By Karen Pierog and Dave McKinney
CHICAGO (Reuters) - Chicago's cash-strapped public school district is not in bad enough financial shape to warrant a state takeover, according to an Illinois State Board of Education staff report.
Illinois Governor Bruce Rauner launched a probe of the nation's third-largest school system in February, contending it could lead to state oversight and a suspension of borrowing at debt-dependent Chicago Public Schools (CPS).
However the report, posted on the board's website ahead of a monthly meeting scheduled for Wednesday, said CPS does not meet "any of the criteria" to be certified in financial difficulty.
"The district has not realized two consecutive years of negative operating fund balances nor is it forecasted in this model," the report stated.
It noted that negative operating balances are possible in fiscal 2018 and 2019.
CPS is struggling with a $1 billion structural budget deficit, caused largely by escalating annual pension payments that will reach $676 million this fiscal year, which ends June 30. The district's efforts to gain an additional $480 million in state dollars to pay its pension bill became entangled in an ongoing impasse between the Republican governor and Democrats who control the legislature.
CPS officials, who have maintained the district is exempt under Illinois law from state oversight, are calling for a revamp of the state school funding formula to ensure poor children are not short-changed.
The recommendation undercuts a series of strident remarks Rauner made in January and February, asserting at one point the school system faced a "financial disaster" that would prevent it from remaining solvent through the end of its fiscal year in June.
Under one scenario that could explain the apparent about-face, the report could represent a potential "olive branch" to Democrats from the Rauner administration to help broker an end to the state's 11-month budget impasse, a Democratic legislative source told Reuters.
News of the recommendation had not reached key state lawmakers until they were contacted on Friday by Reuters.
The move also could suggest recognition by the Rauner-appointed state school board that it lacked proper legal footing to take over CPS in the first place, the Democratic source said.
In April, Democratic Attorney General Lisa Madigan issued an opinion that the state does not have authority to take control of the school system’s finances, including its ability to borrow to help fund operational costs.
Representatives of Rauner, the education board and CPS did not immediately respond to requests for comment.
(Editing by Matthew Lewis)