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Editorial: How CPS got into its financial mess

Chicago Mayor Rahm Emanuel reports  results The First 100 Days Emanuel Administratiduring City Hall news conference Monday August 22

Chicago Mayor Rahm Emanuel reports the results of The First 100 Days of the Emanuel Administration during a City Hall news conference, Monday, August 22, 2011. | John H. White~Chicago Sun-Times.

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Updated: July 15, 2013 7:48PM

Mayor Rahm Emanuel this week refused to rule out lifting Chicago’s property tax cap — a move that would pave the way for a school property tax hike larger than the law currently allows.

It’s easy to see why.

The financial picture for Chicago’s school system is grim, and the options for new revenue extremely limited. This year’s deficit is roughly $1 billion. Next year looks even worse.

CPS has cobbled together its annual budgets in the last few years, relying on one-time revenues, a pension holiday that is expiring, administrative cuts, layoffs and the draining of reserves.

This year is no different. CPS has pledged to keep cuts as far from the classroom as possible but principals, who got their budgets last week, are telling parents to expect layoffs and cuts. CPS is using a new budgeting system this year, which is causing confusion and some misunderstanding, but the steady drumbeat of reports of cuts are too persuasive to ignore.

“There will be loses in positions, programs, services,” Chicago Principals & Administrators Association President Clarice Berry told us. “I don’t see how it can’t be.”

Here’s how CPS got into this mess:

◆ Big pension bills: CPS’ pension bill this year jumps by $405 million, leaping to $613 million. In 2010, CPS put off this day of reckoning by securing a partial pension holiday from the Legislature, but that is ending. The only responsible solution is to pay what’s owed and pass a pension cost-cutting bill that covers the state’s retirement systems, as well as Chicago employees and teachers.

◆ Declining revenue: CPS gets most of its money from three places, according to the Civic Federation: property taxes (34 percent); the feds (15 percent); state revenue (30 percent). Two of the three have been dropping: federal stimulus dollars have dried up and state revenue directed to Chicago is now below 2008 levels.

◆ Property tax cap: Each year, CPS can only grow property tax revenue by the increase in the rate of inflation or 5 percent, whichever is less. If CPS chooses to tax to the cap, it produces only modest revenue growth.

To make ends meet this year, CPS will make more administrative cuts. Already, officials say they’ve cut $600 million. CPS also is pushing to pass a pension cost-cutting bill in next week’s special legislative session.

But cuts alone won’t do it. Given CPS’ mix of revenue sources, lifting the cap temporarily is one of the only plausible ways to help dig CPS out of its budget hole. CPS, which isn’t advocating to lift the cap, also should take advantage of a potential bump in property tax revenue when nine TIF districts dissolve over the next two years and should tap into any available TIF surpluses.

The Chicago Teachers Union and others have proposed other revenue and cost-cutting ideas, but two key ideas don’t amount to much:

◆ Raiding TIFs: Critics claim that tax increment financing districts siphon roughly $250 million annually from CPS by diverting revenue from property value growth into TIF funds. But even if the city killed all TIFs, which would be a mistake, despite their abuses, as they are the city’s only significant economic-development tool, CPS would not get much new revenue.

Remember the tax cap? When property values grow, the cap severely limits how much new revenue CPS can draw from that added value. In other words, most of that $250 million wasn’t going to CPS anyway.

And if there are revenue losses caused by TIFs, CPS partially makes up for them by raising property tax rates. The presence of TIFs also triggers a bump in state aid. A portion of TIF money also goes for school construction — $920 million to date, CPS says. TIFs, in the end, are likely a wash for CPS.

◆ Renegotiate “swaps contracts”: CPS critics have fixated on making CPS renegotiate so-called swaps contracts with banks that lock in interest rates that are higher than the current historic low rates. In theory, a good idea. Not so much in practice. Asking banks to renegotiate could send a signal that Chicago can’t pay, schools officials tell us, which could harm CPS’ credit rating and cost the district more long term. CPS also says swaps have saved the district $70 million in interest costs versus fixed-rate bond issuances. CPS should keep looking at these but it’s clearly no way to generate fast money.

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