CHICAGO (Reuters) - The Chicago Public Schools (CPS) ended its last fiscal year with a bigger-than-expected deficit and will need to find new revenue or make major spending cuts in order to sustain operations over the long term, according to the district's annual audit.

The comprehensive annual financial report, which was presented to the school board on Wednesday, showed the nation's third-largest public school system ended fiscal 2016 on June 30 with a $487 million deficit in its operating fund. The gap was six times bigger than anticipated in the $5.7 billion fiscal 2016 budget, but lower than the $710 million deficit of fiscal 2015.

That indicates the district is working hard to reduce its budget imbalance, according to Richard Ciccarone, the head of Merritt Research Services, which provides research and data related to municipal bonds.

"It's still not a pretty picture. It's not sustainable," he said.


CPS is struggling with pension payments that will jump to $733 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency. The fiscal woes have pushed its general obligation credit ratings deep into the junk category and led investors to demand fat yields for its debt.

To keep afloat over the long term, CPS said it will continue to cut spending, while it awaits action by Illinois officials on cost-saving pension reforms and the district's request for equitable state school funding.

"CPS believes internal decisions and initiatives, coupled with local and state responses to appropriately fund public education will sufficiently address the CPS deficit and provide adequate liquidity," the district said in the audit.

A 13-bill package introduced in the Illinois Senate this month includes a yet-to-be determined school funding revamp and a measure to lock in state contributions toward CPS pensions. Senate leaders on Thursday announced that voting on the bills would be delayed until the chamber returns to session Feb. 7.

The district's $5.5 billion fiscal 2017 budget was hurt by Illinois Governor Bruce Rauner's veto of a bill providing a one-time $215 million state payment to help cover pension costs. Earlier this month, CPS CEO Forrest Claypool announced unpaid furlough days for teachers and administrators to help offset the lost state money.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

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