [the] evidence-based funding formula."

"Illinois should play an even more significant role in supporting Illinois' school districts," the Civic Federation's report concluded. "Chicago Public Schools is still only funded at 81% of adequacy based on the [evidence-based funding] formula, and a majority of other school districts around the state are also under the state's prescribed 90% of adequacy funding targets."

But Illinois Gov. J.B. Pritzker pushed back on the arguments by CPS and Mayor Brandon Johnson that the state owes CPS more money, saying it's not "the job of Springfield to rescue the school districts that might have been irresponsible with the one-time money they received," according to the Chicago Sun-Times.

"When [evidence-based funding] was passed, the state's significant role in funding schools was agreed to and clear," Pritzker spokesperson Alex Gough said. "Illinois would invest $350 million more each year into EBF until all school districts were 90% funded. We agree that the state should continue to fund EBF.

"In the governor's administration, Illinois has played an even more significant role in funding schools in FY25 alone," he added. "That includes a $75 million increase in the Early Childhood Block Grant, as part of year two of Smart Start Illinois, which funds preschool, and $45 million to continue year two of the three-year pilot for Teacher Vacancy Grants." 

A CPS spokesperson said the 2025 budget's $500 million increase is necessary "to address vital facility repairs," and pointed to a statement from CPS CEO Pedro Martinez that this budget "puts teaching and learning front and center where [they] belong."  

"We recognize that future budgets will require new, sustained streams of revenue," board President Jianan Shi said Thursday. "Everything is on the table. We are all responsible for ensuring the success of our students."