S&P releases report warning Chicago Board of Education

S&P Global Ratings released a report this week warning that the credit trajectory of the Chicago Board of Education will hinge on the outcome of current contract negotiations with the Chicago Teachers Union and the willingness of the CTU and Mayor Brandon Johnson to cut expenditures at Chicago Public Schools.

S&P, which rates the Board of Education speculative-grade BB-plus with a stable outlook, said it “believes the ongoing political resistance from the CTU and the mayor to cutting key expenditures and the outcome of the current CTU negotiation, compounded by the uncertainty surrounding CPS’ management stability and board transition, could have near- or longer-term implications” for the board’s credit profile.

When the board approved a budget this summer, S&P noted, a few key expenditure items remained “undetermined” and were not included in the budget. Those included salary and benefit increases for the CTU, a new contract for the Chicago Principals and Administrators Association and a $175 million Municipal Employees’ Annuity and Benefit Fund contribution sought by the city.

The rating agency said in its report that the board will have to find structural solutions to offset the financial impact of a new CTU contract. And because “the possibility of CPS obtaining new funding sources from Springfield [is] unlikely in the near term… management’s ability to scale down its operations to match revenue sources will be crucial to avoid potential rating pressure,” S&P said.

“There could be political resistance to cost cuts from staffing or school consolidation and closure,” Ying Huang, director and lead analyst at S&P, told The Bond Buyer. “We view the contentious relationship between the mayor, the CTU and CPS leadership as evidence of the political challenges surrounding CPS’ key financial and operational decisions, which could potentially lead to management instability that may adversely affect operations.”

S&P also noted the possibility of a CTU strike if the board or the union reject any recommendations about mandatory subjects of bargaining that arise from fact-finding hearings in January.

Huang said “a strike by CTU could be very disruptive to CPS’ operations temporarily and cause reputational risk,” but added that its impact on the board’s credit profile can only be determined “after we understand any details that may result from the contract term negotiation and the associated financial impacts.”

If the CTU contract weakens the school district’s operations and available reserves, or if the board’s already-heavy reliance on tax anticipation note borrowing increases, there would be downside rating pressure, Huang added.

“What S&P appears to have highlighted are the very things that prompted us to raise concerns about the budget,” said Civic Federation of Chicago President Joe Ferguson, referring to a July 2024 Civic Federation report on the CPS 2025 budget. “It was technically balanced, but there were unresolved expenditures… that could tip it into imbalance. And so here we are.”

In its July report, the Civic Federation listed six potential revenue options suggested by Kids First Chicago, which included a property tax increase; a fiscal health property tax increase referendum; allowing all tax increment financing districts to expire; a consolidation of the Chicago Teachers’ Pension Fund with the state’s Teachers Retirement System; an increase to the state’s evidence-based funding contribution; and a concentrated poverty adjustment to the EBF formula.

“Those are things that might be examined; the one of all of them that probably is most viable, not for implementation, but at least for discussion and negotiation, concerns the pension obligation,” Ferguson said, noting that all the other districts in the state have their pensions covered by Illinois at about 99%, whereas for CPS, it’s about 34%. “All of those other things, they weren’t politically viable in the summer and they aren’t politically viable now.” 

Ferguson also pointed to the instability in leadership at CPS, which was underscored when news broke this week that CPS CEO Pedro Martinez has hired an attorney and rejected an offer to buy him out from the Board of Education. Martinez has landed in the crosshairs of the Johnson administration and the CTU over a variety of issues, including his unwillingness to countenance $300 million of short-term borrowing to help balance the budget. 

“Somebody’s who under that kind of pressure should be retaining a lawyer,” Ferguson said, adding that it appears Martinez “meant what he said” when he vowed to finish the job he was hired to do.

“Think about it from the perspective of there being a recently approved five-year plan in a system that doesn’t keep CEOs around for five years,” Ferguson said. “It really makes it hard to do the long-range planning that’s necessary to provide stability and improving outcomes.”

The previous school board resigned in protest amid a reported push from the mayor’s office to fire Martinez, who can only be terminated by the board and only with cause. The November election ushered in a new hybrid CPS school board, with Johnson appointing 11 of the 21 total seats with the balance chosen in elections. CTU-backed candidates won four of the ten elected seats.

But Ferguson said the management instability is only part of the picture.

“With CPS, it’s governance instability beyond that,” he said. “And then there is financial uncertainty, because we do not know the magnitude of the added costs that are coming. But we do know that any added costs tip the budget into deficit. It’s all levels at CPS, so the rating agencies are well within reason in having serious concerns.”

The situation at CPS also serves as a reminder that the public school system and the city are not completely separate entities, as a review of their financial entanglements two years ago made clear. 

“There needed to be some form of working group formed to address the complicated and substantial legal and financial entanglements between the city and CPS,” Ferguson said. “And that hasn’t been done, probably partly because of the managerial instability on both sides.

“If CPS goes under, it’s going to have a significant gravitational pull on how the rating agencies are looking at the city,” he added.