A Doomsday Plan for the Chicago Public Schools

Chicago Public Schools chief Ron Huberman dropped an anvil on Chicago residents late last week when he announced that the district faces a $975 million deficit next year on a budget of $6.2 billion.

Huberman is as savvy a fiscal manager as one finds in Chicago government, and he is no doubt aware of the painful steps that must be taken to balance the budget. The CPS budget situation is so dire that it's exceedingly difficult to make the cuts and revenue hikes add up to a balanced budget even before considering what's politically viable. To close the deficit, Huberman will likely have to follow the doomsday formula outlined last week by Chicago's preeminent fiscal watchdog to save a different government -- the State of Illinois -- from ruin.

Consider what the Civic Federation said about Illinois' fiscal picture: the state currently faces a $12.8 billion deficit on a discretionary budget of $26 billion, a tide of red ink that dwarfs anything the state has faced in at least a generation. To close the gap, the federation said, Illinois must make major reforms to both spending and taxation.

On the spending side, the federation proposed that Illinois roll back non-education, non-health spending to 2007 levels (to save $2.1 billion) and hike pension contributions for state employees (to save $400 million). In terms of revenue, the state should increase personal and corporate income tax rates (to raise $6 billion), and extend its income taxes to retirement and Social Security income (to raise $1.6 billion).

For those keeping score, the reforms backed by the federation -- which are less shared sacrifice and more shared bleeding -- would generate just over $10 billion per year; the $2.7 billion in unpaid bills would have to be rolled over to the 2012 fiscal year. (The steps would slice the deficit by 80 percent, the authors of the plan emphasize.)

As the federation's proposal demonstrates, there is really only one way to clean up massive deficits: cut spending, raise taxes, and leave a manageable piece for the future. Below, I have outlined some of the hard steps -- and, given the size of the deficit, there are many -- that CPS could take right its fiscal ship. And like the ones outlined by the Civic Federation, they don't call for everyone to pitch in a bit; they call for everyone to pitch in a lot.

First, the $975 million deficit assumes that the state will reduce education funding, as it would under Governor Pat Quinn's proposed budget cuts. Simply maintaining its current level of education funding -- Illinois is, after all, nearly last in terms of the state's share of education funding -- would allow CPS to lop $275 million off of its deficit.

Second, teachers are due a 4 percent pay increase under a contract ratified in 2007, before the onset of the "Great Recession." Since 2008, however, virtually no public or private employees have received pay raises -- in fact, most are taking pay cuts in the form of furlough days, as non-unionized CPS employees have. Canceling this pay increase would save the district $170 million.

Third, Cook County is rolling back half of Todd Stroger's one percent sales tax increase on July 1. Half a percent of the sales tax generates about $188 million, according to county officials. A bit over half of the revenue is raised in Chicago, and -- with approval from the City Council -- the Illinois Department of Revenue can keep the tax in place for another year or two and turn over Chicago's share to CPS instead of to Cook County. Such a move would raise about $100 million.

Finally, there is the issue of contributions to the teacher's underfunded pension system, which will cost the district $587 million next year, an increase of $280 million from last year. The reason for this change is that the value of the assets in the pension fund have dwindled and now stand at 74 percent of the promised liabilities. Truth be told, the ratio could be a lot worse. For example, the Fire Department and Police Department's pension funds are 40 percent funded 47 percent funded, respectively.

If the General Assembly actually gives CPS the $200 million the district is owed from this year, CPS could use those funds to make a nearly full pension payment. If it doesn't, the legislature should allow CPS to fund the pensions at last year's level ($300 million) as long as the district puts together a long-term plan to bring the funding level back to 90 percent.

In addition to a timetable for increasing payments to the fund, such a plan would involve ending the system of double taxation, where Chicagoans contribute tax dollars to both the Illinois and Chicago teacher pension funds, and creating a two-tiered pension system that enrolls new employees in 403b plans. These changes would allow CPS to dig itself out of the pension hole, while reducing this year's operating deficit by $280 million.

Such painful cleaving would leave CPS with a deficit of about $150 million, which can be closed with cuts in administration and programs, and a modest property tax hike. Though Huberman has already eliminated over 1,000 administrative and support positions, more reductions might be needed. By way of program reductions, many teachers report that they would love to sack Kaplan's Instructional Delivery Systems, saving $30 million. The property tax levy could be increased by $75 million, or perhaps a little more.

Of course, just about everyone will hate some part of this package, if not the whole thing.

Teachers will have to forgo pay increases and agree to a two-tier pension system for new employees. On the other hand, doing so would avoid layoffs, preserve pensions for current employees (since teachers do not receive Social Security benefits), and still leave Chicago teachers among the best compensated educators in America -- especially given CPS' comparatively short school day and school year.

Taxpayers will have to fork over boatloads of extra cash -- 5 percent instead of 3 percent of their incomes, 10.25 percent instead of 9.75 percent on consumer purchases, and a couple hundred dollars extra per year in property taxes. On the other hand, they would avoid destroying the public schools, and put their state and city on the road to financial recovery.

Politicians will have to take it on the chin -- Mayor Daley would have to force through this austerity budget less than a year before he faces voters, and CTU president Marilyn Stewart would have to agree to unpopular revisions to the union contract just months before facing her own voters. But Chicago's leaders have allowed a structural budget deficit to fester for years, and it's they who ought to take the heat for leading us out of the woods.

As Huberman has argued, the teachers and taxpayers who will undoubtedly be outraged by his coming doomsday budget ought not consider their interests in a vacuum.

Teachers who oppose canceling the pay raise should try to find $180 million in revenue from somewhere -- and justify why some of the best paid teachers in the country deserve raises while taxpayers are already ponying up unprecedented amounts of dough.

Every taxpayer who insists that we can just "cut spending" to close the deficit should keep in mind that shuttering Chicago's acclaimed magnet schools, closing 100 neighborhood schools, opening no new charter schools, and eliminating after school programs would collectively save less than $150 million -- or 16 percent of the deficit. Even increasing class sizes to 40, which is far more than can physically fit inside most classrooms, would save just $200 million.

As chief of the Chicago Transit Authority, Huberman and his staff saved Chicagoans from doomsday after doomsday, implementing administrative cuts, negotiating reforms with the unions, and corralling the legislature to hike sales taxes to fund mass transit. Yet the crashing economy blew another hole in the CTA budget, and despite our faith that another last-minute fix for the CTA would materialize, we saw earlier this month that the agency finally had to make good on its promises.

Now Huberman faces a much larger challenge -- a much larger deficit, a much larger budget, and, it must be said, much higher stakes. Huberman has always been right when telling us that a fiscal catastrophe exists right around the corner. We ignore his warnings at our peril.