Federal grant uncertainty adds to Chicago schools' stress

Bloomberg News

Most federal funding in this year's Chicago Public Schools budget will be unaffected by a pause on federal grants and loans ordered by the Trump White House, even if that pause is upheld by courts, CPS CEO Pedro Martinez said at a Board of Education meeting Thursday. 

The White House rescinded the memo announcing the freeze two days after releasing it, but Democrats warned the Trump administration will keep trying to freeze funds to local governments.

Elon Musk's "DOGE" task force, without clear legal authority, has accessed Treasury payment systems to block grants.

Risks of a federal funding freeze pile on to the problems facing CPS, where management turmoil has distracted from efforts to get the largely junk-rated CPS's fiscal house in order; enrollment is down some 18% from a decade ago; district officials and the Chicago Teachers Union are wrangling over a new contract; and rumors of immigration raids have stirred fear.

Martinez, who has filed a lawsuit alleging breach of contract over the previous CPS board's move to fire him, welcomed the newly-installed hybrid board to its first meeting Thursday. Twenty board members were present, 10 of them elected, for the first time in the school district's history, and the rest appointed by the mayor.

Martinez said contract negotiations are currently in the fact-finding stage, during which an independent fact finder evaluates briefings from both sides on their negotiation positions.

"We are confident that the fact-finder will confirm what CPS has been sharing for months about the financial condition of CPS," he said. "The reality is that CPS has barely any financial reserves, only three days of operating expenses. In fact, we're facing rising deficits for the upcoming years."

Martinez's position was underscored on Jan. 28, when nonprofit fiscal watchdog the Civic Federation of Chicago released an explainer stressing that CPS cannot use its stated general fund reserves to pay for salary increases and other CTU demands.

A fiscal year 2024 audit put the district's fund balance at $1.3 billion as of June 30. 

The reserves are not truly available; the fund balance amount "reflects an accounting mechanism that represents projected future income, not actual cash on hand," the Civic Federation said. 

"The fund balance of $1.3 billion, as reported in CPS' FY2024 balance sheet, has no bearing on the amount of cash actually available on hand at year-end," the Civic Federation said. "CPS only had $66 million in cash and investments on hand at year-end FY2024, enough to cover only approximately three days of operating expenses."

The district's cash flow problems are so deep that the reserve fund never gets refilled, the federation wrote. CPS's February debt service payment on long-term bonds and its June teachers' pension contribution are both due before the March and August lump-sum property tax revenue payments, and the district spends about half the year in a negative cash position, the Civic Federation noted.  

To cover costs while it's waiting for property tax revenue, the district relies on tax anticipation notes.

"The property tax revenue is already spoken for to repay the TANs, [so] it is not available for other purposes," the Civic Federation said. "To reach meaningful fund balance levels, the District would need an additional $1 billion in cash."

S&P Global Ratings and Moody's Ratings have warned the board that its rating trajectory will depend on the outcome of contract negotiations and the district's willingness to cut costs. S&P rates the board speculative-grade BB-plus with a stable outlook. Moody's rates the board Ba1, one notch below investment grade. 

Fitch Ratings assigns 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.

Kroll Bond Rating Agency 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 stable.

Civic Federation President Joe Ferguson said the new contract will probably not be much of a burden on fiscal year 2025, but "the ability to cut costs to pay for an agreement in the out years is a much harder, much bigger question, and that will be driven by who comes in to succeed Pedro Martinez," to whom the board basically gave six months' notice in December.

"CTU has wonderful, experienced people with fiscal acumen as part of the larger team, and so I would like to assume that there is awareness of the gravity of the fiscal situation, but whether that matters is a real question right now," Ferguson added. "The CTU president is up for re-election in May. And that may disincline her and the union toward regarding the fiscal situation as something that is relevant."

Still, the new hybrid board has a chance to reset the discussion around fiscal concerns. And while "there is almost no real financial expertise and operational expertise on the new board to identify sources of funding and to prioritize the building of a reserve," Ferguson said, "I think we're all looking for signs that these sorts of considerations are in mind."

He said there's been more talk than action in securing new revenue from the state government.

"It's certainly made a priority as a matter of strategy and rhetoric," Ferguson said. "We're not seeing it as a priority in terms of thoughtful, meaningful conversation with the right people in Springfield, with the requisite underlying analysis being shared."

According to a spreadsheet shared with The Bond Buyer, the CTU and the district are still negotiating over a laundry list of CTU priorities, including 5% raises, smaller class sizes and 300 additional counselor positions, among other things.

The district has released a roadmap aimed at resolving the roughly dozen and a half outstanding priorities of the union.

"CPS remains committed to collaborating with the CTU to reach a fair and sustainable agreement that prioritizes the well-being of our students, staff, and community," said a CPS spokesperson, who declined to be named. "The CPS bargaining team is dedicated to reaching a mutually beneficial agreement at the negotiation table."
 
Martinez said at the board meeting that the district is also in the midst of preparing for immigration enforcement actions by federal agents.

Leaks from the White House saying Chicago will be targeted for immigration raids threaten not only to undermine operations at CPS, but also to unravel the district's hard-won improvements in student performance, said Anthony Capote, senior policy analyst at the Immigration Research Initiative, a nonpartisan think tank that studies immigrant integration.

"When you have kids who are afraid, it's going to impact not only whether they come to school but how well they do in school," Capote said. "This is one of the reasons why schools have been considered protected sites for so long. It's one of the main tasks that our government has, to educate young people."

Capote noted that 3% of minors in the Chicago area are immigrants themselves and children with at least one immigrant adult in their immediate family comprise 38% of all K-12 students in Chicago. 

"It's a pretty big strain on schools in Chicago," IRI Director David Dyssegaard Kallick said of the new administration's immigration policy. "At the same time as you're creating an added burden for the schools, you're threatening the tax base that supports the schools… People who are undocumented are paying taxes." 

Martinez on Thursday addressed the surprise appearance by Secret Service agents at Hamline Elementary School on Friday, Jan. 24. School officials, seeing "Department of Homeland Security" on the agents' identification, assumed they were from Immigration and Customs Enforcement, refused them entry and alerted parents, triggering panic at the school, whose population is 92% Latino, according to ABC7 News. 

"It was scary — there was no advance notice," Martinez said. "And there's no evidence of cards being left."

Federal authorities have always coordinated with the district when they were investigating something in the past. This time, there was no coordination, he said.

"The operational impact from events like the Hamline incident… raises the specter of whether or not CPS, with the city, finds itself needing to change operations to engage in greater forms of support and outreach in order to protect potentially affected communities," the Civic Federation's Ferguson said. "And this is all against a backdrop in which we don't know exactly how far Washington is going to go with these policies."

Stephen Slivinski, a senior fellow at the Cato Institute, told The Bond Buyer last week that there may be more strings attached to federal funding going forward. "Those will basically be politically motivated criteria," he said.

"The early days of the administration have been aggressive," Martinez said at Thursday's meeting.