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Commentary By Josh B. McGee

The Real Cost of CPS Borrowing: District Now Owes $38,000 per Student

Cities, Education, Governance Public Sector Reform, Pre K-12, Pensions

By all accounts, Chicago Public Schools has made significant academic progress over the last 15 years. Since 2003 the district's proficiency rates on the National Assessment of Educational Progress exam have more than doubled in math and have nearly doubled in reading.

“Rising debt service costs are beginning to take a real bite out of district resources [in Chicago]. ”

But this progress is now threatened by severe financial mismanagement. The district faces a budget crisis driven by the rising cost of past, unpaid bills that is crowding out spending on today's teachers and students.

CPS' budget crisis was not created overnight. For more than a decade, the district has struggled with a widening structural budget deficit. Since 2001, inflation-adjusted spending per pupil increased by nearly 40 percent. In 2001, CPS spent close to $12,000 per student; in 2015, $16,432. Yet revenue has not kept pace: CPS per-pupil revenue has not matched per-pupil spending, with revenue falling short, on average, by $1,000 per pupil since 2001. More recently, the revenue gap has widened to nearly $3,000 per year.

CPS has papered over its annual shortfalls by borrowing vast sums from bond markets. As a result, CPS bonds are now rated as “junk” and the district has to pay a huge premium to get anyone to buy them (three times the rate for benchmark government bonds).

What's more, by failing to make the necessary pension contributions, CPS has borrowed even larger amounts from its current and former teachers through the pension fund—today the district owes the fund billions upon billions. CPS owes bondholders and the pension fund more than $38,000 for every student, up from less than $10,000 in 2001.

Rising debt service costs are beginning to take a real bite out of district resources. And CPS has scrambled to keep pace while protecting classroom spending. Since 2011, CPS has made nearly three-quarters of a billion dollars in budget cuts “away from the classroom,” with administrative and programmatic spending hit especially hard. Nevertheless, from 2001 to 2015, annual per-pupil inflation-adjusted spending has been hit hard as well:

  • Spending on textbooks has declined by 36 percent.
  • Spending on classroom supplies has fallen by nearly 60 percent. 
  • Budgets for elementary school sports (coaching stipends and equipment) have been cut by the millions.
  • Annual per-pupil spending on capital repairs and replacement has dropped by 55 percent.

Because the majority of a school district's spending is on salaries and benefits, there is only so much that can be cut beyond that. Which is why Chicago's teachers are feeling the budgetary pressure. Since 2001, CPS teacher salaries, as a share of total CPS spending, have fallen by more than 10 percentage points, while pension contributions have jumped, from 2 percent of total CPS spending to more than 10 percent.

Teachers' retirement benefits have also been reduced. Changes for new teachers instituted in 2011 represent an average total compensation cut of about 10 percent compared with teachers who began working before the changes took effect. For career teachers the drop is even larger—representing a reduction of more than 40 percent of the total potential benefit value.

There are only three ways to right CPS' sinking financial ship: Secure additional revenue, reduce teachers' retirement benefits, or cut services for current students. Start with revenue. Given that the Legislature is mired in a long-running budget standoff, securing significant additional state aid seems unlikely. Raising more local revenue faces another constraint: Chicago's property tax increases are capped at the rate of inflation.

As for cuts to retiree benefits, the Illinois Supreme Court has prohibited pension reductions for all but future hires, thereby disallowing even the modest changes to teachers' benefits. For these reasons, major service cuts to Chicago's public schools—however undesirable—appear most plausible.

This piece originally appeared in Crain's Chicago Business

This piece originally appeared in Crain's Chicago Business