CHICAGO — Ahead of the Chicago Board of Education's expected vote Wednesday on a new $5.9 billion budget, a local watchdog group endorsed the plan to eliminate a $712 million deficit through cuts, use of reserves, and a property tax hike, but warned of a looming fiscal crisis unless the district overhauls its spending habits.

The Civic Federation of Chicago in its review released on Monday praised the Chicago Public Schools' new leadership team for "making significant expenditure cuts and implementing reasonable increases in revenue."

The budget represents a 1.5% increase over the current spending plan that relied heavily on one-time revenues like $260 million in federal stimulus funds, $160 million from debt restructuring, and $40 million in tax-increment financing surplus revenue freed up by the city.

The $5.9 billion spending plan includes a $5.1 billion operating fund, $391 million in capital projects funding, and $410 million for debt service. The budget is the first under Jean-Claude Brizard, who was chosen by Mayor Rahm Emanuel as chief executive officer of CPS soon after the mayoral election earlier this year.

To eliminate a $712 million deficit, the budget trims about $221 million by reducing administrative costs, eliminating some programs, and improving operations. The proposed spending plan cancels a 4% cost-of-living wage increase for teachers called for in their union contract to capture savings of $100 million.

The move puts at risk more than 15 years of labor peace, but officials contend CPS can't afford the scheduled hike without deep cuts that would affect classrooms. Teachers' salaries account for $2.1 billion of spending in fiscal 2012 with total personnel costs carrying a price tag of $3.6 billion. The budget does fund scheduled annual step increases for teachers.

The district will draw $241.1 million from its various reserves to further chip away at the deficit. About $181.3 million will come from its fund balance, which provides a liquidity cushion, and another $69.8 million from other reserve funds.

CPS adheres to a board-imposed goal to keep its fund balance at or above 5% of general fund appropriations. The once-flush fund, long cited as a credit strength, has fallen short of goals in recent years largely due to chronic delays in Illinois school aid payments. Even after drawing the fund balance down, officials anticipate closing out fiscal 2012 with a $289 million balance, or 5.9% of appropriations.

To fully erase the red ink, the budget relies on $153 million of additional property tax revenue by raising the levy the maximum amount allowed under legal caps, for a 2.1% increase. The district has over the last few years sought more modest increases or held the levy flat.

"We had to make some very difficult but necessary choices in order to keep cuts as far away from the classroom as possible to ensure we are protecting investments we are making in our students to help make them college and career ready," Brizard said in a recent statement.

The fiscal 2012 budget relies on $2 billion of funding supported by property taxes. General state aid accounts for $1.1 billion and federal funding another $1 billion.

The federation, which tracks the fiscal policies of local governments, agencies, and the state of Illinois, acknowledged that the tax increase will strain struggling residents and businesses, but called it the most reasonable way to close the remaining gap.

"While the Civic Federation supports this year's property tax increase, we also caution CPS management that they must continue to emphasize cutting costs if they are going to head off an enormous fiscal crisis in just two years," said federation president Laurence Msall.

The positive news about the organization's endorsement was tempered by its dire warning over CPS' long-term fiscal health and its call for structural budgetary changes to avert a fiscal calamity as the district faces a $861.7 million budget hole by fiscal 2014.

The driving factors behind the looming deficit stem from rising debt service and personnel expenses, the end of a three-year pension funding holiday, and the end to the state's contribution to the teachers' pension fund. The holiday was part of pension reforms enacted by state lawmakers in 2010.

The pension's funded status has fallen dramatically from a 100% funded ratio in 2000 to just 55% in fiscal 2010. CPS' pension contribution will increase by $451.8 million, or more than 200% over the previous year's contribution, in fiscal 2014.

"The district's growing financial storm offers frightening evidence that CPS cannot afford its existing pension system," Msall warned. "District officials must articulate a plan to address this pending fiscal crisis immediately."

The federation has recommended that CPS scale back benefits not yet earned by current employees and increase teachers' contribution levels. The group also called on the district to adopt long-term financial planning for both its budget and capital spending.

The new budget anticipates the issuance of about $400 million of general obligation debt to fund ongoing capital projects, including maintenance and school improvements.

The federation expressed concerns about the district's debt trends due to a $1 billion, or 26.8%, increase to $4.9 billion in GO debt levels between 2006 and 2010. The debt has supported a $5 billion capital program to upgrade schools and build new ones.

"The rate of increase over time has been large and it bears watching, particularly as the CPS faces continuing challenges in meeting its rising expenditures in areas such as personnel and retirement costs," the report warned.

The board's GO debt carries an A-plus from Fitch Ratings while Moody's Investors Service rates the district Aa2 with a negative outlook and Standard & Poor's rates it AA-minus. Fitch downgraded the district last year due to its fiscal challenges and a reliance on one-shot solutions to balance its 2011 budget.

Chicago Public Schools operates 675 schools and serves 417,800 students.

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