CHICAGO — Chicago Mayor Rahm Emanuel and Chicago Public Schools’ leaders shed little light Wednesday on how the cash-strapped district will afford the estimated $300 million price tag for a new four-year teachers’ contract that ended the system’s first strike in 25 years.
The Chicago Teachers Union’s House of Delegates voted to suspend the strike Tuesday after reviewing the pact struck between the district and CTU leaders following compromises from both sides. Rank and file teachers still must formally approve the contract but schools reopened Wednesday.
The deal carries a price tag of $74 million annually over its four-year term. The contract runs for three years with an option for a fourth year. The cost reflects pay increases of 2% to 3% annually and additional increases based on experience and savings from cost-of-living adjustment reductions, layoff benefits, sick day compensation, and a new wellness program.
The teachers’ five-year 2007 contract cost an additional $129 million annually although the current board appointed by Emanuel did not fund the 4% pay increase called for in the final year of the contract, a decision that escalated discord between the district leadership and teachers. The teachers’ 2003 contract cost $133 million annually, according to CPS documents.
“We will search all sources possible for additional revenue,” said Chicago Board of Education president David Vitale in an interview on the local public television program Chicago Tonight. “We will additionally have to deal with saving as much money as we can in basic overhead and in other ways we run the system. We will also have to look at restructuring the system and rightsizing it for the number of students we have.”
Vitale’s comments suggest that the district will seek to close schools, but after the seven-day strike that began early last week and ended Tuesday teachers have vowed to fight school closures. Teachers believe the district may seek to close up to 200 of its 675 schools, but Vitale dismissed that number and said no plans have been made on how to deal with the 100,000 in excess seat capacity in the system. About 350,000 students attend CPS schools.
Emanuel did not offer any additional insight on funding Wednesday, saying officials would continue to seek out savings in the central administrative office and “other things we have to do as a city to bring the budget in line.”
The board approved a $5.2 billion fiscal 2013 budget last month that did not provide funding for new teachers raises so it must revisit the spending plan. It’s a difficult task given the district’s near draining of reserves to eliminate a $665 million deficit this year and fiscal reckoning looming next year in a projected $1 billion gap when a three-year pension holiday expires forcing a $330 million increase in pension payments.
CPS’ reliance on one-shots like the use of reserves drove a round of negative credit action. The district is planning a $100 million debt restructuring next year for relief in the fiscal 2014 budget and could increase that amount but analysts could also punish it for using non-recurring revenues. Officials are also hoping for pension reforms at the state level.
The Civic Federation of Chicago, which has long tracked CPS’ finances, questioned how the district would pay for the contract and believes a system-wide restructuring that trims the number of schools would be a welcome outcome.
“Because they have very little reserves remaining and no funds set aside to pay for the contract raises, CPS which already faces enormous financial challenges is going to have a very hard time accommodating the increases and will likely have reduce personnel and schools,” said federation president Laurence Msall. The federation also attributes the district’s fiscal crisis to its failure to fully fund its pensions.
Fitch Ratings earlier this month raised concerns over a strike’s impact on the district’s ability to manage its finances while implementing measures to improve educational standards. Fitch rates the district A-plus with a negative outlook.
Moody’s Investors Service last week warned in a special commentary that the district could ill-afford the added pressures on its credit. “The resolution of the strike and the outcome of negotiations…could materially impact projected budget deficits for fiscal 2013 and beyond,” warned Moody’s, which assigns an A1 to the board’s $6 billion of debt and a negative outlook.
Standard & Poor’s rates CPS A-plus with a stable outlook.
Nationally, the standoff was being watched also for its impact on the relationship between public unions and governments, an especially timely issue as governments seek concessions from unions to address fiscal stress. Unions could be emboldened by the outcome or vice versa, market participants have said.
The district last month sold $470 million of new-money debt that was back-loaded. Rising debt service to repay the district’s heavy borrowing for more than a decade as officials sought to renovate and rebuild dilapidated schools is also pressuring its balance sheet. The district plans just limited new money borrowing over the next five years of $100 million to $200 million annually.
The board prevailed in preserving Emanuel’s signature proposal to extend the school day and school year and it won changes — required under state legislation — giving more weight to student test scores in teacher evaluations, and giving principals flexibility on hiring.
The union won concessions from the district in reducing the amount of weight given to scores in teacher assessments, and received higher raises than initially offered, and no changes were made to healthcare benefits, and more teachers will be hired to staff the longer school day.
