Budgeting Case study Problem

Balancing the Chicago Public School Budget

The first day of class in the 411000 student , 25700 teacher Chicago Public school system was a week late in 1993, and classes began only under U.S. District court judge Charles .P. Kocoras’s  restraining order. The order was necessary because Illinois Law requires  that school systems have a balanced budget to operate, and the Chicago system has a $299 million deficit in its $2.8 billion budget . Judge Kocoras  waived the requirement for 10days ,thus allowing the schools to open while the school board and the teachers union negotiated anew contract, and while the state legislature worked to arrange some package to assistance. The board had convinced the judge that if schools were  kept closed, it could not fulfil its desegregation obligations.

Consider these Questions :

1What do you think of the proposal outlined here ?

2.How are the various interests(school children, city residents, teachers, the state ,etc./) affected by the proposal?

3. What is your reaction to the balanced budget requirement?

4.What other options might the school system have had ?

One of the proposals (supported by Chicago Mayor RICHARD Daley) to manage the problem for the next 2 years contained the following elements:

Establish concessions from teachers:$75milllion annually .

Borrow for the next 2 years :$300 million(total)

Divert contributions to teachers’ pension fund: $55 million each year

 Those measures would bring $ 280million in deficit reduction each year, close enough to closing the deficit to make everyone happy.

Here are some additional notes about the situation:

Because of early retirements during the summer of 1993,no regular teachers had been laid off , and the school board promised that layoffs would not be used to close the gap.

The Public school Teachers’’ Pension and Retirement Fund of Chicago was about 82percent of fully funded, that is, contained sufficient funds that those  funds plus interest on them would cover all exiting pension obligations. The fund recently increased its annual return assumption to 8 percent.

The state legislature required annual contributions to the $ 5 billion pension fund, but the requirement had been suspended before, amounting to about $ 200 million over the past 3 years. The teachers’ pension program is a defined benefit program, pensions are paid regardless of amounts in the pension funds.

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