Chicago Mayor Brandon Johnson’s office says it’s facing the imminent prospect of closing out the 2024 budget with a deficit if the Board of Education doesn’t agree to make a controversial $175 million pension payment by March 30, raising the stakes in an ongoing dispute with the school district.
City Chief Financial Officer Jill Jaworski tells WBEZ the city will have to reach into reserves to cover the shortfall, which would likely be concerning to credit rating agencies. The city’s rating was recently downgraded to two notches above junk rating, which will result in city taxpayers being forced to pay higher interest rates on loans.
Meanwhile, dipping into reserves would face scrutiny from a wary City Council that fiercely butted heads with Johnson during a drawn-out budget fight last year. Alderpersons, depending on where they stand politically, would likely blame both the city and the school district for the financial quagmire.
With this looming, the mayor’s office is again putting pressure on school board members to agree to make the payment, which the city counted on CPS making in its 2024 budget but the district has resisted paying. The pension covers CPS staff who are not teachers, as well as some city employees. City officials are suggesting that the district borrow $242 million, this time at an interest rate of 4.37% for a five-year loan or 4.6% for 10 years — rates that are relatively low for CPS.
Jaworski said her office came up with these figures by looking at the current interest rates for government agencies and taking into account CPS’ credit rating. The $242 million would cover the pension payment, plus costs associated with the Chicago Teachers Union contract, which is still being negotiated.
This borrowing scenario was laid out in a presentation sent from the mayor’s office to school board members last week, as the Chicago Tribune first reported.
These rates counter the dire predictions of school district leaders and others who have blasted the idea of CPS borrowing, saying the district would have to pay “exorbitant” rates. Some have said it would be akin to a payday loan.
Still, the school district continues to reject a loan. Chicago Public Schools “cannot issue debt in order to balance the budget,” a spokesperson said in a statement.
Financial experts contend such borrowing would be short-sighted and add to the district’s already heavy debt burden, which robs funding from current and future students. CPS has $9.3 billion in long-term debt, most of which was used to pay for capital projects. The pension payment borrowing being discussed would be short-term debt.
“You don’t want to take out debt to pay an everyday expense,” said Amanda Kass, assistant professor at DePaul University’s School of Public Service. “It is pretty bad.”
Additionally, she points out that borrowing is a one-time fix and there’s a high likelihood school board members will resist making future pension payments. The city is also counting on CPS to make the pension payment this year, 2025.
The mayor’s office first floated the idea of borrowing this summer, spurring a firestorm of criticism.
Even the mayor’s office agrees borrowing is not ideal, but rather, in their opinion, necessary to meet obligations. City officials have said they don’t want CPS to have to cut staff and are still holding out hope that the state will agree to pay more of CPS’ pension contribution, as it does for other districts. The city is committed to “working with CPS on long-term solutions to pension obligations, including State level solutions,” according to the presentation to school board members.
A financial quagmire
If CPS doesn’t pay, dipping into city reserves to cover the payment is “worrisome,” said Ald. Jason Ervin, 28th Ward and chair of the City Council’s Committee on Budget and Government Operations. Ervin called on CPS to follow through on their obligation, especially after receiving a record $300 million from the city in surplus funding from special taxing districts called TIFs.
“We ultimately don’t have a choice. So either CPS pays or we have to pay. There are no options,” Ervin said. “To outright say, ‘No, we can’t make any payments.’ I think it’s disingenuous.”
But Ald. Gilbert Villegas, 36th Ward, noted that declaring a TIF surplus was also to help the city bring in revenue to fill its own budget gap. If the city has to dip into reserves to cover the pension payment, “then that’s a lesson learned,” Villegas said.
“The administration knew that this was coming, and they should have planned accordingly,” Villegas said. “There has to be a really come to Jesus as to what we’re going to do with the revenue that we have, how we’re going to make it work.”
The newly seated partly elected, partly appointed school board is getting ready to confront this financial quagmire.
