“Both sides worked in good faith to reach a deal, and as a result Chicago’s students are in class where they belong today, getting the education they deserve,” Emanuel said Tuesday

CHICAGO – Junk-rated Chicago Public Schools averted a teachers' strike after striking a tentative four-year deal with union leaders during negotiations that came down to the wire.

The school district gave in to the teachers and agreed to continue covering 7% of teachers' 9% pension contribution but teacher raises were trimmed back from a previous offer.

The cost of the contract was not disclosed by Mayor Rahm Emanuel or CPS chief executive officer Forrest Claypool at a news conference early Tuesday after general terms of the pact were announced. The negotiated outcome beat a midnight deadline.

"Both sides worked in good faith to reach a deal, and as a result Chicago's students are in class where they belong today, getting the education they deserve," Emanuel said Tuesday morning in his 2017 budget address. "Chicago Public Schools' finances will be on stronger, firmer ground because of this agreement. Today, we must also focus on our work and our finances."

The Chicago Teachers' Union bargaining group signed off but the 800-member House of Delegates must approve the deal. While the cost is unclear, the agreement allows the district to avoid the short- and long-term damage of a strike as it works to stabilize its precarious fiscal position.

"A downgrade is never good for spreads but a potential strike is more harmful to CPS and will, in fact, make it more expensive to borrow," Howard Cure, director of municipal bond credit research at Evercore Wealth Management, said in a recent interview when the strike threat loomed. A strike would have far-reaching implications with the potential to raise the public's ire or impede future tax increases that may be needed by either the city or CPS, he said.

Under the agreement, teachers will receive a 2.5% pay raise in year three and a 2.5% raise in year four. The contract is retroactive to last year when the previous one expired. Teachers will also receive separate step raises based on their experience.

The raises are smaller than the district's previous offer earlier in the year that was rejected in a delegate vote and teachers will pay slightly more of their healthcare costs. But the teachers won their fight to maintain the district's coverage of 7% of their 9% pension contribution. The district had sought to phase out the "pension pickup" with the goal of eventually saving $130 million annually. Teachers hired after January 1, 2017 will lose the benefit but receive what equates to a 7% base pay raise.

The union had also been pushing for an infusion of $200 million in funding to bolster classroom funding and wanted to block future classroom cuts. Those demands were not included in the terms disclosed.

The agreement does include $7 million in additional funding annually to bolster teacher help in overcrowded kindergarten through second grade classrooms and give teachers more say in some privatization issues. The deal also offers an early retirement incentive for some teachers.

It's expected that some of the contract costs will be covered by additional tax-increment financing dollars that the city is expected to free up. The union and some city council members had been pushing hard in recent days to free up more of the city's TIF surplus, of which about half goes to the district. The fiscal 2017 budget relies on $32 million but numerous reports said a surplus declaration of up to $175 million was expected.

The use of TIF funds has a downside. While the city has been declaring surpluses in recent years, they are considered a non-recurring source of revenue because they may not always be available and that contributes to the district's structural deficit, market participants and analysts have warned. The district's heavy use of one-shots to close past gaps helped drive its deficit up to $1.1 billion this year.

Moody's Investors Service recently dropped the district further into junk, to B3 from B2, and maintained a negative outlook. The district won an infusion of state aid and a property tax hike this summer and has new credit lines in place but its liquidity remains precarious and some of its budget solutions are uncertain.

The district struggled with market access earlier this year and paid a punishing rate of 8.5% on a $725 million deal it had to scale down to find a market. It was able to capture a lower rate of 7.25% on a $150 million private placement in July with JPMorgan.

The district is rated B-plus by both Fitch and S&P Global Ratings and carries investment grade ratings from Kroll Bond Rating Agency of BBB on some of its debt and BBB-minus on most. All assign a negative outlook and S&P has the credit on negative watch.

CPS operates 673 schools with an enrollment of 392,285, down from 378,481 students last year.

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