CHICAGO -- A last-ditch effort to free up $35 million for the cash-strapped Chicago Board of Education to fund teacher pay raises failed last Friday in the Illinois General Assembly.

The plan would have required the Chicago School Finance Authority -- the state-created panel that must approve the board's budget each year -- to loosen a reserve fund restriction. That would have given the board access to $17.5 million this year and next to fund 2% teacher pay raises each year, according to Steve Brown, a spokesman for House Speaker Michael Madigan, D-Chicago.

Finance authority member Maxwell Griffin said the panel is strongly opposed to relaxing the reserve fund restriction. He said it would set a dangerous precedent that could put the board back on the slippery slope to where it was in 1980, when it had an estimated $460 million operating deficit.

The authority now requires the board to set aside cash in a reserve fund when expenditures are incurred to ensure timely payments of bills. The board has estimated it ended fiscal 1991 on Aug. 31 with as much as $200 million in the reserve fund.

Debt service payments are made from other funds that would remain inaccessible for school operating purposes.

Mr. Madigan and Gov. Jim Edgar favored the proposal as a way to head off a possible strike by the Chicago Teachers Union, aides said. Chicago Mayor Richard Daley also reportedly backed the idea. A spokesman for the mayor could not be reached for comment.

The plan passed in the House last Friday, but it failed in the Senate. The legislature will not meet again until next spring, unless called back by the governor for a special session.

Legislative sources said the key reason the proposal was defeated was the opposition of black legislators from Chicago to a provision that would have given the authority the power to approve or reject all board contracts and reorganize the board's financial accounts and budget system.

The possibility of a teachers' strike was one of the concerns cited by Standard & Poor's Corp. on Oct. 6 when it assigned a negative outlook to the board's BBB rating on $75 million of outstanding general obligation debt.

The teachers are unhappy that the board's $2.3 billion budget for fiscal 1992 froze their salaries instead of giving them the 7% pay raise called for in their current contract. The board has maintained that a clause in the contract allows them to waive the salary increase if there is not enough money to fund it. The teachers have threatened to go on strike as early as Nov. 18 if the problem is not resolved.

An estimated $315 million shortfall in the board's fiscal 1992 budget was eliminated in part by freezing teacher salaries. Board officials already are estimating a shortfall of $178 million in fiscal 1993, even without the raises.

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