Is Chicago the next Detroit?, public schools edition

Last updated on: April 22, 2015 at 11:34 am by Jane the Actuary

Is Chicago the next Detroit?, public schools edition 2015-04-22T11:34:04-06:00 Jane the Actuary

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Yesterday I wrote about funding woes in the Detroit Public Schools. And what should be in the paper today but an article on a projected budget deficit in Chicago that makes Detroit’s problems seem like nothing more than chump change?

The past few years have already seen thousands of layoffs at CPS, and more cuts will likely be a part of any plan forward. But no matter how much the district carves out of its budget of almost $6 billion, it probably won’t be enough to solve its projected $1.1 billion deficit.

Here’s the graphic from the Tribune:

What’s worse is that Chicago really has no excuse. Sure, they have charter schools, just like Detroit, but the funding structure is entirely different. In Michigan, schools are largely state-funded, so that every transfer from the DPS to a charter school means reduced funds coming into the DPS system. (And yes, the DPS no longer has the responsibility to educate that student, but they can’t shed legacy costs like pensions just because the current student enrollment drops.) In Chicago, it’s the CPS that is sponsoring, and funding, the charter schools, and is doing so, to the best of my understanding, in part as a moneymaker, paying less to the charters than it would otherwise cost them to educate the kids themselves, in terms of ongoing operating costs. At any rate, that’s the accusation that’s hurled at the city by the teachers’ unions, whose jobs are threatened. Chicago is is also not suffering from the same loss of population (and tax base) as Detroit.

So why, then, is the Chicago Public School system in debt to such a massive degree?

It’s easy to think of one reason after another: mismanagement. The failure to pay pension obligations on time, compounding the future payments due. Overly-generous benefits for teachers. It is also true that there is a tax cap in place in Illinois, which limits school spending without voter approval, to the lesser of CPI or 5%. And the pols disagree in their solutions: Gov. Rauner wants the system do declare bankruptcy. Mayor Emmanuel wants the state to cover their pension costs (with the argument, not entirely unreasonable in principle, that the state already picks up the cost for teachers outside the city).

But wait — you say that revenue has been decreasing, from 6.2 to 5.9 to 5.6 billion, and expenses have been increasing, from 5.8 to 6.4 billion, so that clearly there must be circumstances outside the CPS’s control?

Let’s look at the actual financial reports; 2014’s is here:

To begin with, government accounting is wacky. I just don’t know why it’s acceptable to account for their finances in the way that they do. The “revenues” cited above include not just tax revenue of various sort, and state and federal grants, but also include the proceeds from a bond issue, and the fact that in 2014 they issued less debt is the cause of their lower “revenue” (without this component, revenues increased slightly from 5.39 billion to 5.44 billion).

And expenses? Well, someday you’ve got to pay the piper. To be fair, expenses increased in all categories. Excluding pensions and other debt, expenses increased from 5.21 to 5.34 billion, a modest 2.5% increase. Which I suppose means that you’d say their budget is in “primary balance” or whatever the term is for being balanced if you exclude debt service. And the debt itself? General debt service increased from 390 million to 468 million, and pension payments from 228 to 593 million.

Oh, and by the way, no where in the private sector do you account for pensions by showing the year’s required cash contribution as the “expense” so that, in order to reduce your expense, all you have to do is find your way towards an exemption from contributing for the year.

Some more numbers:

The CPS has total debt of $13 billion. Of this, $3.2 billion is the pension liability, and $1.7 billion is the postretirement medical liability. And another difference between accounting in the private sector and the public sector is that in the private sector, you’re required to use an interest rate reflective of liability-matching corporate bonds (or maybe about 4% right now), but in the public sector you use an “investment return rate” for valuing your liabilities — in this case 7.75%, which considerably understates the liabilities. And even with this rate, the funds are still only 49% funded.

Oh, and the bit about how teachers have “earned” their pensions by contributing with payroll deduction? Teachers are obliged to contribute 9% of pay — but according to this report, as a result of contract negotiations, all but 2% of this is actually paid by the CPS.

So back to the question in my title: Is Chicago the next Detroit? In terms of the local economy and population, no. Chicago has a far healthier and more diversified economy, has retained its middle class to a much greater degree than Detroit, and generally is in much better condition. But in terms of governance, Chicago’s problems are compounded by its size (it’s a heck of a lot easier to bail out the comparatively modest DPS liabilities) and the equally severe governance issues at the state level, where fights in Springfield over funding for basic social service programs leave little left for thoughts of bailouts such as what Michigan is contemplating.

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