08/28/2013 06:30 pm ET Updated Oct 29, 2013

Chicago School Budget Approved Unanimously, Taps Reserves To Plug $1 Billion Gap


CHICAGO, Aug 28 (Reuters) - The Chicago Board of Education on Wednesday unanimously approved a $6.6 billion fiscal 2014 budget for the Chicago Public Schools, tapping budget reserves to cover 70 percent of a $1 billion deficit.

The budget gap for the nation's third largest public school system was driven by a steep climb in pension payments that will rise to $613 million in this budget year from $208 million in fiscal 2013. The big rise is largely due to the expiration of a three-year partial pension funding holiday the Illinois Legislature approved in 2010.

The city-run district also blamed the deficit on flat or declining revenue and contractual salary increases.

It plugged the gap this year mostly by draining nearly $700 million in budget reserves. The budget also cut spending by $112 million and increased the property tax levy to the maximum rate allowed by state law.

Chicago Public School CEO Barbara Byrd-Bennett said the district can't cut its way out of its fiscal crisis.

"We need meaningful pension reform that can generate significant savings and prevent devastating future cuts to our schools," Byrd-Bennett said in a statement.

Any changes in the pension system must come from the Illinois Legislature, which is struggling to come up with a plan to deal with the state's own $100 billion unfunded pension liability.

The school spending plan for the fiscal year that began July 1 has drawn criticism from the Chicago Teachers Union and a government finance watchdog group.

In a budget analysis released on Wednesday, the union said the school district was unfairly blaming all its fiscal woes on inadequate funding from the state of Illinois and inaction by state lawmakers on pension reform.

"Absent from this discussion was any acknowledgement of poor district decisions: no advocacy for additional local revenue, no planning for the self-inflicted increase in pension payments, brazen charter (school) expansion at the same time public schools are closed en masse, and complete disregard for public input on the district's spending priorities," the union's analysis said.

The Chicago-based Civic Federation's analysis of the budget, released last week, concluded it was unsustainable and said the district's fiscal health will continue to deteriorate without pension reform. The group also noted the system was already projecting budget gaps of nearly $1 billion for the next two fiscal years.

Chicago Mayor Rahm Emanuel, who lobbied the state legislature last year for pension reform, is closing about 50 schools, the largest mass public school closing in U.S. history.

The system eliminated 1,581 teaching positions and 1,587 non-teaching positions this summer, but has hired back 1,000 teachers for the school year.

Moody's Investors Service last month downgraded the credit rating on the school system's $6.3 billion of outstanding general obligation debt a notch to A3, citing a high debt and pension burden that relies on the same tax base as the city of Chicago.

The rating agency on July 17 cut the city's GO rating three notches to A3 due to growing pension liabilities and related budget pressures.