Sept. 20 (Bloomberg) -- Chicago’s 30,000 public school teachers had little time to celebrate their return to class as attention shifted to how the third-largest U.S. city will pay for the deal that ended their first strike in a quarter century -- and how soon some of those educators will lose their jobs.
Mayor Rahm Emanuel and the Chicago Public Schools system he runs face a projected $1 billion deficit next year and the prospect of scores of school closings. The union peace they obtained may be short-lived because other pressures -- including at least $338 million in pension payments due in 2014 -- are squeezing the budget.
“If you look at the contract language, both sides got important stuff,” said Linda Lenz, publisher of Catalyst Chicago, a newsmagazine that has followed school-improvement efforts in the city’s schools since 1990. “But paying for this is going to be hugely painful.”
The three-year contract, with an option for a fourth, carries an annual cost of $74 million, 43 percent a year less than the pact signed by the district and the union in 2007, according to Chicago Public Schools. The $1 billion deficit doesn’t reflect the deal with the Chicago Teachers Union, said Robyn Ziegler, a spokeswoman for the district.
“It was understood that we would have to come back and amend the budget once we finalized a contract with CTU and knew what the total net cost of the contract would be,” Ziegler said in an e-mail. “We now are analyzing our budget in order to determine what cuts would need to be made in order to fund the contract.”
The agreement is only part of a larger financial challenge. More than 50,000 of the district’s 400,000 students in recent years have moved to charter schools, diverting state aid tied to enrollment. Along with unfunded pension liabilities, the district’s solvency faces mounting threats.
Schools are approaching a “devastating financial reality,” the Civic Federation, a Chicago-based research organization that tracks government finances, warned in a July report. It called for a reduction in benefits for current employees and retirees to make the system “affordable and sustainable.”
“This will increase the financial pressure on the district significantly,” Laurence Msall, the group’s president, said in an interview after union delegates agreed to suspend the strike and allow rank-and-file members to vote on the deal. “They have no reserves set aside. This’ll bring it into sharper focus.”
The spike in annual pension obligations will occur in two years with the expiration of a legislatively approved reduction in retirement payments that helped reduce budget pressures on the district. The Chicago Teachers’ Pension Fund had 60 percent of the assets needed to meet forecasted obligations, down from 67 percent a year earlier, according to its June 30, 2011, annual report.
Pension cuts weren’t addressed in the new contract, which includes an average teacher raise of more than 16 percent over four years. With the district’s limited ability to increase property taxes and the end of the pension holiday, the raises will challenge district officials, said Richard Ciccarone, director of fixed-income research McDonnell Investment Management LLC in Oak Brook, Illinois.
“That’s a lot of money given their constraints on revenue,” said Ciccarone. “In this day and age, 4 percent a year is a pretty healthy increase.”
In 1987, the same year of the last Chicago schools strike, then-U.S. Education Secretary William Bennett called the city’s system the worst in the nation and advised parents to send their children to private schools. Twenty-five years later, the fallout from the contract and the district’s financial strains could drive more children into charter or private institutions.
“There is little wiggle room” for trimming costs that would avoid school closings and teacher layoffs, Lenz said.
Standard & Poor's, which cut the district’s credit rating last month to A+ from AA-, is “comfortable with the additional cost” of the new contract and expects the district can incorporate it into its budget, said John Kenward, an analyst.
“It’s at a size where we don’t think it will result in a substantial impact on their fund balance,” he said.
In a Sept. 13 report calling the strike a “credit negative,” Moody’s Investors Service said the district faces the likelihood of having to increase class sizes and cut extracurricular programs to pay for the new contract.
The Moody’s report said the district’s property-tax levy is already at the legal maximum, “leaving expenditure reductions as the likely recourse to offset unbudgeted increases in salaries in fiscal 2013 and beyond.”
As union members picketed last week, the Chicago Tribune reported that 80 to 120 schools on the city’s west and south sides were being considered for closing. While Sarah Hamilton, Emanuel’s spokeswoman, denied the report, the possibility weighs on teachers.
“We are still protesting school closings arbitrarily,” Valerie Morris, 51, a special-education teacher at McKay Elementary School, said in an interview. “And we are still protesting opening of charters as a way of ‘improving the school system,’ when statistics are continually proving that they are actually in many cases doing just as well or worse than many of us are.”