CHICAGO — Chicago Public Schools must close an up to $700 million shortfall in its next budget with a more than $1 billion deficit looming in 2014 due to mounting operational, pension and debt service costs amid dwindling federal funds.

The district’s administration — led by chief executive officer Jean-Claude Brizard — laid out a bleak picture of the fiscal challenges plaguing the system as it launches into budget season at a Chicago Board of Education meeting Wednesday.

“Chicago Public Schools is facing a daunting financial challenge heading into fiscal year 2013 and beyond,” chief administrative officer Tim Cawley said in a budget overview. “Past obligations to pensions and debt service equaling hundreds of millions of dollars are coming due, adding to the district’s deficit and threatening its ability to drive student learning. Historical increases in revenue, which fueled spending and hid structural deficits in the past, have reversed.”

The warnings mirror those of last year when CPS faced $712 million of red ink in a $5.9 billion budget, but fiscal pressures continue to escalate. To close last year’s gap, the board pushed off a planned debt sale and scaled back its size, cut spending and jobs, cancelled a collective bargaining raise for teachers, raised property taxes by the maximum allowed under state caps, and drew $214 million from reserves. The system expects to close out the current fiscal year in June with an ending balance of $289 million, but a healthy balance remains central to its credit profile.

CPS now estimates a $600 million to $700 million deficit in the next budget with a structural deficit of between $1.1 billion and $1.3 billion in fiscal 2014 because pension payments will skyrocket by $338 million due to the expiration of a three-year cut in those payments the state government had allowed.

The district had $5.4 billion in unfunded teacher pension liabilities at the close of fiscal 2010 for a funded ratio of 67%. That ratio is expected to fall below 50% by fiscal 2013, according to a bond offering statement from last year. CPS could lobby Illinois lawmakers for a change in how its pensions are funded as part of a state pension reform package expected during the current legislative session.

The bill is rising for a capital spending spree — begun in the late 1990s after the state handed control of the schools back to the city — that included upgrading and repairing aging school buildings and the construction of new ones to address overcrowding. CPS debt service payments have grown by 85% over the last five years. Debt service in the next budget will rise by $79 million to $511 million, according to officials.

On the revenue side, the district’s reliance on $726 million of one-time revenues like federal stimulus funds and debt restructuring to balance recent budgets adds to its woes. “Those one-time fixes are gone,” Cawley said. “Weak state support also seriously undermines the ability of CPS to fully fund its schools.”

CPS said it cut more than $400 million in spending over the past year and officials are looking for both short- and-long-term solutions to shore up its balance sheet. It plans to overhaul procurement with an eye on cutting expenses and is examining potential savings in the areas of real estate, information technology and finance.

“Despite these efforts to eliminate wasteful spending, the need for structural changes remains as past obligations tied to contracts and capital expenses are coming due,” Cawley said. The warnings set the stage for the district’s position in contract negotiations with teachers. The district also has not disclosed the fiscal impact of a longer school day being adopted next fall.

A proposed budget is expected to unveiled later in the spring.

Moody’s Investors Service last year downgraded the Chicago Board of Education’s $5.7 billion of debt one notch to Aa3, citing mounting fiscal pressures on the district’s balance sheet from rising costs, state aid delays, and a high debt burden as it has undertaken its mammoth capital program.

Fitch Ratings last year affirmed the board’s A-plus rating and stable outlook and Standard & Poor’s affirmed its AA-minus rating while revising its outlook to stable from negative.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.