CHICAGO (CBS) — The budget watchdog group the Civic Federation warned Monday that the Chicago Public Schools’ finances are in such bad shape that the State of Illinois may need to take control of the school district.

The financial landscape outlined in a new report by the watchdog group paints a picture of hardship and ruin—all while contract negotiations are under way between CPS and the Chicago Teachers Union. The teachers want money for all their demands, while CPS insists such money is limited.

The Civic Federation’s finance report for the 2025 budget raises serious concerns about how the district will survive in the future.

“CPS faces a critical financial juncture, highlighted by structural budget imbalances, rising expenditures, declining enrollment, significant near-term infrastructure investment needs,” the report says.

The report goes on to say the existing FY2025 CPS budget is structurally imbalanced—heavily relying on temporary revenues and lacking provisions for impending collective bargaining costs.

The report comes as a newly-expanded 21-member Chicago Board of Education takes office—with 10 elected members and 11 appointed by Mayor Brandon Johnson. The Civic Federation said the new board has “a monumental task ahead” in fixing the crisis at CPS.

According to the Civic Federation, enrollment in CPS schools has dropped by about 21% since FY2010. A total of 56% of CPS buildings are underutilized, and more than $3 billion in immediate infrastructure—and $14 billion in total infrastructure improvement—is needed, the Civic Federation said.

The school system also owes $9.3 billion in outstanding debt and has below investment-grade bond ratings, the Civic Federation said.

The Civic Federation criticized CPS for how it used $2.8 billion in federal ESSER COVID-19 pandemic relief funds. Instead of using those funds to sustain operations with support for pandemic-specific challenges, CPS used them to expand their operation expanses dramatically—through increased hiring and expanded program—without identifying how this would be paid for once the COVID relief funding ran out, the Civic Federation said.

Future funding for CPS is a contentious issue that Chief Executive Officer Pedro Martinez has said was the motive for his ouster.

In December, the Board of Education voted unanimously to fire Martinez without cause, but his contract allows him to stay on the job for six more months.

Martinez has said Mayor Brandon Johnson—a former CPS teacher and former CTU activist—asked him to resign in September, after he declined the mayor’s request to take out a $300 million high-interest loan to pay for the costs of a new proposed teachers’ contract and pension costs previously covered by the city. Johnson has publicly denied asking Martinez to step down, but sources told CBS News Chicago he did ask.

The Civic Federation warns that new debt at CPS could result in a credit downgrade, making borrowing more expensive. This, the Civic Federation said, could cause what it calls a catastrophic debt spiral.

“CPS’ fiscal situation is fragile at best. To save itself from catastrophe, the incoming Board of Education will need to work quickly to identify and institute spending cuts and find new sources of revenue,” Joe Ferguson, president of the Civic Federation, said in a news release. “In doing so, any resort to irresponsible fiscal practices, such as depleting reserves or issuing debt to fund operations, will likely trigger further downgrades of its already below-grade credit rating that would increase borrowing costs and threaten constriction of access to markets. Instead, the District should implement long-term financial planning to break from the long-running crisis management orientation toward sustainability.”

At a CPS news conference Monday, Martinez said the assessment from the Civic Federation was right.

“The Civic Federation’s report out this morning confirms what I’ve been saying all along,” Martinez said. “That is why these negotiations have been so difficult.”

Martinez and his team provided even more troubling numbers—saying the district has over $9.3 million in outstanding debt.

“We are at the end of our rope when it comes to revenues to fund new expenses,” said CPS Chief Financial Officer Miroslava Mejia Krug.

These expenses include raises for teachers and additional staff—which the Chicago Teachers Union is demanding in its ongoing contract talks.

“We heard from the Civic Federation, a consortium of business interests in Chicago. Like all our contract cycles today, they once again said CPS cannot afford to fund the schools our students deserve—and instead should cut and lay off,” said Chicago Teachers Union Vice President Jackson Potter.

The report shows federal pandemic funds are depleted, and despite the debt mounting since 2005, “Teacher positions have also increased significantly by 12.8%,” and, “Central office and network office staff increased by 64%.”

Yet CPS pointed out that it only has three days of cash on hand to operate, while everything else is pure debt.

“Borrowing money for daily essentials does not work when you’re dealing with a family budget, and it does not work when you’re dealing with taxpayers’ money,” said Martinez. “That’s why the state law is very clear about this.”

The CTU said there are necessities that certain educational needs are funded.

“But our contract ensures CPS continues to money where it should be—staffing special education, language services—all which is supported by the state’s own funding model,” said Potter.

The CTU said money is available through the Tax Increment Finance, or TIF, district funds. Martinez said the city only allocated half of the $484 million TIF dollars requested, so if they want more TIF dollars, they should tell Mayor Johnson to release them.

The Chicago Public Schools issued this statement late Monday:

“Chicago Public Schools CEO Pedro Martinez and his team appreciate this independent review of CPS finances which confirms information that we have publicly shared over the past couple of years, essentially that the District remains in a precarious financial position. District officials have discussed and shared District finances during Chicago Board of Education meetings, as part of the 2022 entanglement report required under law in advance of the elected school board, and, in recent months, during a public negotiations session with CTU and during a five-hour City Council hearing.

“Amid these financial challenges, CPS showed a great return on the historic influx of federal post-pandemic recovery funds, posting the largest gains in literacy among 40 large urban districts and ranking third among those same districts for combined math and literacy gains. As ESSER funds dwindled, CPS adjusted, making cuts and finding efficiencies totaling more than $500 million before the Chicago Board of Education unanimously approved and passed the FY2025 balanced budget which largely protects the investments that have helped drive academic improvement for the past two consecutive school years. 

“We remain committed to doing all we can to protect those investments – and honor the four percent raise offered early in negotiations to our Chicago Teachers Union. Our dedicated teachers deserve these raises which are in line with what we have secured with other labor partners, most recently members of the Service Employees International Union (SEIU), Local 73. We continue to negotiate with the CTU in good faith that we can land a fair contract but some facts remain:

• The District cannot legally secure a loan
• There is no meaningful ability to use reserves, which total about $66 million, for any budget gap closure
• We have just enough Tax Increment Financing (TIF) for FY25 to honor the CPS offered Cost of Living Adjust (COLA) of four percent to our teachers union but not enough to cover other expenditures. 

“CEO Martinez made a TIF request of $484 million in April 2024 to provide our Board the ability to fund the requested MEABF pension payment and the cost of raises proposed to the Chicago Teachers Union for this current school year. The Chicago Board of Education-approved Fiscal Year 2025 budget does not include the MEABF payment and while the District is set to receive a historic TIF surplus, the District did not receive the amount requested to cover the projected gap in our FY25 budget. We will continue to advocate for additional resources at the City, State and Federal level, and with the philanthropic community.”