Four Scenarios to Consider for Balancing the 2026 CPS Budget

Overview

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Chicago Public Schools (CPS) faces a projected $734 million deficit for fiscal year 2026. This is a significantly larger deficit than the $229 million shortfall that informed the school-level budgets principals built and Local School Councils approved earlier this summer. By state law, the Chicago Board of Education must pass a balanced budget by August 30. This memo considers four strategies for closing the budget deficit before that deadline.

1. Close the deficit with cuts.

Cost reduction is necessary based on the deficit’s size and the budget’s structure, but options that avoid school-level cuts are limited this late in the planning cycle. Through July, CPS identified about $165 million in savings through reductions to central office staff and services. Closing the remaining $550+ million gap primarily through cuts would significantly affect students’ learning experiences. Other central cuts options are possible but limited and likely insufficient, including additional staff reductions. For example, moving to 2019 central-office staffing levels and limiting centralized discretionary spending could save another $60 to $70 million, but would reduce services to schools. Furlough days, which have been used in the past, could also reduce the gap. Each potential furlough day saves the system about $15 million. This option would require collaboration with the district’s labor unions.

If schools absorbed the full cost of cuts, the system could lose over 900 teacher positions and $179 million in discretionary spending, equivalent to cutting more than 1,400 teachers and other staff.

The public strongly opposes this approach: Only 26% of voters (22% of parents) support reducing school budgets. Principals already report that budgets are strained, too. About half say budget changes, limited resources, and facility challenges are already significant burdens.

2. Use borrowing to close the gap.

Borrowing would postpone painful choices and could provide a bridge to more permanent solutions. However, tough choices will eventually have to be made, and borrowing could heighten CPS’s long-term financial risk.

CPS already holds $9 billion in bond debt, pays $817 million in annual interest, and has a credit rating below investment grade. The district’s last round of operational borrowing (2016 through 2018) still costs about $200 million annually. Additional borrowing risks a credit downgrade, making future borrowing of any kind more expensive. Capital borrowing remains an urgent need, considering the district’s aging buildings and its $14+ billion maintenance backlog.

Voters also recognize these risks: Only 8% support borrowing to close the gap.

3. Secure additional revenue from the city and/or state.

Like most districts statewide, CPS plans to raise its property tax levy to the legal cap. CPS is also assuming $300 million in tax increment financing (TIF) surplus revenue for 2026, and it will receive an additional $50 million in state funding. Still, the budget gap looms large. In the near term, the most practical option is more TIF surplus dollars, which the city has used before. In the long term, new revenue must come from collaborating with the city and state, and it may include legislative changes.

Chicago voters prefer additional state support over loans and more cuts: 53% favor new state revenue. 

4. Resolve the MEABF payment question.

The current deficit assumes a $175 million CPS payment to the city of Chicago for costs related to the Municipal Employees Annuity and Benefit Fund (MEABF). CPS is not legally obligated to make this payment and did not do so for nearly a century. It only contributed between 2020 and 2023, when federal COVID-19 funds were available. With those one-time funds gone, continuing to assume this cost would force deeper cuts or new borrowing if not paired with offsetting revenue.

Public support for an MEABF payment is weak: Only 25% of voters think CPS should take on this payment. CPS and the city could work toward a long-term, jointly beneficial solution — potentially with state participation — that does not immediately burden school budgets.

The Bottom Line

Despite the challenges, there is broad agreement on two fundamental points: 

• In the long term, CPS needs a coordinated, sustainable revenue strategy to fix its structural budget deficit, address pension cost inequities, and stabilize the district’s finances to serve student needs. 
• In the near term, the least disruptive path for young people starts with avoiding additional school cuts in fiscal year 2026. 

With those assumptions in mind, the most fiscally responsible path for 2026 likely includes no operational borrowing, declining the optional MEABF payment unless offsetting revenue is identified, and securing additional city dollars through an increased TIF surplus. Arriving at the right balance within this context will require continued collaboration across the district, city, and state.

 

Introduction

As Chicago Public Schools (CPS) faces a projected operating deficit for the 2026 fiscal year (FY26), city and district leaders are weighing high-stakes budget decisions. Years of compounding cost pressures — from inflation and labor agreements to pension costs and the expiration of federal funds related to the COVID-19 pandemic — have created structural gaps in CPS’ finances. The question now is not whether to act, but how.

What makes this moment especially urgent is the status of school-level budgets. In May, CPS distributed funding allocations to principals based on a working deficit of $229 million. Certainly, principals and community members understood that there were likely additional cost demands. However, principals have submitted those budgets, and Local School Councils (LSCs) have already approved them. These budgets are now built into school-year 2025-26 (SY25-26) planning. Reopening them at this point, just weeks before the start of school, would be disruptive and unprecedented. 

