CHICAGO — Chicago Public Schools' teachers went on strike for the first time in 25 years Monday with market participants closely watching to assess the fiscal impact of an eventual resolution on the cash-strapped district while also gauging the national ramifications for governments facing labor strife and the November elections.
The teachers in the nation's third largest-district that operates 675 schools announced their intention to strike late Sunday. The action came after 11th hour negotiations between the Chicago Teachers Union and representatives of the district, the Chicago Board of Education, and Mayor Rahm Emanuel's office failed to reach agreement on a new contract.
The impasse in recent days had centered on disagreements on teacher compensation, work rules, and class sizes. CTU president Karen Lewis said the parties were close to resolving compensation issues but remained apart on healthcare benefits, how teacher evaluations are conducted, and on job security and class size issues.
Both sides have traded harsh words over what is in the best interests of students and bickered over implementation of the longer school day that Emanuel has made a centerpiece of his education plans. Lewis in recent days had called Emanuel a "bully" and a "liar."
At a news conference late Sunday, Emanuel labeled the action as a "strike of choice" that was not necessary. He insisted that the dispute was not over compensation but over two issues including changes in teacher evaluations. "I believe that the issues are down to two, that we can do what is necessary to finish this," Emanuel said.
Both sides said they were ready to immediately resume negotiations.
The latest raise offered by the district - led by chief executive officer Jean-Claude Brizard and board president David Vitale - would have totaled about 16% over four years.
Fitch Ratings on Thursday raised concerns over a strike's impact on the district's ability to manage its finances while implementing measures to improve educational standards. The district was hit with a round of negative credit recently after nearly draining its reserves to help eliminate a $665 million deficit in its $5.2 billion fiscal 2013 budget.
"Fitch's concern is that the resolution of the strike could be costly and leave management with even less flexibility to reduce spending to a level in line with revenue expectations," the report read. "The lasting impact on the district will depend on the outcome of the negotiations and the duration of the strike, if there is one."
Analyst Amy Laskey added that any agreement, either to resolve a strike or to avoid one, stands to affect the district financially, but if a strike occurs, it signals just how severe the differences between the two are and it could have a more significant impact.
Moody's assigns a negative outlook to the district due to its fiscal challenges that include a $1 billion deficit looming next year and "uncertainty surrounding the financial impact of the current labor negotiations with CTU."
Even after downgrades, the district maintains a healthy rating in the high single-A category but the negative press is a challenge, noted Richard Ciccarone, chief research officer at McDonnell Investment Management LLC. "This showdown is very significant and will be watched by bondholders. They are at a critical juncture and the decisions that are made will have a long-term impact."
Nationally, the standoff is 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, Ciccarone said.
Given that Chicago is President Obama's home base and Emanuel served as his first chief of staff, some also believe the strife could affect the November election and union support for Democrats in general.
The district has little room to accommodate raises, since it nearly drained its reserves to balance the fiscal 2013 budget.
Standard & Poor's recently downgraded the board's rating to A-plus from AA-minus. It assigns a stable outlook. Fitch revised its outlook for the board's A-plus rating to negative from stable. Moody's Investors Service downgraded the board's $6 billion of debt to A1 from Aa3 and assigned a negative outlook.
The original budget proposal allocated $46 million for a 2% raise for teachers, but that money was diverted to pay an extended school day. The union is also upset that the district last year canceled a 4% raise that had been in its previous contract. The board has set aside $25 million for strike contingency plans.
The district faces a financial reckoning next year when its deficit will balloon to $1 billion due to rising debt service costs and a hike in pension payments after the expiration of a pension holiday.
The district last month sold $470 million of new-money debt that was back-loaded.
It is also planning a $100 million debt restructuring for later this year or early next year, but market participants said those funds would be used next year as the district girds for the big pension payment spike. More than 350,000 students would be affected by a strike.
