July 31, 2025
The following is testimony delivered by Civic Federation President Joe Ferguson to the Illinois House Executive Committee at a July 31, 2025 hearing on Chicago Public Schools' finances. The original testimony has been edited slightly for publication.
Chicago Public Schools (CPS) faces a budget deficit recently estimated at $734 million for the 2026 fiscal year, which already began on July 1st. By state law, the District must pass a budget by the end of August. Regardless of whether CPS closes that gap in the next four weeks, the District’s financial distress will not end this year. The deficit facing CPS is, and has long been, structural and is projected by CPS itself to increase annually for the foreseeable future. This year’s stated projected deficit already assumes one-time revenue sources not within CPS’ control. Moreover, and not much discussed, the District’s structural cash flow challenges may be further complicated this year by the late mailing of property tax bills and the expectation of lower-than-average collection rates due to leaps in bills for some taxpayers after the most recent assessments.
One option being discussed to bridge this year’s deficit is short-term borrowing. Such borrowing would not be backed by revenue, which, coupled with the District’s already junk credit rating and high long-term debt, would likely mean higher borrowing costs. This would then drive even greater deficits in future years and all but certainly cause ratings agencies to reduce CPS’ credit rating yet again.
This is a pivotal moment for CPS. The district is run by a Board of Education and leadership in transition, and struggles with underfunded pensions, intergovernmental disputes with the City of Chicago, and a significant mismatch between facilities management and the long-term decline in student populations. In the aggregate, the District’s untenable financial position warrants the opening of a discussion on the potential use of a revived School Finance Authority. How soon this occurs may well be a function of the decisions the Board makes on the FY2026 budget in the next four weeks.
The foremost challenge facing CPS is the size of its structural deficit. Over the last five years, federal revenues earmarked to mitigate the effects of the pandemic were used to increase staffing, with no plans for how to fund those positions in the future. That federal support was one-time, and the last of it was used up in the District’s last fiscal year. Despite declining enrollment, CPS has approximately 7,000 more personnel than it did in 2019, with no revenue source to cover their salaries. Additionally, the new collective bargaining agreement with the Chicago Teachers Union is poised to add an additional $1.4 billion over the next four years. Most of these costs are due to cost-of-living adjustments, providing raises for CPS teachers. Adding to this weight, CPS has a junk-status credit rating, making its debt service very expensive.
CPS also struggles with underfunded pensions. The Chicago Teachers’ Pension Fund has a funded ratio, recently calculated at just 48%. Unlike every other school district in Illinois, the State covers only the normal cost of CPS’ pensions, leaving the unfunded liability – about 65% of employer contribution costs – to the District. Although CPS has a designated property tax levy it can use to pay for teacher pension costs, this levy is not sufficient to cover the liability, and the District is regularly forced to dip into operating revenue to make the required pension payments. In FY2025, for example, CPS spent over $100 million in operating funds on pension contributions. In addition to the employer costs, CPS also picks up 78% of employee pension contributions for all teachers hired before 2017. This unique expense is projected to be $135 million in FY2025.
On top of its teacher’s pension costs, the City of Chicago has renewed its demand that CPS make a $175 million payment to its Municipal Employees’ Annuity and Benefit Fund (MEABF) to cover some of the pension costs of non-teachers employed by CPS. Historically, and as mandated by a century-old state law, the City is responsible for paying the full cost of the MEABF. Although CPS began contributing to the fund in 2020, it did not make a reimbursement last year and for good reason – it had neither the financial resources nor the legal obligation to do so.
As public-school enrollment in Chicago declines, the District has seen many of its school buildings dip into its own definition of underutilization. 287 of CPS’ 498 facilities are underutilized, meaning that they hold less than 70% of their capacity for students. 50 schools are at less than one-third of their capacity. Underutilized schools inflate system operating costs and necessitate a high staff-to-student ratio to provide the same opportunities as provided to students in larger (and in some cases overenrolled) schools. In severe cases, these schools also do a disservice to enrolled students by failing to provide them with an adequately large community of peers for holistic development and well-being.