We now know that CPS faces a total deficit of $734 million for FY26. That represents a $505 million gap compared to the $229 million deficit principals worked within earlier this summer. That gap comes from changes in assumptions about revenue and expenditures:

Revenue Assumptions

• $300 million less in assumed additional state and/or local funds (since such revenue isn’t committed at this point)

Cost Assumptions

• $175 million in additional costs to reimburse the city of Chicago for the Municipal Employees Annuity Benefit Fund (MEABF) for FY26
• $30 million in additional costs to transition five schools from the Acero charter network to CPS management

Through July, CPS had identified about $165 million in cost savings, leaving a gap of $569 million. CPS also received around $50 million in additional state funding, narrowing the gap further. By state law, the Chicago Board of Education must approve a balanced annual budget by August 30, 2025. The vote requires a majority of the 20 members to pass, with the board president breaking a tie. 

This memo outlines four scenarios that have emerged in public debate and private discussions, and that were discussed at a series of five CPS community feedback sessions in July:

1. Close the deficit with cuts.
2. Use borrowing to close the budget gap.
3. Secure additional revenue from the city or state.
4. Resolve the question of the MEABF payment.

While each has trade-offs, this document aims to provide context and analysis of their implications for CPS’ financial future and the start of the upcoming school year.

 

Scenario 1: Close the deficit with cuts.

Under this scenario, CPS would cut up to an additional $569 million, which would severely impact school budgets and the student experience.

Cutting school staff and resources to balance the budget would be devastating. To reach $300 million in cuts, the average school could lose:

•  2 allocated teacher positions (8% of staff)
•  $366,000 (67%) in discretionary funds, equivalent to more than two teachers or other staff

Across the district, schools could lose 903 teacher positions and $179 million in discretionary funding, equivalent to cutting more than 1,400 teachers and other staff. No school in CPS can bear these reductions without significantly impacting students.

Principals already note the strain their budgets are under, even before any such catastrophic cuts. In The Fund’s 2025 Principal and Assistant Principal (AP) Engagement Surveys:

• 19% of principals state that more financial resources for their school would improve their impact as a principal (ranked second out of eight options), an increase from 13% in 2024.
• 53% of principals state that budget changes, 48% state that limited resources, and 47% state that facilities and supply challenges significantly impact their school communities (second, third, and fourth out of 20 possible options).

Such cuts are also extremely unpopular with the public at large. According to an April 2025 poll, only 26% of Chicago voters (and 22% of parents) support reducing school budgets.

CPS’ current FY26 budget cuts have already affected facilities, food service, academic support, and transportation. More cuts of this magnitude could have serious negative consequences for students.

The district could make other cuts as well. CPS could further reduce the number of staff in its central office. For example, cutting back to its 2019 staffing levels and reducing centralized discretionary spending might save another $60 to $70 million, but this would also further reduce services to schools.

The district could also use furlough days as it has in the past, which would reduce the gap more. Each furlough day saves the system about $15 million, and there are seven days without student attendance built into the calendar that could be used. Of course, this would also require a partnership with the labor unions representing school leaders, teachers, and other staff. Overall, it would be difficult to fully close the deficit through cuts alone. 

 

Scenario 2: Use borrowing to close a budget gap.

Given the obvious risks from school budget cuts, many have asked whether CPS can borrow its way out of this crisis. But borrowing is not a long-term solution. It may delay the pain, but it won’t prevent it. 

Voters understand this: Just 8% of Chicago voters support borrowing to close a CPS budget gap.

Aversion to borrowing is well founded, given that a large share of the current CPS deficit is due to debt service costs from previous borrowing. 

CPS currently holds $9 billion in bond debt and pays $817 million in interest yearly. Its credit rating remains below investment grade. It last borrowed to cover operational gaps from 2016 through 2018. Those loan payments currently cost the district $200 million annually. Any borrowing to cover operational needs may lead to a further credit rating downgrade, making future loans even more expensive.

If CPS chooses to borrow and receives a downgrade, it will pay three times:

• First, through the interest costs of the new debt.
• Second, through the forgone savings for debt refinancing of previous higher-interest debt.
• Third, through incurring higher interest costs for future debt that it must issue in coming years to make needed capital repairs. The average facility in CPS is over 85 years old, and the maintenance backlog is over $14 billion. These repairs must be covered by taking out more loans, which would become even more expensive, allowing for less capital improvement.

Given these dynamics, borrowing to cover a budget gap is extremely risky, and it gets riskier as the amount of borrowing increases.

 

Scenario 3: Secure additional revenue from the city and/or state.

CPS’ revenue generation is very limited. Over 50% of its revenue comes from property taxes. However, CPS can only increase taxes to the rate of inflation or 5%, whichever is lower. All FY26 budget scenarios assume CPS increases its tax levy to this maximum limit.

