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Lightfoot dismissed questions about ability to afford new CTU contract if economy tanked. Then COVID-19 hit, damaging CPS budget for years.

Mayor Lori Lightfoot, left, with CPS CEO Janice Jackson talks about the Chicago Teachers Union strike Oct. 29, 2019, at City Hall.

Mayor Lori Lightfoot, left, with CPS CEO Janice Jackson talks about the Chicago Teachers Union strike Oct. 29, 2019, at City Hall. (Brian Cassella / Chicago Tribune)

After the Chicago Board of Education approved an expensive new teachers’ contract last fall following a bitter strike, Mayor Lori Lightfoot dismissed as “100% wrong” the notion that the school district could have trouble affording the deal if there was an economic downturn.

Then came COVID-19, stay-at-home orders and a resulting recession that has hammered public finances across the country. Now, the financial fault lines that the Tribune identified have been breached as Chicago Public Schools officials try to put together a new spending plan in the coming weeks.

There are short-term problems: The state, which has its own financial woes, did not include extra education funding in its new budget that CPS was counting on to help pay for the teacher contract. And property tax collections the district is heavily relying on could decline because people and businesses might not have the wherewithal to pay their bills.

Over the longer haul, the school district faces the double-whammy prospect of further erosion in property tax collections and higher pension contribution costs triggered by the economic downturn, budget analysts said.

“Chicago Public Schools entered the pandemic, or the fallout of the pandemic, in very tentative financial shape hoping for Springfield to find enough resources to constantly increase the school aid formula,” said Laurence Msall, president of the Civic Federation budget watchdog group. “That did not occur, and now there are very significant downward revenue pressures on them while their expenses haven’t necessarily dropped. They may have increased because of COVID.”

Linda Bhavilai waves a Chicago flag as she marches with striking teachers outside City Hall while thousands of striking teachers and supporters march on Oct. 23, 2019.

Linda Bhavilai waves a Chicago flag as she marches with striking teachers outside City Hall while thousands of striking teachers and supporters march on Oct. 23, 2019. (Stacey Wescott / Chicago Tribune)

Potential fixes include tapping into leftover and yet-to-be-approved additional federal funding for local governments to make up for losses caused by COVID, and approval of a Nov. 3 graduated income tax referendum that would make it possible for the state to provide more money.

CPS officials declined to respond to a series of Tribune questions for this story. The Lightfoot administration tends not to engage with questions about the city’s challenges before she has a chance to put forward her own narrative.

The five-year contract with the Chicago Teachers Union, along with another deal for staff who are members of Service Employees International Union Local 73, boosted pay and committed the district to hiring 750 social workers, nurses, special education case managers, counselors and other support personnel. CPS also agreed to set aside $45 million annually to reduce class sizes, support sports and increase veteran teacher pay.

The contract increased costs by $137 million for the school year that just ended, and CPS was able to scrape together enough money largely with one-time fixes.

The total cost of the contracts are expected to reach $558 million by the fifth year, but at the time of their approval, CPS officials said not to worry — the money would come from annual state funding increases and growth in property taxes.

The contract is “responsible and affordable based on conservative assumptions about our finances and anticipated revenue,” CPS spokesman Michael Passman said in November.

Not everyone was sold, however.

“Should Illinois’ own financial problems result in reduced (school) funding ... the fiscal pressure (on CPS) could be immense,” wrote an analyst for S&P, a major bond rating agency.

It didn’t take long for the state not to live up to its pledge to significantly raise school funding each year.

Faced with its own long-running financial problems made worse by a pandemic that sent tax revenue tumbling by a projected $4.6 billion, the state held education funding flat in the new budget Gov. J.B. Pritzker signed in June. The state was supposed to increase money for schools by $350 million, and CPS was counting on collecting about $70 million of that to balance its new spending plan.

Democratic state Sen. Andy Manar of Bunker Hill, who pushed for the current state school funding formula and its extra funding, said the state just didn’t have the financial wherewithal to fulfill that commitment this year.

“Would I have liked to have seen $350 million? You bet, of course I would have,” Manar said. “But at the same time, given the set of circumstances that we face, preserving what we have, at the minimum, I think is a very positive place to land.”

CPS also is banking on a rise in property tax collections to help in the next budget, but two challenges loom.

The money could arrive later than usual — the county gave property taxpayers two extra months to pay up without penalty this year. That could lead an already-leveraged CPS to do costly short-term borrowing until the money starts flowing after the October due date.

Even then, some people and businesses struggling financially amid the pandemic may simply not have the wherewithal to pay their property tax bills.

Another ratings agency, Moody’s Investors Service, took notice. In June, Moody’s issued a report stating that CPS could find its budget dipping deeper into red ink if state aid to schools remained flat for two years and its property tax levy collections for pensions declined substantially. Still, the agency concluded the school district was unlikely to sink to the lows it struggled with in the last decade before the state school-funding formula was revamped in 2017.

The ratings agency already has downgraded CPS’ outlook from positive to stable. All three of Wall Street’s major bond rating agencies classify CPS debt as noninvestment grade, commonly referred to as junk. That means it costs CPS more to borrow money.

