June 08, 2023
With the upcoming implementation of an elected school board to oversee Chicago Public Schools, the governance of CPS will be separated from the City of Chicago. The 21-member elected school board, set to replace the existing seven-member board appointed by the Chicago mayor, will be phased in beginning in 2025, with the fully elected board in place beginning in 2027. The separation raises questions about the ongoing financial responsibility of the City to the school district and whether partnerships between the two agencies will continue. Before the elected school board takes office, there are two key questions that still need to be answered:
- How much financial responsibility should the City of Chicago have to CPS once the school district governance becomes fully independent?
- How will Chicago Public Schools deal with the looming budget deficit of $628 million projected to begin in FY2026?
Public Act 102-0691 required the Chicago Board of Education to commission an independent review of the district's finances and entanglements with the City of Chicago by October 31, 2022. The legislation also requires the State Board of Education to make recommendations on the Chicago Board of Education's ability to operate with the financial resources available to CPS as an independent unit of local government, based on the review of financial entanglements. The recommendations are due to the State legislature July 1, 2023.
Historically, the Chicago Public Schools and the City of Chicago have had a close financial relationship, partly established in state statute and partly through intergovernmental agreements. As a result, the City provides the school district with significant annual subsidies. This is a situation unique to Chicago. No other Illinois municipalities have a financial responsibility to their school systems. Rather, each unit of local government is fully responsible for its own financial obligations. With Chicago Public Schools set to become a fully independent government, it is not clear that the City would or should be obligated to fund CPS pension, debt and other related costs.
An analysis of entanglements between the City of Chicago and Chicago Public Schools released in October 2022 lays out in detail each of the financial entanglements that need to be resolved. Based on the information in the report, the City provides CPS with approximately $383 million in financial benefits, either through direct appropriations or reduced payments in FY2023. These include:
- $142.3 million in payments from the City to CPS from a property tax levy that the City levies on CPS’ behalf to pay for the debt service on bonds used to support capital improvements in schools. This agreement exists per an intergovernmental agreement that runs until the end of calendar year 2031.
- $97.7 million in pension contributions made by the City on behalf of CPS employees and retirees who are members of the Chicago Municipal Employees Annuity and Benefit Fund (MEABF). The full cost of the CPS portion of the MEABF contribution to the pension fund is $272.7 million, of which CPS is covering $175 million in FY2023. Previously the City covered the full cost of the pension contributions, but CPS began reimbursing the City in FY2021 beginning with a payment of $60 million, which increased to $100 million in FY2022 and $175 million in FY2023.
- $97 million in Tax Increment Financing (TIF) Surplus revenue, which is distributed pursuant to State law.
- Other capital funding intergovernmental agreements, including $7.9 million in Modern Schools Bonds, which are financed through Tax Increment Financing.
- $27 million in free or reduced CTA fares for students.
- $11 million in user fee waivers. Pursuant to City ordinance, the City waives the water and sewer bills for CPS properties used by CPS (estimated to total a value of $10 million), as well as a number of other permitting fees such as driveway permitting, building inspections, vacant building registration and sprinkler inspections (estimated to total a value of $1 million).
In addition to these entanglements, the City and CPS have many other partnerships. The City provides some small grants to CPS for programming. CPS and the City collaborate on early childhood education: CPS pays $80.2 million annually to help fund preschool programs. CPS now takes on the full cost of school resource officers ($10.2 million in FY2023) and school crossing guards ($16.6 million).
In addition to addressing the entanglements, Chicago Public Schools desperately needs a long-term financial plan to address its unstable finances. The District relies on short-term borrowing each year to generate enough cash-flow throughout the year to pay for ongoing operations and personnel costs. The CPS budget currently also relies heavily on federal COVID-19 pandemic relief funding; 8.3% of the CPS budget is funded through federal ESSER funds in FY2023. This one-time federal funding is projected to run out in FY2025. Deficits are projected beginning in FY2026, with a deficit of $628 million estimated for FY2026, increasing to $733 million in FY2027 and $650 million in FY2028. Additionally, operating reserve levels remain below targets.
Because many of the District’s revenue sources are largely out of its control, legislation may be required to provide new or increased revenues if they are needed to keep up with rising costs. Given the District’s fragile financial condition, coupled with the potential for CPS to lose even more revenue as it becomes independent of the City of Chicago, the City must plan ahead for the inevitable fiscal cliff looming after federal COVID relief funds run out.
The City of Chicago and the Board of Education will need to work together to develop a plan for how each of these entanglements will be handled in future years and develop a long-term financial plan that sets up the elected school board with clear guidance on the City’s financial responsibility to CPS after 2024.