Thus, additional revenue must come from the city of Chicago or the state of Illinois. Voters support additional revenue to close the gap: 53% prefer new state revenue, and 32% support additional city contributions.

Revenue from the city can come via tax increment financing (TIF) surplus funds. The city has declared TIF surpluses in past years, and CPS receives around 55% of any such surplus. Although the amount of funding CPS has received in TIF surpluses has dramatically increased over the past decade, from $62 million in 2015 to $300 million in 2025, there is an opportunity for even more TIF surplus funding in 2026. 

While CPS is already assuming $300 million in TIF surplus revenue, consistent with last year’s contribution, the mayor must declare a TIF surplus, including the already assumed amount, with a final budget approved by the Chicago City Council before the end of December. That gives this path advantages over the other revenue options, which would take longer to realize. Recent reporting indicates the city of Chicago faces a $1 billion budget shortfall, so it may be looking to additional TIF surpluses as an option.

The other revenue option is through the state of Illinois. State revenue accounts for around 28% of CPS revenue, and, according to the state’s evidence-based funding formula (EBF), CPS is only at 79% of its adequacy target. CPS, like most districts in the state, is underfunded.

At the same time, the state has many conflicting budget priorities. In May, it passed an increase in new funding for K-12 education of about $300 million. In addition, the state will not approve a new FY27 budget until May 2026. Securing additional funding for CPS requires action by the state legislature and the governor. Although a special session this summer or fall is possible, it is doubtful, given the state’s current financial outlook and a lack of motivation across the legislature to solely offer CPS emergency assistance. If the state does provide more funding, it would not likely occur until next spring, especially since no current bill is ready for the Illinois General Assembly to consider. For reference, some revenue solutions, like a progressive income tax, require a constitutional amendment, which failed in 2020.

Over time, state revenue options could include:

• Increase EBF funding for all districts in the state faster.
• Modifications to the EBF that increase funds sent to Chicago and similar districts, through recognizing poverty concentration or modifying cost assumptions on special education.
• Increased state support for CPS teacher pension costs, perhaps through a graduated merger with the state system.
• Approval for increased local tax levies to support CPS beyond the current ones.

In this moment, additional revenue from the city through a TIF surplus is the only realistic option in the near term. While it does require political coordination and a shared strategy between CPS and the city, this scenario presents a path that minimizes disruption, preserves school programming, and honors the time already invested by school communities.

For more information on potential revenue sources, see the “Potential Revenue Options” table at the end of this memo. Kids First Chicago also published “Revenue Options to Address Chicago Public Schools’ Deficit” in July 2024.

 

Scenario 4: Resolve the question of the MEABF payment.

The $734 million deficit includes an assumption of a $175 million payment to the city of Chicago for costs related to the Municipal Employees Annuity and Benefit Fund (MEABF). This pension system covers municipal employees, including CPS employees who are not certified educators. The district is not legally obligated to cover this cost and did not do so for nearly 100 years. It reimbursed the city from 2020 through 2023, with COVID-19 funds. Of course, those funds are no longer available, and making this payment now requires cuts elsewhere in the CPS budget or additional borrowing. As already noted, neither is an attractive option.

The public has signaled its disapproval politically: Just 25% of voters support CPS taking on this responsibility.

Working with the city to identify a long-term solution that meets both institutions’ needs may be possible. Perhaps the state could identify a new dedicated tax levy that the Chicago Board of Education could raise, or the state could absorb the normal cost of pensions for CPS employees covered by the MEABF, as it does for CPS teachers. Such options would again require a coordinated effort over several months.

Ultimately, CPS is not legally required to make this payment, and doing so would require more revenue to avoid borrowing or additional cuts.

 

Key Considerations for Balancing the Budget

• Level of school cuts: Schools cannot bear additional budget cuts without profoundly impacting students and without significantly reworking their existing plans for SY25-26. School-level cuts would be disruptive in all contexts, though other efficiencies and savings may be possible.
• Borrowing: Successfully taking out more loans is never guaranteed, and adding debt now will create additional challenges later. Even if it is possible to close a gap in FY26, what happens in FY27, in FY28, or beyond?
• Additional revenue: The city of Chicago can declare an additional TIF surplus, resulting in additional revenue for CPS. This requires the support of the mayor and City Council. The state legislature adjourned on May 31 and will not return until a six-day session in October. Its next full session begins in January 2026.
• MEABF: Given considerable financial pressures, including risks to school budgets, it is challenging for CPS to assume a $175 million payment that it is not required to make. At the same time, CPS and the city can work together to identify a sustainable solution.

While no path is without trade-offs, and all decisions have future consequences, avoiding significant school cuts offers the most direct route to preserving what matters most: continuity for students, predictability for educators, and trust between the district and the communities it serves.

 

Potential Revenue Options