Back to School in the Windy City

Fitch this week lowered its rating of the Chicago Public Schools--its fourth ratings blow of recent months--as the district struggles to cover the $300 million cost of a new, four-year teachers’ contract. Fitch warned that the downgrades may not be over by leaving the rating with a negative outlook. The Fitch downgrade is the second from a rating agency since the school district’s resolution of a seven-day teachers strike last month, its first strike in 25 years. Fitch wrote: “The labor agreement following the recent Chicago Teachers’ Union strike results in considerable increased costs to the Chicago Public Schools…The increases come at a time of highly stressed operations, when Fitch believes spending reductions are imperative to maintaining fiscal stability.” The district closed a $665 million gap to balance its $5.2 billion fiscal 2013 budget over the summer only by nearly draining its reserves. That leaves it little room to cover the $74 million price tag in fiscal 2013 of the four-year teacher’s contract or to manage a $330 million increase looming in its teachers’ pension payment next year. Fitch noted in its report that while the district has cut spending, dramatic changes are needed, but the school district may be hard-pressed to achieve them given its labor strife and likely political opposition to possible school closures: “The coming challenges now appear considerably greater than they have been historically.” At the center of the district’s challenges is the expiration of a state approved three-year pension holiday. The district’s already weak pension funding ratios worsened due to the deferrals and the payment will rise by $338 million to $534 million next year. The district’s teachers pension plan was 59.9% funded at the close of fiscal 2011. The increase next year puts the district on the path to reach a 90% funded ratio by 2059. Other post-employment benefits are similarly underfunded but annual payments are capped at $65 million, leaving an increasing burden for employees and retirees. Moreover, the pension increase comes as the district already faces rising debt service payments to cover borrowing that financed renovations after years of neglect. The district has also in recent years restructured debt pushing off near-term debt service and is planning on restructuring at least $100 million for fiscal 2014 relief.