Solutions to CPS’ long-term fiscal challenges within its control are limited. It is unlikely that the larger structural crisis facing CPS will be resolved without support from the State. To close its structural deficits, CPS will need additional funding from the State or a new source of internally controlled revenue. However, the State should not give something for nothing, nor should it provide additional support to CPS without good reason to believe that the District will be a prudent fiscal steward. CPS would best be able to provide the State with this assurance by implementing a real and practicable austerity budget.
One revenue source discussed that is neither fiscally nor procedurally practicable is the recurring demand for immediate funding of the State’s evidence-based funding formula (EBF) at 100%, or even 90%. To be clear, EBF does not create an enforceable right to full funding. It took years to be developed and politically socialized, and cannot be altered for one district – what is done for one must be done for all school districts in Illinois. The bottom line, therefore, is that for CPS to get $1 billion more in EBF funding, the State would actually need to make an outlay of over $4 billion statewide at a time when Illinois is dealing with other immediate fiscal challenges, including more than one that affects CPS families.
Another potential source of aid that warrants future examination is the current level of State funding for the Chicago Teachers' Pension Fund (CTPF). The State covers over 97% of funding, including payments for historical unfunded liabilities of every downstate school district, while covering only 35% of the annual payments due to the CTPF and none of the historically unfunded liabilities. This makes CPS an anomaly in that it is forced to devote hundreds of millions of dollars in spending to pensions that no other Illinois district must bear. However, the prudent management of the State’s higher contribution to the non-Chicago teachers’ funds is assured by direct State control over the Teachers’ Retirement System (TRS) that covers non-Chicago public school teachers. The State might be called upon to examine full funding for the CTPF’s unfunded liability, in exchange for management of the fund. This might best be achieved by consolidating CTPF with TRS – a move that would equate the funding structures, give the state control over Chicago’s teacher pension fund, and create cost savings by eliminating administrative redundancies. Such a move, in conjunction with a transfer of existing revenue-generating authority for MBEAF from the City to CPS, would move the system into more responsible budgeting that aligns operations to traditional revenues and could help close the remaining structural deficit.
Finally, an alternate and maybe even companion solution to CPS’ crisis would be to revive the School Finance Authority (SFA). The School Finance Authority was originally established in 1980 to save the District from financial insolvency. At the time, the District was unable to make payroll, its access to the credit market was effectively shut down, and the State, following years of financial bailouts, refused to provide further assistance. The SFA was given approval power over the District’s annual budgets, financial plans, and contracts. It was further authorized to issue debt for CPS and levy a separate property tax for debt service. It was this structural independence that separated the SFA from the District’s low credit ratings, which provided access to bond markets that CPS could no longer secure on its own.
While the financial situation at CPS today is not nearly as dire as it was in 1980, many of the same components that drove the District to its breaking point exist today. If CPS goes forward with short-term borrowing despite its junk-status credit rating, it could drive its future deficits even deeper while risking its access to credit markets. If the District does not address the looming structural deficit, the SFA could become a necessary last resort.
Reinstating the SFA need not, and should not, equate to a takeover of the District, nor does it need to take the same form as it did 40 years ago. The Board of Education should continue to make decisions on operations and education, but with financial oversight that will better position the District to thrive for future generations. A revived SFA could provide financial oversight through full veto authority over contracts and budgets, partial budget control without veto power, enhanced oversight and auditing capacity, or any combination of the three. Its operation could also be phased in part to the gradual democratization of the Board, which, it bears noting, still operates with a majority of members who were not democratically elected, at least yet.
The SFA could provide a framework calibrated to the District’s actual need, which would be determined by the State providing the assistance. It may not be a panacea for all the District’s financial woes, but it warrants consideration as a tool to right the ship and provide the education the children of Chicago deserve.
None of these bigger possible paths are immediately available, and they are all complex. However, engagement between the topmost principles of CPS, the State, and the City would reassure constituents that their leaders are coming together in ways that might assure we are not here this time next year.