S&P issues Chicago Board of Education a warning: Find revenue or ‘scale down’ operations to fund CTU contract

Global credit ratings firm S&P rang the alarm on Chicago Public School finances last week, weighing in on the ongoing political gridlock between district leadership, the Chicago Teachers Union and Mayor Brandon Johnson with a warning: How the Board of Education opts to fund the CTU’s forthcoming contract will determine the financial health of the district for years to come.

“Failure to sustain structural solutions by either increasing ongoing revenues or containing costs to offset the financial impact of a new CTU contract could mark a turning point in the board’s recent positive financial trend and jeopardize its fiscal stability,” according to S&P analyst Ying Huang.

In other words, the board must identify a reliable source of new revenue or “scale down” CPS’ current $8.4 billion operating costs, according to S&P, one of three credit ratings firms whose determinations impact government agencies’ ability to issue bonds, which are often used to fund major one-time capital projects, such as new school buildings or fleets.

Negative credit ratings result in higher interest rates, in which fine margins can make a big difference, of potentially millions over a bond term, which tends to match the lifetime of a project, such as a building expected to be in use for 30 years.

If CPS wants to maintain its current “BB+/Stable” rating — which the district has strived for years to improve — neither drawing upon the $1 billion the district has in reserves, nor taking on new debt to fund the contract is an option, warned the S&P.  Huang’s note is a vindication by an authoritative third party of CEO Pedro Martinez’s refusal to take out a short-term, high-interest loan that the mayor, a close union ally, proposed in July.

Martinez’s job at the helm of the district has been in a precarious position since, as tension surrounding the collective bargaining negotiations with CTU continues to mount.

A vote on a budget amendment to in part, fund the contract is expected before the end of the school year. The district’s current $9.9 billion budget was approved without accounting for its cost, nor a contentious pension payment previously funded by the city, by a prior slate of board members in July.

At November media briefing Chief Budget Officer Mike Sitkowski promised to stave off cuts, telling reporters the district had no plans for layoffs, furloughs or impacts on programming. However, in response to the S&P report, a district spokesperson told the Tribune in an email that they remain committed to maintaining their credit rating.

“Our leadership will continue to explore all options to generate additional revenue as we pay nearly $200 million in debt payments related to crisis borrowing from 2016 to 2018 and will do so for another 20-plus years,” the spokesperson wrote. “We will continue to aggressively advocate for additional local and state funding.”

Ongoing negotiations amid deficits

The S&P warning comes as CTU contract negotiations have slowed in a dispute over the projected cost of the union’s demands as the district faces daunting deficits of up to $560 million in each of the next five years.

In an update sent to families Dec. 6, CPS estimated the four-year cost of meeting the union’s recently narrowed list of demands at $3.5 billion.

In negotiations on salary increases alone, a gulf of approximately $7.2 million remains between CPS and CTU, according to a district comparison of the cost of the 4% to 5% raises proposed by CPS, compared with a union counterproposal of 5% to 6% raises, down from a starting demand of 9%.

Pavlyn Jankov, CTU research director, said the “real risk” to CPS’ long-term health lies in allowing disinvestment and related inequities to persist — and pointed to state officials as both the problem and solution.

“Our educators mandating smaller class sizes, more support staff and better teacher retention through our contract isn’t the fiscal liability here,” he said.

Jankov noted that an Illinois school funding bill requires lawmakers to provide districts statewide enough funding by 2027 so that each of their schools have at least 90% of the total funds deemed necessary by the state’s funding formula to meet their students’ needs. Tax reform at the state level is also needed, he said, alluding to President-elect Donald Trump’s stated plans to dismantle the Department of Education.

“Expiring federal pandemic relief funds and potential threats to DOE make the need for sustainable, progressive revenue solutions even more urgent,” Jankov said. “If state leaders continue to pass the buck, they’re not just shortchanging students — they’re jeopardizing CPS’ financial health and creating the very risks bond rating agencies warn about.”

School finance expert Marguerite Roza, director of Georgetown University’s Edunomics Lab, said that regardless of the cause, when a district has a discrepancy between expenses and revenue, a reckoning is inevitable. It’s far better for that to occur sooner, through compromise, than later through layoffs or state intervention, she said.

“Putting it off and spending the district into the ground just generally doesn’t play out well,” Roza said, noting that state takeovers can occur if a spiral of spending reserves and negative credit ratings results in a district’s inability to rely on bonds for facilities repairs.

“It’s a cycle we’ve seen over and over again, that’s not a good cycle for kids,” she said.

Stabilize leadership and prepare to scale down, S&P warns

After CTU and CPS asking for more state funds earlier this year proved unsuccessful, new revenue from Springfield is unlikely, the S&P noted. As for how the contract will be funded, Sitkowski said in November that CPS is awaiting tax increment financing, or TIF, surplus funds from the city. But as those funds vary year-to-year, the S&P’s analysis implies that cuts may be inevitable, if CPS aims to avoid a negative credit rating.

“The potential for downside rating pressure could increase if the financial impact of the CTU contract materially weakens CPS’ operations and available reserves, especially considering the compounding effect of the annual salary increases,” wrote Huang, the S&P analyst.

“We believe management’s ability to scale down its operations to match revenue sources will be crucial,” Huang wrote. He added that uncertainty surrounding both Martinez’s tenure and the incoming Board also carries implications for the district’s credit trajectory.

“Higher ratings speak to positive management, positive economic outlook, and positive utilization of that which has been loaned before,” said Kyle Wedberg, a senior manager for the Government Finance Officers Association.

“For those that are involved in any side of the transaction with a public entity, what they want to see is stability and not volatility,” he said of the S&P’s response to efforts to oust Martinez.

And for times when volatility can’t be foreseen, such as the onset of the COVID-19 pandemic, it’s crucial for districts to maintain reserves, said Wedberg, who’s previously worked as a senior budget analyst for the city, and in top leadership roles for the School District of Philadelphia and the Louisiana Recovery School District.

As of the mayor’s most recently proposed spending plan, for which a vote Friday was postponed, CPS will receive $311 million in TIF surplus funds this year — still leaving the district with a shortfall of around $174 million, if CTU were to receive 4% raises, according to the S&P’s analysis.

In recent weeks, both CTU and the current board of six Johnson appointees have pressured Martinez to resolve the contract — a demand that’s prompted pushback among an assortment of stakeholders.

CTU President Stacy Davis Gates asked board members Thursday to direct the CEO to finalize the contract by Christmas, which she said was necessary to protect vulnerable students before the Trump administration takes office next month.

The contract isn’t the only means to guard civil rights in CPS, a district spokesperson said Thursday, listing 16 policies devoted to student and staff protections, ranging from religious freedom to human rights.

Fact-finding hearings were scheduled this month, as the next stage of formal mediation to resolve the contract. But the hearings, and a subsequent report of recommendations by the fact-finder, have been pushed back upon CTU’s request, according to the district.