CHICAGO -- The financial oversight authority for the Chicago Board of Education yesterday approved the board's $2.9 billion fiscal 1995 budget, which is balanced with $203 million of bond proceeds.

The budget, approved unanimously by the Chicago School Finance Authority, includes a $50 million surplus from the current fiscal year. Of that, $26 million will go toward "critical needs," including special education and computer and science equipment. The remaining $24 million will be placed into a budget reserve fund.

The $50 million surplus resulted from the early retirement of teachers, teacher vacancies, and delays in adopting a fiscal 1994 budget last fall.

The budget for fiscal 1995, which begins Sept. 1, is balanced with $203 million of proceeds from a February bond issue designed to bail out the school system through fiscal 1995. The authority issued $410 million of general obligation bonds to allow the school system to operate in fiscal 1994 and 1995.

The authority's approval of the board's budget sets the stage for a battle in the Illinois General Assembly next year over a permanent increase in funding for Chicago schools. Without more money, Chicago schools will face a projected $290 million deficit in the school system's fiscal 1996 budget.

Martin Koldyke, chairman of the authority, said that between now and next spring the board and authority must work together to show lawmakers that the system is worthy of a funding increase.

"I think that if the General Assembly can be sold that we've made very considerable progress on the business side and there are some concessions on improving the school staff, then you've got a shot at increasing the revenue line," Koldyke said.

Donald Haider, an authority member, said the board must manage its finances wisely because it will not be able to rely on bond proceeds to bail out the system in fiscal 1996. He said the February bond issue was the second time the authority issued bonds to finance the board's operations. "Three strikes and you're out in the capital markets," Haider said, noting that the authority first issued $573 million of bonds in 1980 to alleviate the board's severe cash flow problems.

Board president D. Sharon Grant said Illinois lawmakers are responsible for finding ways to increase money for schools. She said the board did not consider an option approved by lawmakers to hold a property tax referendum in Chicago to provide the needed funds.

Last year, the lack of a balanced budget led to federal court orders that let schools stay open even though Illinois law requires the system to have a balanced budget before classes can begin. The court involvement ended in November when the General Assembly approved the bond issue.

Diane Schenkman, vice president and manager of the Great Lakes regional ratings group at Moody's Investors Service, said that while the board has a balanced budget, it is "not indicative of a long-term solution to its structural budget imbalance."

Todd Whitestone, a managing director at Standard & Poor's Corp., said that despite the authority's passage of the budget, the board still needs a permanent solution to its financial problems.

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