Mayor Brandon Johnson's finance team wants the Chicago Public Schools to refinance debt to free up money so it can make a $175 million Municipal Employees' Annuity and Benefit Fund payment to the city.
That's one takeaway from two days of hearings meant to clarify for the Board of Education the choices CPS faces heading into a vote next week on the amended fiscal 2025 budget.
The new hybrid board is composed of 11 members appointed by the mayor and 10 elected members. The amended budget requires a two-thirds majority vote.
CPS is not legally required to make the MEABF payment, but the city counted on it in its 2025 budget.
Contract negotiations continue between the district and the Chicago Teachers Union against the backdrop of both CPS and Chicago facing a
The amended CPS budget would increase the operating budget to $8.57 million from the $8.43 billion in the $9.9 billion FY2025 budget passed last year.
Chicago's 2025 budget released $298 million of tax increment financing surplus for CPS, of which $139 million remains unspent.
With staffing cuts off the table and no ability to raise taxes or levy new ones on its own, CPS' choice appeared to be to spend the TIF money on collective bargaining agreements or on the MEABF payment.
"Other resources or budgetary reductions beyond those needed to keep the initial FY2025 budget in balance will need to be identified to cover [the MEABF] payment," Mike Sitkowski, the district's chief budget officer, told the board. "We are not legally allowed to balance our budget using the proceeds from debt."
"[The] $139 million is not enough money to cover both the labor agreements and the pension reimbursement, and as the district has reiterated before, CPS is not legally allowed to balance the budget by taking out a loan and using it as revenue," a CPS spokesperson said. "CEO [Pedro] Martinez has advocated for the last remaining funding for this fiscal year to go toward a pay increase for our talented and valued educators for the first year of their pending new contracts, instead of reimbursing the city for a pension payment."
CPS said a forthcoming report from Baker Tilly on the district's budgetary situation will be shared first with the board, not district staff.
Board President Sean Harden said at Thursday's meeting the report is expected out in the next few days. Baker Tilly declined to comment on client matters.
"This compels a need for the board — as well as the public and the media — to hear from bond counsel and Baker Tilly before casting a vote next week," Joe Ferguson, president of fiscal watchdog the Civic Federation of Chicago, told The Bond Buyer. "Until we do, it is hard to evaluate exactly where the city stands legally."
At Friday's board meeting, Chicago's Chief Financial Officer Jill Jaworski advocated issuing bonds to refund about $240 million of debt, some tax-exempt and some taxable bonds.
"If you issue bonds that take existing debt coming due, and you refinance it out over a longer term, what you actually do is reduce your costs — you lower your expenditures," she told the board.
"If it involves or requires extending the term of payment, that is kicking the can down the road," Ferguson said, noting that Jaworski is not an impartial expert witness but an interested party, albeit one with considerable expertise. "That is problematic in and of itself."
Jaworski said at the hearing that she advised CPS in 2016 and 2017, when deficit financings were needed to balance the budget, and "those structures that we used at that time were not illegal — nobody lost their board membership … and no CPS staff lost their jobs."
CPS CFO Miroslava Mejia Krug was noncommittal about Jaworski's proposal, saying she would like more time to study it.
"We have to borrow about $600 million a year for capital," Krug said at the hearing. "We know that we're going to be doing refinancings next year … Our budget for 2026 already includes some assumptions of refinancings that we're going to do for 2026. What I'm hoping is that everything that we're doing will keep our ratings stable so we're not going to receive any downgrade … and that [it] doesn't impact our ability to go to market."
KBRA on Friday
CPS CEO Pedro Martinez, whom a fully appointed board
The administration's chief labor negotiator heard from CTU staff that if the $139 million TIF surplus does not go toward collective bargaining agreements, it will result in a strike, Martinez said.
Board member Jitu Brown stressed the importance of making the MEABF payment and worried about reciprocity from the city — which gives CPS a laundry list of financial support and breaks on fees — if CPS fails to pay.
