CHICAGO — Struggling to close a $1 billion budget gap, Chicago Public Schools will curtail capital spending in its next budget and take aim at its teachers' labor contract.
The district is trying to close the gaping deficit under the close scrutiny of analysts and investors worried about the system's solvency.
Moody's Investors Service on March 6 downgraded the system's $6 billion of general obligation debt two levels to the lowest investment grade level of Baa3. Ahead of the district's recent bond sale, Fitch Ratings lowered its rating three levels to BBB-minus. The double downgrade triggered swap termination events.
The district is asking its Board of Education to approve a $160 million capital budget for the fiscal year beginning July 1.
That's down from more than $400 million this year and the lowest in recent memory. Debt service on the district's debt load this year is about $600 million.
Spending will be limited to previously announced projects and emergency repairs and maintenance. About $113 million will come from CPS funds raised through borrowing and $47 million from the city, federal programs, and other sources. Under the five-year capital plan adopted last year, the district had anticipated spending $183 million of its own funds in fiscal 2016.
The district has previously sought to curb capital expenses only to subsequently raise spending. The capital program is expected to fall even further under the five-year plan, which totals just $536 million with annual spending scheduled to fall below $100 million in fiscal 2018.
"Chicago Public Schools is facing tremendous financial challenges, and with a projected $1.1 billion budget deficit, we can only afford to address our greatest needs," Jesse Ruiz, the district's interim chief executive officer, said in a statement partly aimed at officials in the state capital.
"This budget is just another example of why we need immediate relief from Springfield," he said.
The district warned that the lack of funding means it can't address overcrowding issues or make a real dent in $4 billion in needed upgrades. CPS is seeking more capital aid from the state and wants relief from its growing pension burden, which will consume $700 million of its roughly $6 billion operating budget in fiscal 2016.
The district argues that the state should pick up a greater share of the contributions to its teachers' pension fund - burdened by $9.5 billion of unfunded liabilities - because city taxpayers help support the separate state teachers' fund.
CPS late last week said it would not offer the Chicago Teachers' Union a one-year contract extension as permitted under the current pact struck after a 2012 teachers' strike. CPS said it can't afford the $100 million price tag to cover a 3% raise.
On Tuesday, the union disclosed that CPS wants employees to accept what the union describes as a 7% pay cut. The proposal would shift a share of CPS' scheduled pension costs on to employees.
"Once again, the board has created a fiscal crisis in order to justify its continued attack on our classrooms and communities," union president Karen Lewis said in a statement.
Investors snapped up CPS' $300 million bond issue last month but the district paid mightily for its low ratings and negative headlines about its fiscal ills and leadership turmoil. The top yield of 5.63% on a 25-year maturity landed 285 basis points over the Municipal Market Data's triple-A benchmark, a level reflective of junk-rated debt.
Ahead of the sale, the district was stung by Gov. Bruce Rauner's recent suggestion that bankruptcy presented a good option, even though the state lacks a Chapter 9 law that would even make it possible.
CPS then announced federal authorities were probing a no-bid contract and the role CEO Barbara Byrd-Bennett played in awarding it. She was placed on paid leave.
CPS is continuing negotiations with the counterparties to stave off about $228 million in swap payments due to their negative mark-to-market valuation.
