CPS finances tell a grim tale

I read this article about the Chicago Public School strike in the Sunday paper. Please read the article down below and answer all of the following 4 questions. -What accounting principles (GAAP) can you apply to the article? -If the Chicago Public School system was a public company, do you believe that they would be a good company to invest in? Why or why not? -If you were to prepare a current ratio, debt ratio, or profit margin for the Chicago Public Schools (you do not have the numbers, so I am not asking you to actually compute them), how would you interpret them? In other words, based on the article, do you think it would have strong/good ratios or weak/bad ratios? -Do you believe that the Chicago Public School system is "too big to fail"? Should the federal government step in and "bail" them out as they did with the auto industry or banking industry? The following is the article you need to read to answer the questions stated above: Before this year's strike, the Chicago Public Schools enjoyed a quarter-century of labor peace. But a Tribune review of the district's financial records shows that the stability came at a significant cost that is likely to fuel conflict for years to come. Since 1987, when the city's teachers last walked out, former Mayor Richard M. Daley got leaders of the Chicago Teachers Union to go along with various reform measures by raising teachers' pay and improving their retirement benefits. His administration also embarked on an expensive construction program that built new schools and repaired old ones, even as the number of students declined. To cover the costs, CPS borrowed heavily and siphoned billions of dollars from the teachers' pension fund. Those moves, compounded by the burst of the dot-com bubble and a severe recession, have thrown the school district into a financial tailspin. Since 2001, the district has seen its net assets plummet from $1.2 billion to negative $1.2 billion, a decrease of 200 percent. "The seeds of the financial stress that CPS and its union find themselves in can be traced all the way back to when the mayor was given control of the public schools" in 1995, said Lawrence Msall, president of the nonpartisan Civic Federation. Under tremendous pressure to regain its financial footing, CPS is likely to cut costs by closing schools, laying off employees and increasing its reliance on charter schools, all major issues in last week's strike. Union and school officials said Friday that they had agreed on the "framework" for a deal, and union delegates are expected to vote Sunday on whether to end the walkout. Much was made in recent days of the personalities involved in the conflict. But records suggest the impasse has as much or more to do with the district's deteriorating financial outlook than with the volatile relationship between CTU President Karen Lewis and the administration of Mayor Rahm Emanuel. As the school system's annual budget grew more and more strained, unionized teachers started losing their jobs. Since 2009, the number of CPS teachers who do not work in charter schools has declined by nearly 1,700. Charter schools, meanwhile, began taking up a larger share of the CPS budget, in no small part because they operate more cheaply by hiring nonunion teachers. The amount of money going into charters grew eightfold between 2002 and 2011, from $47 million to nearly $380 million. In 2010, the CTU's rank and file rose up against its entrenched leadership, which was seen as too cozy with Daley. The teachers elected new leaders with a mandate to stem the tide of layoffs, school closings and charter schools while holding on to hard-won pay increases and retirement benefits. Yet the school system's finances make it increasingly difficult for CPS to give in to those demands. After 25 years of peace, some fear that this year's strike could mark a return to a time when the district and teachers wage constant battles over pay and job security. Teachers walked off the job five times in the 1980s. The challenge facing CPS, the mayor, teachers, parents and taxpayers is balancing the powerful interests involved while moving the district toward financial stability, all while improving student performance. That is no small task at a time when revenues are flat and expenses continue to rise. The total number of students in CPS declined by nearly 35,000 between 2002 and 2011, yet the district's annual expenses grew during that time by more than $1.7 billion. Those cost increases have outpaced modest revenue gains, leading to the annual budget deficits that plague the district. For years, records show, CPS has relied on one-time fixes to plug holes in its operating budget, including heavy borrowing, pushing off required pension payments, restructuring debt, tapping into TIF funds, drawing on reserves and withholding raises for teachers. But the district is quickly running out of fiscal Band-Aids. This year, CPS reached its legal threshold for property taxes, which grew from $1.5 billion in 2002 to $1.9 billion in 2011, a 27 percent increase. For the past few years, CPS benefited from federal stimulus money that