CHICAGO -- The federal government has sided with the Chicago Board of Education in a court battle to maintain the suspension of an Illinois law that requires the school system to have a balanced budget to operate.

The school system is being kept open by a temporary restraining order issued on Oct. 15 by U.S. District Court Judge Charles Kocoras that suspends the state's balanced budget requirement until Monday. The board faces a $298 million deficit in its $2.8 billion budget for fiscal 1994, which began Sept. 1.

Kocoras based his order on the board's contention that shutting down the schools would violate a federal consent decree that requires the school system to provide its students with desegregation programs. If the schools are closed, they cannot offer the programs, the judge said.

The Chicago School Finance Authority, the panel that oversees the school system's finances, has appealed the order in the U.S. Court of Appeals for the Seventh Circuit.

In a legal brief filed in appeals court on Friday, the U.S. attorney's office asked the court to "preserve the status quo and uphold the temporary injunction against the operation of the state balanced-budget law."

The brief argues that the federal district court has "broad" powers to enjoin state laws that hamper the ability of the Chicago Board of Education to implement desegregation remedies that the board and the U.S. government agreed to in a consent decree.

The brief, which represents the first time the federal government has taken a stand in the court proceedings, also warns that if the restraining order were lifted by the court before a hearing could be held. Chicago schools would close and "the resulting disruption would inflict irreparable harm upon the school children."

For its part, the School Finance Authority filed a brief on Monday arguing that the board is using the desegregation argument to mask an inability to live within its means.

"The plain fact here is that the school district has no desegregation problem -- it has a financial problem," the brief says. "It has simply chosen to redefine that problem because it has handy a 13-year-old consent decree that gives it access to a federal judge without having to start from scratch."

The authority asked the court to reverse the Oct. 15 temporary restraining order that is keeping schools open until Monday.

On another front, the Illinois General Assembly falled last week to vote on several measures that would alleviate the board's financial problems over the next two years.

Those measures include issuance of between $300 million and $386 million of GOs by the School Finance Authority, a $1 10 million loan from the Chicago teachers' pension fund, and the use of $36 million of restricted state funds over two years.

However, lawmakers are on call indefinitely for three days a week in the event that an agreement on a revised school funding plan is reached by legislative leaders and Gov. Jim Edgar.

The original funding relief measures could land in Kocoras' court if Kocoras issues a court order further suspending the balanced-budget requirement on Monday.

But an authority official said the appeals court could stop that proceeding if it rules that the funding measures should not be addressed by a federal court.

Lawyers for the School Finance Authority have argued that a court-ordered sale of bonds to help bail out the school system would result in "unmarketable bonds" because the authority lacks legislative approval to issue the bonds, turn the proceeds over to the board, and force Chicago to levy the necessary property taxes to pay debt service.

Standard & Poor's Corp. has placed about $30.5 million of board-secured debt on CreditWatch with negative implications. Moody's Investors Service has said the ratings outlook for the unenhanced debt of both the board and the finance authority is poor.

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