His point was echoed by two aldermen at Friday's hearing. Ward 25 Alderman Byron Sigcho Lopez called out Martinez, saying the CEO committed to making the MEABF payment.
Martinez said he requested $484 million in TIF surplus from City Council in order to make the payment, and the total released came in "very short" of that. Jaworski told the board she doesn't believe the City Council thought the $484 million request was serious, or that falling short would result in CPS reneging on the payment.
"It's been stated, and it's true, that you all have no obligation to reimburse the city of Chicago … for the pension payment that we have made," Ward 28 Alderman Jason Ervin said Friday. "Leaving us holding the bag is not the best … We share constituencies."
Ervin pointedly noted, "Chicago currently supports CPS to the tune of $1.25 billion."
"It is unseemly for one body of local government to make threats to an adjacent and intertwined other body of local government," Ferguson said, adding, such threats are hollow and demonstrate the weakness of the city's position.
"It certainly is not helpful," Lisa Washburn, managing director at Municipal Market Analytics, said of the MEABF impasse. "I would put [a potential missing MEABF payment] in the bucket of credit negative for Chicago. If CPS ends up refinancing, that's credit negative for CPS. Somebody is going to be negatively impacted regardless. It's just who and by how much."
Washburn cast doubt on the argument that a refinancing will ultimately lower costs. "You can always refinance to save money in the near term, but typically it ends up costing more over the longer term," she said. "It's another example of pushing out problems to future budgets and making them more difficult."
The Civic Federation released a fiscal 2025
"These financial strains, coupled with long-term issues such as declining enrollment, rising expenditures, pension liabilities, and looming credit downgrades, demand immediate and strategic action," the nonprofit said.
It added, "Unresolved pension costs and backloaded union agreements risk deficits of $508.7 million in FY2026 and $557.8 million in FY2027." Those projections do not include extra costs from collective bargaining agreements.
The Civic Federation urged CPS to develop a long-term financial plan; right-size district operations; advocate for state funding; resolve city financial entanglements; conduct financial projects; strengthen reserves; enhance financial transparency and strengthen its board's capacity.
Ferguson said Jaworski's proposal "begs the question of whether what we are doing is refinancing in ways that lean into fiscal 2026 activity. … What that constitutes is a mid-year borrowing. Because what we're talking about is new debt to replace existing bonds."
"To the extent there's disagreement, I think it's really important that we actually hear from bond counsel," he added. "And to the extent that that is in any way withheld, it is leaving the board members at risk of not having adequate counsel and legal advice on something that may subject them to liability."
As for Jaworski's argument before the board that "there's been inequitable funding to CPS for a long time, and that needs to be solved," Ferguson emphasized the distinction between state funding of teacher pensions and the evidence-based funding formula. There is a disparity in the former arena, he said, but CPS is treated the same way other schools are under the EBF.
There is some question as to whether or not the current EBF algorithm accounts for certain conditions at CPS, Ferguson said — meaning it may not adequately address various needs that are more prevalent in the CPS population.
"It's not unreasonable to take a look at that and whether CPS might deserve more money under the existing system," Ferguson said.
"Everybody needs to realize, especially against the backdrop of what's happening in Washington, the state has very limited options," he added. Those options include putting the district under state oversight.
"It could take the form of a complete takeover of the system, or it could be … [more] financial oversight," Ferguson said. "If the state is going to come in with some form of relief for the system, it is more than reasonable for the state to say we need some guardrails of how that money is going to be used."
S&P Global Ratings assigns the Board of Education a speculative-grade rating of BB-plus with a stable outlook. Moody's Ratings assigns the board a rating of Ba1, one notch below investment grade. Both S&P and Moody's have warned the board its rating trajectory will depend on the outcome of contract negotiations and the district's willingness to cut costs.
Fitch Ratings gives the board an issuer default rating and unlimited tax general obligation bond rating of BB-plus and a dedicated capital improvement tax bond rating of A. The outlook is stable.
KBRA rates CPS GO bonds either BBB or BBB-plus, depending on whether the bonds have a special revenue bond legal opinion attached. The outlook is negative.