A trio of warning signs are starting to emerge for CPS beyond the next budget it must draft.

The first centers on property taxes that go toward the district’s day-to-day expenses. CPS has estimated that it will be able to increase those property taxes by about $100 million a year, and has identified that annual boost as a way to afford the teacher contract. But a lower rate of inflation could cut that figure by tens of millions of dollars.

That’s because CPS operates under the state’s property tax cap law, which effectively limits district property tax increases to the rate of inflation for the previous year.

And inflation this year is running extremely low, with the national consumer price index even declining in May. If that keeps up, CPS won’t be allowed to increase its property tax levy next year by nearly as much as it did in prior years. That would affect the budget for the 2021-22 school year.

The second warning sign involves a separate property tax that CPS charges for teacher pensions. CPS’ retirement fund has an enormous shortfall, and the district has to put in more money each year to whittle down the debt. Wall Street has identified this problem as the biggest drag on CPS finances.

Much of that debt is covered by a separate property tax for pensions, but that levy is calculated in a different fashion: it goes up as property values rise, and goes down if they decline.

While property values usually rise overall in the city, they soon could be falling. Cook County Assessor Fritz Kaegi plans to reassess Chicago properties for tax purposes based on the COVID-19 economic fallout. He already did that in the south and west suburbs, significantly lowering the values of many properties.

If Kaegi does the same in Chicago, the city’s overall assessed value would decline for taxes that cover the 2021-22 school year.

What might the impact be? In the current budget year, CPS received about $477 million in pension property taxes, based on the assessments of all land in the city. For every 1% reduction in overall assessments, the district will lose nearly $5 million. A 10% reduction, which would not be out of keeping with what Kaegi did in the south and west suburbs, would mean a loss of nearly $50 million.

The third warning sign also involves CPS pensions. The amount of money the district must put toward teacher retirements each year is tied to the value of the pension fund, which is invested in the stock market, among other things. And the stock market is down during the coronavirus pandemic.

That means future required pension payments shouldered by local taxpayers could increase to make up those investment losses, leaving the district with less money to spend on education. CPS already is diverting about $120 million a year to pension contributions out of funds that would otherwise go to classroom education.

Putting that spending document together won’t be easy. Already, the district announced in late April that it planned to distribute an additional $125 million to schools in the coming year, although it didn’t say if those costs would be offset elsewhere.

There also are two major uncertainties: whether Congress and President Donald Trump will provide additional funding to state and local governments to cover losses caused by the COVID-fueled recession, and whether Illinois voters in November will approve a change to the state constitution to allow for a graduated income tax backed by Pritzker.

Although the federal money must be used for coronavirus-related costs, it could give the district some breathing room.

“Money is fungible,” noted Ralph Martire, executive director of the Center for Tax and Budget Accountability. “I think there’s enough, frankly, fuzzy language in the COVID relief, the CARES Act, that they will be able to apply some of that money to replace local revenue (that would have been used for COVID-related expenses), which frees up that revenue to help plug costs elsewhere.”

Pavlyn Jankov, a teachers union education policy analyst, said he believes the CARES Act funding will allow CPS to have “a stable budget” this year, and he’s hopeful the federal government will provide further relief.

Chicago Teachers Union President Jesse Sharkey and Vice President Stacy Davis Gates after a CTU House of Delegates meeting at which they announced a tentative contract agreement was reached Oct. 30, 2019.

Chicago Teachers Union President Jesse Sharkey and Vice President Stacy Davis Gates after a CTU House of Delegates meeting at which they announced a tentative contract agreement was reached Oct. 30, 2019. (Chris Sweda/Chicago Tribune)

The federal government has far more wherewithal to step into the breach, should it choose to do so. Congressional Democrats are pushing for another COVID-19 package, but Republicans so far are opposed to providing state and local governments with more relief.

State government also could come to CPS’ rescue if Illinois voters approve a referendum on the fall ballot to switch to a graduated income tax system where wealthier people would pay a higher rate. Pritzker, who backs the referendum, estimates the change would bring in an extra $1.3 billion from January through June 2021.

“Further investing money in (school) funding would be at the top of the list should the fair tax be approved by voters of the state,” said Manar, the state senator from central Illinois, referring to the income tax moniker used by supporters.

CTU’s Jankov also noted inflation growth was relatively robust last year, so CPS should get a bit more money from whatever 2021 tax increase the Board of Education enacts. He also reiterated the union’s position that City Hall should pick up $60 million in annual pension costs that it had covered until last year.

Although Martire is a bit more optimistic than the Civic Federation’s Msall when it comes to CPS’ current financial predicament, he conceded the district faced “a difficult couple years.”

A silver lining, Martire said, is CPS’ heavy reliance on property taxes. Even though they can decline in an economic downturn, they are far more stable sources of revenue than income or sales taxes.

“It’s really time to wait and see,” Martire added. “At least CPS has been managed well fiscally in the last couple of years, and they’ve developed a decent relationship with the new mayor. So, there’s reason to believe that if they can get through the next two to three years of uncertainty, they can stay on track.”

Chicago Tribune’s John Byrne contributed.

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