The board is planning to hold hearings in March to consider financial options and recently hired a financial firm to offer up and evaluate funding options, a development also first reported by the Tribune.
The school board not only has to figure out whether it will cover the pension bill and how, but also how it will pay for this year’s costs included in the Chicago Teachers Union contract. The contract is still being negotiated, but the school district has offered a 4% raise, which wasn’t included in the budget passed over the summer. CPS’ budget typically does not include projected costs when a contract is still being negotiated.
The school board office confirmed to WBEZ that it will pay Baker Tilly Advisory Group up to $35,000 to do the analysis of funding options and a risk assessment.
The union is ramping up pressure to get a contract deal and the earliest it could legally strike is in just a few weeks.
Long simmering battle
These deadlines re-ignite a controversy that has been simmering since this summer when the mayor’s office first suggested borrowing. At the time, Martinez urged the board not to do it, saying it would be fiscally irresponsible.
Martinez presented the school board a budget that did not include the pension payment, despite the mayor’s demands otherwise. The move was bold and unprecedented, considering the board at the time was still fully appointed by the mayor and historically the CEO abided by the mayor’s wishes.
Amid the wrangling over how to pay for the pension and teachers contract, the entire school board of mayoral appointees resigned in October and, in December, a group of short-term appointed board members fired Martinez. Because he was terminated without cause, a clause in Martinez’s contract allows him to stay on for six months.
The upheaval meant that the appointed school board left these big issues on the table for the 21-member board, which was seated in January, to confront.
The mayor’s office finds itself trying to convince new board members, in short order, to take a loan to make the pension payment. The mayor still appoints the majority of the board, but it will take two-thirds to approve an amendment to the budget and some members campaigned on rejecting borrowing.
The city is facing the March 30 deadline because its 2024 fiscal year ended Dec. 31 and it has 90 days to close out its books. In passing the 2024 budget in the fall of 2023, city officials said the city had a reasonable expectation that CPS would make the pension payment because it had in past years. Jaworski points out that Martinez told the City Council at a hearing in October that the school district would make the pension payment.
The school district counters that Martinez said he would be supportive if the city provided $484 million in TIF surplus, but CPS is only expected to receive about $300 million.
Until 2020, the city had been making the payment for CPS before shifting it over to the school district.
In its presentation, the mayor’s office makes several arguments why the school should make the pension payment. Chief among them: The city is legally obligated to make the contribution, but the majority of staff covered by the municipal pension fund are current or former non-teacher CPS staff.
It is one of the many financial entanglements between the city and the school district from when the mayor had full control of the school district. But in two years the school board will be fully elected and independent and there has been an effort to disentangle. The city supports the school district in a myriad of ways, including waiving fees for water and sewer service and spending money from TIF districts to build and repair schools.
To support the idea of a loan, officials with the mayor’s office say the city is providing new revenue for the school district that can be used to pay it back. Johnson’s administration is letting several TIFs expire. The city estimates that CPS will get an additional $100 million or more in property taxes as soon as 2026. And the loan interest rates they are discussing would be considerably better than the 6.4% the school district committed to in a series of loans starting in 2016.
Justin Marlowe, director of the University of Chicago’s Center for Municipal Finance, said CPS gets somewhat lower interest rates, despite its credit rating, because of incentives that financial institutions have to lend to cities and school districts and because there’s an assumption that the city and state won’t let CPS fail.
He said short-term borrowing is a technical solution for a political problem, and in this case is papering over the need for the school district to look for efficiencies.
Martinez has thanked the city for providing CPS with additional TIF surpluses, plus letting TIFs expire. But he does not think the city is doing enough. He has said that if all TIFs were eliminated, the school district would get an additional $1 billion a year, which would solve its deficit.
City officials say they agree that too many TIFs were put in place, but note TIFs pay for a lot of important capital projects across the city, including in the schools.
Sarah Karp covers education for WBEZ. Follow her on X @WBEZeducation and @sskedreporter. Tessa Weinberg cover Chicago government and politics for WBEZ.