Chicago Mayor’s Terrible, Horrible, No Good, Very Bad Debt Plan for the District

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There are good debts and there are bad debts.

Good debt is an investment in something that will grow in value over time. For an individual, taking out a mortgage to buy a house might be a good type of debt.

But it’s risky to live beyond your means and take on debt if you don’t have a way to pay back what you borrowed.

Chicago Mayor Brandon Johnson is urging his city’s school district to take on some very bad debt. Rather than balancing this year’s budget through program cuts or staff furloughs, Johnson is urging the district to take out a $284 million loan. Worse, the loan would only delay those decisions until next year, when the city’s budget shortfall is projected to grow again, to $982 million.

Johnson is sticking with the idea, though, and the political fallout has come fast and furious. Chicago Public Schools CEO Pedro Martinez balked, leading Johnson to call for Martinez to resign. Martinez refused, so Johnson then escalated the battle to the school board. Not only did his hand-picked board members refuse to fire Martinez, they resigned en masse — sowing chaos just a month before the city’s first-ever school board election.

It’s still unclear whether Johnson will get his way, but the loan is a bad idea. As district officials noted in a memo leaked to the press, Chicago is already “the largest junk bond issuer in the United States.” Johnson’s plan would make that worse. It’s not exactly clear what terms Chicago would get on its proposed loan, but high-yield bond rates as of Oct. 14 were at 6.89%, and Johnson’s team has proposed the district take on a 20-year loan. At current rates, that works out to total payments of around $540 million. That’s before any fees, and it means Chicago would pay as much in interest over time as it would spend patching over this year’s budget deficit.

Moreover, a short-term loan would solve none of the district’s real budget problems. There are five big ones: high salaries and ongoing contract negotiations, overinflated staffing, declining enrollment, rising pension costs and the expiration of federal emergency COVID funding.

Let’s start with salaries. In 2019, the Chicago teachers union went out on an 11-day strike. Though its educators were already the highest-paid in the country, the district agreed to what then-Mayor Lori Lightfoot called a “historic” contract that raised teacher salaries 16% over five years and immediately raised the pay of teaching assistants, clerks and other workers by 40%. Amid the current budget fiasco, the union is now seeking 9% raises a year for the next four years. The district won’t be able to afford those without substantial new investments from the state. 

The next factor is staffing levels. The 2019 union contract promised every school would have certain types of employees, regardless of the school’s size or enrollment. This has proven particularly costly. The district says it has added 7,000 school-based staff members since 2019:  more teachers, special education classroom assistants, nurses, counselors and social workers. 

At the same time, the district has suffered large declines in student enrollments. Despite a small  uptick last year, the city has lost 38,000 public school students over the last five years, a decline of 10.5%. And yet, the political leaders in Chicago have stated they will not even consider closing underenrolled schools until 2027.

Budgeting decisions like these would be anathema in any other industry, where leaders normally try to match up the number of employees with customer demand. When business at a restaurant is slow, it needs fewer workers; If a hospital has fewer patients, it needs fewer doctors and nurses.

Chicago Public Schools is doing the opposite. Its latest budget boasts that it will, “complete its transition away from a budget model that primarily relied on enrollment” to prevent schools from going into death spirals, where fewer students leads to fewer staff which leads to further disenrollment. That may be admirable or even smart in some situations, but it’s also contributing to the current budget crisis.

Bubbling in the background is what in 2023 I dubbed “America’s Worst Teacher Pension Mess.” Chicago has two major pension problems. One is that it has to pay for its own pension costs, unlike other districts in Illinois, which are covered by the state. The district now pays more than $1 billion a year toward its teacher pension plan, and that’s still not enough to meaningfully cover its unfunded liabilities.

But even more pressing is what to do about the pension costs for district employees who are not teachers and who are covered by a separate, municipal retirement plan. This issue has been a political football in Chicago for the last few years, with Lightfoot shifting the cost onto the district and the district now trying to shift it back. Those payments total $175 million this year.

And on top this all is the expiration of the federal ESSER funds. The district prided itself on directing 92% of the $2.8 billion it initially received toward schools and staffing. But another way to say that is that Chicago chose to invest 92% of its one-time relief funds in full-time school employees.

Now that the federal money is gone, Johnson is desperately trying to fill that gap. But taking on more loan debt won’t solve his city’s longer-term budget problems. For that, he’ll need to come to terms with the pension challenges and address the staffing imbalance in Chicago schools. 

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