Chicago Schools Expected to Get State Aid Hike: Deputy Governor

(Bloomberg) -- Chicago Public Schools should get a “significant increase” in state aid next year, according to a top Illinois budget official, even as some 2021 education funds hinge on whether voters decide the rich in the state should pay more in taxes.

Governor J.B. Pritzker's $42 billion spending proposal for the year starting July 1 includes $1.4 billion that won't be spent unless a November referendum passes to change Illinois's flat income tax to a progressive rate. The budget includes a $350 million jump in state aid for schools in 2021, though about 40% of that increase is contingent on the graduated levy going through.

“We believe the funding that will be going to CPS is going to represent a significant increase,” Dan Hynes, Illinois's deputy governor for budget and economy, said in an interview. “They are not going to be greatly impacted by the way we had to structure the budget this year.”

The budget caveats due to the uncertain state revenue have raised questions about how much of an increase in state aid Illinois schools will receive. Pritzker's 2021 proposal earmarks $7.6 billion for so-called evidence-based funding for schools, about $350 million more than in fiscal 2020 if the graduated-income tax vote is approved, budget documents show.

The junk-rated Chicago Board of Education has been counting on higher state aid after Illinois's new evidence-based funding formula became law in August 2017, sending more aid to districts with lower resources. This helped stabilize CPS's finances and reduce its short-term borrowing. The aid is especially needed as costs are climbing after the board signed a five-year contract, including salary hikes, last year to end the longest teachers' strike since 1987.

Meet Expenses

In November, the board increased its 2020 spending to $7.84 billion from $7.7 billion after reaching the agreements with unions. Chicago schools got more than $1.6 billion in evidence-based state funding in the year that ended June 30. The district “depends heavily” on full, on-time revenue from Illinois and had expected increases of $70 million annually, according to S&P Global Ratings.

Hynes declined to comment on the exact amount of a funding increase CPS should expect in 2021. Education is a priority for the governor in next year's budget and Chicago's schools, which sit in the top tier for funding needs, should receive money to help meet expenses, Hynes said.

“We are in an unusual circumstance,” Hynes said. “We are still facing a multi-billion dollar structural deficit. In this fiscal year we are continuing to live with that financial burden and with the restraint that comes along with it.”

Illinois has the worst credit rating of all 50 states as it struggles with $137 billion of retirement debt and $6.9 billion of unpaid bills. During his budget address last month, Pritzker underscored the need for the graduated income tax to raise revenue, as about 20% of his proposed budget goes to pension costs. The new tax structure would bring in an additional $3.6 billion annually, according to estimates from his administration.

Plan B

Still, the Civic Federation, a government watchdog group, has long warned Chicago schools not to be too optimistic about ongoing state funding increases given the dire state of Illinois's finances, said Laurence Msall, president of the federation.

“It's not unreasonable to worry that next year's allocation from the state may not grow as CPS projected,” Msall said. The district's “expectation for growth of the state funding formula is questionable in light of state's ongoing financial crisis.”

The district should develop a plan B given the lack of clarity on the size of the increase it can expect as Illinois's growing pension liabilities and unpaid bills crowd out other spending, Msall said.

“They are coming out of a long period of austerity and stressed operations, and to the extent there is more state funding available, we will be watching as to what they do with that,” said Arlene Bohner, a senior director with Fitch Ratings, which has a BB rating, two levels below investment grade, and stable outlook on the district.

The level of state aid may not be known until the Illinois General Assembly weighs in on the budget over the next three months, the Illinois State Board of Education calculates how much state funding schools should receive, and voters cast ballots on the new tax structure.

“We are appreciative for the state's continued investment in K-12 education,” Emily Bolton, a district spokesperson, said in an emailed statement. “CPS and other school districts across the state still operate far below adequacy targets and we trust that the state's plan will not place districts in a financially unstable position.”

Some investors are taking a wait-and-see outlook.

Chicago schools “have gone through much more difficult” budget processes, said Dennis Derby, a senior credit analyst and portfolio manager at Wells Fargo Asset Management, which holds the Chicago district's bonds among its $40 billion in municipal assets.

“It's early on in the process,” Derby said. “This is obviously the beginning of a negotiation process and we would expect the governor to try to put forth some incentives to align his interests with that of the local school district.”

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, Michael B. Marois

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