doubled its federal funding to more than $1.1 billion in 2011. But that money has now dried up. The district is also leveraged to the hilt, so it can't borrow more money. Even if it could plug budget holes with more debt, its bond rating has suffered as a result of the financial problems, which means the cost to borrow would be much higher. Three main factors are driving the steady growth in costs: teacher compensation, the construction program and paying off debt. Despite the dismal financial picture, Emanuel made expanding the school day a centerpiece of his school reform package. That inflamed the issue of teacher compensation when contract negotiations already promised to be contentious. As the strike dragged on, the CTU stressed that the walkout was not based solely on pay but also included the broader issues of job security and poor working conditions, including classrooms with more than 40 children, a lack of books and supplies -- even air conditioning. Yet in the beginning, pay raises and the ability to roll over sick days were central issues in the standoff, especially in light of the longer school day. At first, the CTU demanded a 30 percent increase in pay. The district eventually countered with something less than the status quo of annual 4 percent raises, to which the teachers seemed to be amenable. Raising teachers' pay without more layoffs is increasingly unlikely, however, given the current financial picture. The school board already rescinded teachers' most recent pay increase to help balance last year's budget, even after shedding more than 1,200 instructional positions, according to the financial reports. Pay also lay at the heart of labor strife in the 1980s. Since then, teachers have seen their salaries steadily increase, thanks to contracts inked under the Daley administration. Between 2002 and 2011, the median salary of CPS teachers grew nearly 50 percent, from $47,647 a year to $67,974. The salary increases not only have strained the annual budget, but also have made it increasingly difficult to fulfill promises made to retired teachers. Teachers who started working before 2011 are eligible to receive a pension worth 75 percent of their salary if they work 34 years. They can retire at age 55 if they put in 20 years or more, and they can count a year's worth of sick days toward their pensionable time. Meanwhile, although teachers are required to contribute 9 percent of their take-home pay toward their pensions, the district agreed in 1981 to "pick up" most of that amount indefinitely in exchange for lower pay raises. That means teachers pay only 2 percent of their paychecks to receive retirement benefits most private-sector workers can only dream of. Last year, the pension pickup cost the district $130 million, records show. Under Daley, CPS continually sought relief from making its full pension payments. In 1995, when Daley took control of the school system, he pushed through changes to the state's pension law that diverted money from the pension fund to CPS coffers. During the first year, the district's pension bill was adjusted down from $93 million to just $10 million. The following year, CPS officials returned to Springfield. This time, a change to the law required CPS to make its contributions only if the pension plan's funding level fell below 90 percent. At the time, the teachers' pension plan was more than fully funded, at 102 percent. For the next decade, CPS contributed zero to teachers' retirements, apart from the payments it had agreed to "pick up" on behalf of teachers. Between 1995 and 2009, the district diverted more than $2 billion from the fund. Meanwhile, costs continued to increase because of pay raises. The plan's funding ratio dipped below 90 percent in 2004, and two years later the district had to start paying into the fund again, contributing $36 million. By 2010 its share had grown to $340 million. Pension costs put so much pressure on the bottom line that then-CEO Ron Huberman went to Springfield in 2010 to push for another pension break, this time a three-year partial holiday that saved the district $1.5 billion over three years. Now, the bill is quickly coming due, and there aren't enough resources to cover it. By 2014, the district estimates that its annual pension cost will reach $534 million. In the meantime, the pension plan's unfunded liability has reached $6.8 billion, according to the fund's most recent financial documents. Its funding ratio has dropped under 60 percent, placing the retirement security of tens of thousands of teachers in jeopardy. In addition, a yearslong borrowing spree by the district has increased its long-term debt load to more than $5.7 billion, up from $3.4 billion in 2002. The annual cost of paying down that debt has grown by 51 percent since 2002 and now stands at more than $332 million. "The fiscal challenges in Chicago are massive, driven in large part by the unfunded pension plan," said Timothy Knowles, director of the Urban Education Institute at the University of Chicago. "Sensible minds must prevail -- avoid the ideological battles we've seen in the last weeks and solve the big problem in good faith."