published Aug 8th 2016, 6:23 pm, by Elizabeth Campbell

(Bloomberg) —
Chicago school officials presented a budget that relies on the state of Illinois passing an overhaul of its underfunded pension system and assumes that the teachers’ union will agree to pay more into their retirement funds.

The $5.4 billion operating budget for the fiscal year that began July 1 is more than $230 million smaller than last year’s spending plan, district officials said. The plan relies on the state providing the district with an additional $215 million for its pension bills, which lawmakers and Governor Bruce Rauner have agreed to shell out only if the state comes up with a plan to restructure its own retirement system.

“The fiscal ’17 Chicago public schools’ budget is balanced without gimmicks or without operational borrowing,” Forrest Claypool, chief executive officer of the school system, told reporters on Monday. “Today marks the return to financial stability for the coming school year.”

The district won some relief from Illinois’s stopgap budget. The six-month spending plan approved at the end of June allows Chicago to establish a property tax levy up to $250 million specifically to help cover the teachers’ pension fund. The retirement system was only 52 percent funded as of June 30, 2015. The school system also secured $131 million of additional state funding from a so-called equity grant to bolster districts with high concentrations of students in poverty.

Credit Lines

While there’s no new operational debt planned, the district is still negotiating short-term lines of credit with large banks, Claypool told reporters at a press conference in Chicago. The board of education has $6.7 billion of outstanding long-term debt and $870 million of outstanding short-term debt, school documents show.

The 2017 proposal also assumes that the Chicago Teachers Union agrees to a contract that is similar in framework to the agreement that district officials reached with union leadership in January, according to Claypool. Rank-and-file employees ultimately rejected the accord, leaving the district without a contract.

“Without absolute certainty on our labor costs, we have to make, and do make, rational assumptions,” Claypool said in response to questions about the union contract.

The January plan included a two-year phase out of the so-called pension pickup. Since 1981, the district has paid 7 percent of the 9 percent pension contribution that employees are supposed to contribute to their retirement fund. The pension pickup cost the district $130 million last year.

“Make no mistake, if CPS enforces a 7% pay cut, we will STRIKE!!!” Karen Lewis, president of the union, said in a post on Twitter.

The district is making a “reasonable” effort, but there are some loose strings when you look at the plan, said Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances.

“I don’t think that the bond market is going to feel right about this and give them the support they’d like until they can accomplish those important provisions,” especially when the district is counting on labor, Ciccarone said. “The bond market is going to be uncomfortable until the entire gap is covered.”

The district also outlined a $338 million capital plan that includes $266 million of bonds, according to documents on the district’s website. The Chicago City Council approved a capital improvement tax in 2015 in the form of an annual property tax levy that is specifically for school construction projects.

The budget will be presented to the board at its Aug. 24 meeting.

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Michael Marois, Justin Blum

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