Chicago Schools' Bond Spreads Widen as $734 Million Deficit Looms

Chicago's school district faces a $734 million deficit and rising bond spreads as investors demand higher premiums for its junk-rated debt. The district's budget struggles and Chicago's deficits are contributing to the weakness, with S&P warning of pressure on the city's finances due to a new law aimed at raising police and firefighter pension benefits. The district must adopt a balanced budget by Aug. 29, and the city's mayor is expected to release his budget forecast later this month.

Chicago Public Schools (CPS) is grappling with a $734 million budget deficit and rising bond spreads, as investors demand higher premiums for its junk-rated debt. The district's financial struggles are contributing to the weakness in Chicago's overall financial health, with Standard & Poor's (S&P) warning of potential pressure on the city's finances due to a new law aimed at raising police and firefighter pension benefits [1].

The district is required to adopt a balanced budget by August 29, and the city's mayor is expected to release his budget forecast later this month. CPS has been facing challenges in maintaining adequate funding levels, with the percent toward adequacy dropping from 79% to 73% in FY 2026, according to the Illinois State Board of Education (ISBE) [1].

The state has allocated $76 million in additional funding for CPS in FY 2026, but this is not enough to cover the district's funding gap. CPS is still short of adequacy by approximately $1.6 billion, with the district's funding adequacy rate declining from 79% to 73% [1].

The district's budget woes have two primary root causes: the use of COVID-19 funds to hire 7,000 additional staff, including a disproportionate number of central office staff, and the refusal to shutter empty or underutilized schools due to political considerations [2].

Investors are increasingly concerned about CPS's financial stability, as evidenced by the rising bond spreads. Junk-rated debt typically carries higher interest rates and requires higher premiums due to the higher risk associated with it. The rising bond spreads indicate that investors are demanding a higher return for taking on the risk of CPS's debt.

The city of Chicago and CPS must work together to address these financial challenges. The district needs to maximize efficiency, close empty schools, and enact tighter fiscal controls. Additionally, the city must drive support for additional funding to achieve sustainability and attract families to the city.

References:
[1] https://capitolfax.com/2025/08/05/cps-gets-larger-share-of-state-dollars-but-still-16b-short-of-adequacy/
[2] https://www.propublica.org/article/cps-budget-woes-root-causes