CHICAGO — The Chicago Public Schools proposed a $5.6 billion budget for fiscal 2014 that relies on the maximum allowed property tax hike, spending cuts, and using $700 million in reserves, including a first-time draw on a reserve labeled for debt service, to erase $1 billion of red ink.

The budget, which must fund a $400 million increase in teacher pension contributions following the expiration of a three year partial payment holiday, was presented to the Chicago Board of Education at its monthly meeting Wednesday.

The budget was submitted just a few hours before Moody's Investors Service downgraded the board's $6.3 billion of general obligation debt by a single notch to A3 and left a negative outlook on the credit. Analysts cited as the lead factor a leveraged overall debt burden on the district's tax base due to the weight of its debt and pension obligations in combination with the city's and other overlapping government bodies.

Moody's downgraded the city's GOs three notches last week over its mounting pension woes. The rating agency assigned a negative outlook to the school district's debt due to its budgetary stress and reliance on non-recurring revenues to balance its books.

In a fresh example of just how squeezed the district has become it is turning to what it called a "Debt Service Reserve" for the first time ever "to cover the cost of increasing debt service, so that we do not have to dedicate as much general state aid to debt costs this year," according to a budget overview. The district will use $54 million from a $249 million debt service reserve account bringing its total use from $1 billion in existing reserve accounts to $697 million. Additional information on the debt reserve was not immediately available.

District officials on Wednesday put much of the blame for additional spending cuts that include a new round of layoffs on the state's inaction on pension reform and warned that their use of one-time fixes similar to last year is not sustainable.

"We need a structural fix," said chief administrative officer Tim Cawley.

"We need to not be paying $600 million in pension [contributions]. We need not to have low funding from the state," he said.

"This budget proposal protects critical investments needed to ensure a high quality education while reflecting the financial realities of a district facing a $1 billion budget deficit," said the district's chief executive officer, Barbara Byrd-Bennett.

The proposed budget, which is up from last year's $5.1 billion, trims $112 million in central office, administrative and operations costs. Another $68 million is being cut from school budgets. An additional $89 million in revenue will come from a maximum allowed increase in the district's property tax levy.

The budget relies on $643 million from various operating reserves including $563 million in general unrestricted reserves. Those accounts were deeply drained to balance the budget last year but are flush again primarily because of the timing associated with the collection of certain revenues. Property taxes came in early and the state catch-up on its chronically late aid payment was better than expected.

In a gamble, the district noted that the timing of upcoming property tax payments must come in as projected for the new budget to remain balanced.

In addition to the $400 million increase in pension payments, the district's $1 billion deficit stems from flat or declining state revenues and the cost of a new teachers' contract last September that ended the first teachers' strike in more than two decades. CPS' pension payment rises to $613 million in the next budget from $208 million in fiscal 2013. Without reform, the number will rise to $1 billion by 2032.

Deficits of between $900 million and $1 billion are projected in fiscal 2015 and again in 2016. The district and city are banking on state action on pension reforms for local governments, but an agreement has so far eluded lawmakers on state level reforms which Gov. Pat Quinn has insisted must come first. The district asked lawmakers this spring to ease the payment hike, but the measure failed.

As part of its efforts to rein in costs, the district previously announced the closing of nearly 50 schools. The district will finance improvements at schools that will take in transferred students with a planned new-money borrowing.  The administration was seeking approval for an up to $300 million bond sale on the board agenda.

Administration officials stressed that the budget protects the longer school day adopted during the 2012-2013 school year, an expansion of early childhood education, full day kindergarten, and other academic programs.

Critics of the budget, including the Chicago Teachers Union, called on the city to free up tax-increment financing funds or find another revenue source to prevent further cuts.

Public hearings will be held over the next month on the budget and the board is expected to vote at its August meeting.

The district's structural budget woes are due largely to a reliance on non-recurring revenues including debt restructurings and reserves to balance recent budgets. Those moves drove several rounds of previous rating downgrades over the last two years. Standard & Poor's rates the board A-plus and stable. Fitch Ratings assigns an A rating and negative outlook.

Moody's downgrade Wednesday "reflects a leveraged overall debt burden resulting from significant debt and pension obligations of overlapping governmental entities on the district's tax base, particularly the city of Chicago."

The negative outlook stems from the district's budget struggles, declines in state aid for operations, and sizeable pension hike. Analysts also factored in the expectation that the pension burden of the district, city and other governmental entities will continue to rise.

"The district's general obligation credit quality may be impaired if fiscal adjustments are insufficient in addressing the district's budget gap in a timely manner and increases in overlapping debt and pension obligations continue without satisfactory pension reform," Moody's wrote.

"This confirms what we have been saying — our financial situation is real and must be handled now," CPS spokeswoman Becky Carroll said in a statement. "As a result of Springfield's inaction, we will need to spend more money paying interest and less on our classrooms and children."

CPS' teachers' pension fund has $6.8 billion of unfunded liabilities for a funded ratio of 59.9%. A Civic Federation of Chicago analysis earlier this year reported that the pension funds of Chicago, Cook County, and five other local governments deteriorated by $4.6 billion in 2011, bringing their collective unfunded obligations to $32 billion.

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