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How badly will COVID, looting hurt CPS finances?
Moody's says Chicago Public Schools probably will scrape by, but it won't be pretty and it could get rocky.

Thursday, June 04, 2020
Crain's Chicago Business
by Greg Hinz

The combination of COVID-19 and the looting that marred some protests over the killing of George Floyd obviously aren’t good fiscal news for any local government, raising costs and slashing income. But how harmful will it be to Chicago Public Schools, which is just getting back on its financial legs after a few very bumpy years?

Odds are there will be damage, which at this point appears containable, Moody’s Investors Service says in a new report. But I think the bond rating agency may be being a bit charitable, and indeed it says there is a real possibility of “material operating deficits and increased cash flow borrowing.”

As I and others have written, CPS’ new financial stability mostly is due to increased revenue from the state under its new evidence-based funding model, and from a special property tax levy the Legislature authorized a couple of years ago to pay off old pension debt. Those two factors were crucial when the school district agreed to a new five-year contract with the Chicago Teachers Union, which will cost the district an estimated $1.5 billion over the term of the agreement.

But what if those new revenues don’t come in? Already, the new fiscal 2021 state budget approved last month omits $350 million in expected additional school funding, of which CPS expected to get $60 million to $70 million more. And with Cook County Assessor Fritz Kaegi now in the process of knocking down property tax assessments, CPS could lose a chunk of the $477 million it’s been expecting from the new pension tax.

Moody’s concludes the most likely outcome is that increases in state funding will be cut somewhat and the pension levy will decline moderately. The firm adds, though that “would further reduce the district's financial flexibility, the material effects of the changes are likely several years out and represent a relatively manageable share of the district's total operating revenue."

In other words, CPS probably will scrape by.

But the problems will worsen down the road because most of the costs of the new contract are back-loaded and won’t arrive for two or three years. If the nation's and CPS’ finances haven’t recovered by then, that’s a problem.

Moody’s doesn’t expect it to get that bad. Under its worst-case scenario: "The district would likely need to materially increase cash flow borrowing. Still, given the financial gains made over the last several fiscal years, CPS' financial position would weaken, but the district would not return to its previous low over the next five years."

One thing Moody’s didn’t discuss is whether CPS could borrow at very low rates from the Federal Reserve. That’s exactly what the state is doing to the tune of up to $5 billion to balance its new budget, and some financial experts tell me CPS likely could do the same, indirectly, by having the city borrow on its behalf.

Another bond rater, S&P Global, a few days ago called the balance in the state’s budget “precarious.” All in all, the last thing Chicago needs to do is borrow more money if that possibly can be avoided.

Congress also could ride to the rescue with more help. But there’s a big debate now in Washington and what will occur is quite uncertain.

CPS and CTU did not respond to requests for comment.

UPDATE:

The teachers' union is out with a response, and it may sound a familiar.

It says the city ought to tap "surplus tax increment financing funds," and stop billing CPS for $100 million in city services that Lightfoot began charging for this year to balance her budget. The union also wants borrowing from the Fed at the same "near zero" rates it charges "Wall Street profiteers."



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