On August 28, 2025, Chicago Public Schools (CPS), the fourth-largest school district in the US, passed a $10.2 billion budget and is facing a $743 million deficit. Prior to the budget passage, the big three credit rating agencies each rated CPS General Obligation (GO) Bonds “non-investment grade speculative,” also known by the more pejorative title “junk bonds.” CPS bonds received a Ba1 rating from Moody’s and a BB+ rating from both S&P Global and Fitch Ratings.
The name “junk” refers to the risk that investors face that CPS will not make interest payments or repay the principal when the bond fully matures. To offset this risk, junk bonds offer high interest rates to attract investors. This is especially significant because GO bonds are backed by “the full faith and credit” of CPS, meaning the district promises to use all existing revenue to pay back the debt and, if necessary, raise new taxes to pay the debt.
Unfortunately, these ratings are justified. Research from the Illinois Policy Institute found that CPS suffers from chronic budget deficits as well as billions of dollars in debt and unfunded pension liabilities despite record-high operating revenue. The problem is persistent overspending. As my colleague Corey DeAngelis wrote, CPS officials and staff “put their own desires before the needs of children.”
The situation at CPS, however, will not be contained within Chicago. The budget stress could put additional stress on the state of Illinois, which is already teetering on the edge of the fiscal cliff.
If the perfect storm of an economic and budget crisis occurs, policymakers in the Land of Lincoln may turn to DC for financial assistance, shifting the cost of mismanagement onto the rest of the country.
What Does That Mean for Students?
The most important group affected by CPS’s financial troubles are the students. An upcoming bond sale at the new junk rating will further increase borrowing costs, diverting more of the district’s budget toward debt service rather than classrooms. Not including the upcoming bond sale (which Bloomberg estimates will be more than $600 million), CPS currently owes $9.1 billion in long-term debt and $13.9 billion in unfunded promised pension benefits.
Every dollar spent on debt service is a dollar not spent on textbooks, technology, safety systems, facilities, or instruction. This squeeze comes at a time when funds for students are already strained. The chart below from the Illinois Policy Institute shows that spending on personnel accounts for 70 percent of the growth in operating expenses for CPS.
The prioritization of spending on personnel over students is already showing. Corey DeAngelis reported that in 2022 not a single student was proficient in math in 33 public schools in Chicago. As debt service continues to devour an already unsustainable budget, do not expect student learning outcomes to improve.
What Does That Mean for Chicagoans and The State of Illinois?
The primary source of operating revenue for CPS is local tax revenue, specifically property taxes that the school district levies itself. For FY 2025, these revenues make up $5.1 billion of the $8.6 billion in operating revenue (59 percent).
CPS is a legally separate entity from the City of Chicago, with the power to levy its own taxes, issue bonds, and manage and control all public schools in the district. While it has independent status, its governance is tied to the Mayor of Chicago, who appoints members of the Board of Education (until 2027 when all board members will be elected).
CPS relies on the same tax base as the city of Chicago, which means residents are responsible for supporting both entities. As CPS debt accumulates, Chicago taxpayers will be on the hook to pay it.
CPS also relies heavily on state funding as well. For FY 2025, about $2.1 billion of the $8.6 billion operating revenue (24 percent) was funded by the state. Should CPS be unable to pay its debts, history suggests that it may look to Springfield for help and oversight. Such oversight may resemble Michigan’s own interventions in the Detroit Public Schools (DPS), with Lansing’s involvement in the district spanning nearly twenty years.
State involvement in DPS began in 1999 under then-Governor Engler. The State Superintendent of Public Instruction and a six-member board of education ran the school district from 1999-2005 when Detroit residents voted to return the district to local control. That control, however, was short-lived as finances and enrollment deteriorated going into the Great Recession. Then, in 2009, the state appointed emergency managers, four years before the city declared bankruptcy.
These managers had complete control over district finances, making major spending cuts to tame structural deficits. In 2016, the district was separated into two distinct legal entities: the Detroit Public Schools, which exists solely to pay down long-term debts, and the Detroit Public Schools Community District, a “new” debt-free entity that provided public schooling for Detroit residents. The state of Michigan also provided a $25 million transfer to assist with the transition costs from the “old” to the “new” entity.
If Chicago Public Schools cannot properly manage their finances, Illinois taxpayers outside of Chicago will have to pay a larger portion of taxes to cover CPS budget deficits.
What Does That Mean for the Rest of the Country?
As I discussed elsewhere, one stark difference between Detroit and Chicago’s circumstances is the respective finances of Michigan and Illinois. Where Michigan was in relatively good financial condition when Detroit declared bankruptcy, Illinois is in much worse shape. Fiscal stress in Illinois is akin to Puerto Rico in the lead-up to the Commonwealth’s 2015 budget crisis. At the onset of the crisis, Puerto Rico was plagued by massive debt and credit ratings just above junk status, much like Illinois today.
If policymakers in Springfield are unable to financially support CPS, it is likely both state and city officials will turn to federal policymakers to bail them out. Illinois and Chicago heavily relied on federal stimulus packages in 2020 to close budget gaps. In FY 2025, federal taxpayers provided $1.3 billion of the $8.6 billion of CPS operating revenue (just over the remaining 15 percent). These officials already have an appetite for federal taxpayer dollars; there is nothing stopping them from demanding more.
This relationship allows state and local officials to fund spending at the cost of federal taxpayers in other states, and gives federal officials influence over state and local budgets by attaching terms and conditions to federal funds. Additionally, if such a bailout is achieved through an emergency lending facility at the Federal Reserve, such as the 2020 Municipal Liquidity Facility, federal officials will also be able to outsource politically unpopular bailouts to the Federal Reserve.
While neither CPS nor the City of Chicago seems to be changing their ways, state and federal officials must set up fiscal guardrails should Chicago officials come to them seeking financial aid. These guardrails, whether an ex-ante guarantee against bailouts or tying strict austerity measures to stimulus packages that make seeking financial aid as unattractive as possible, will stop the Windy City from continuing the irresponsible practices that put the city in this position in the first place.
