Chicago Schools Increase Capital Spending Plan

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CHICAGO - The Chicago Public Schools plans to raise capital spending next year to install air conditioning in schools, build a new selective enrollment high school named for President Obama, and finance other upgrades.

The cash-strapped district's move to increase its capital budget to $423 million in fiscal 2015 marks a reversal of its plan announced several years ago to trim capital spending as it grapples with projected near billion dollar deficits and pension funding strains.

The district's 2014 capital budget totaled $162 million to reflect its scaling back, but was later amended and raised to more than $300 million as costs were tacked on to finance upgrades at schools slated to take in students from dozens of other schools being shuttered.

The district noted that while the 2015 plan is higher than last year, it's still lower than recent capital plans adopted in past years as the district sought to overhaul its aging schools, and will put only a small dent in its ongoing needs. CPS has spent more than $1 billion on capital work since fiscal 2012 and billions more since the state handed control of the district back to the city in the mid-1990s.

"Although we are operating in a difficult financial climate that demands fiscal prudence, we must continue to invest in our schools in order to ensure that all of our students are in learning environments that are equipped to provide them with the high-quality education they deserve," CPS' chief executive officer, Barbara Byrd-Bennett, said in a statement.

The fiscal 2015 capital plan is part of a five-year capital program. The district intends to cover about $266 million of the 2015 plan with borrowing, according to district spokesman Joel Hood.

The remainder would be paid for with tax-increment financing revenue from the city, state funds, federal grants, and other sources. The district has not released information on the timing or size of its planned borrowing for fiscal 2015, including whether the deal might include a refunding piece or restructure debt.

The district will spend $100 million over five years to install air conditioning in all schools, including $20 million next year. About $60 million in TIF funds is earmarked for the new Barack Obama College Preparatory High School. School additions, upgrades, and modernization and maintenance projects are planned across the district.

"While our $3.5 billion dollar capital deficit far outweighs what we are able to address, we have put forth a capital plan that will allow us to make essential investments that are crucial to our core mission of providing every student in Chicago with an education that will promote success in the classroom and in life," Byrd-Bennett said.

The capital budget will become part of the district's overall spending plan for fiscal 2015 that also includes an operating budget and funds for debt service. It will be unveiled in the coming months. The district closed a near $1 billion deficit last year and faces a similar amount of red ink this year.

Local government research organization the Civic Federation of Chicago which tracks CPS spending said it supports the district's need to upgrade and maintain schools but wants more detail on how it picked projects and intends to cover the added debt service costs of the new borrowing.

"Last year CPS' goal was to reduce the cost of debt service due to its financial crisis … it's difficult to understand how the new borrowing helps reduce debt service," said Civic Federation president Laurence Msall.

The district faces other challenges. Officials are attempting to negotiate a pension overhaul. CPS' teachers' pension fund has $6.8 billion of unfunded liabilities for a funded ratio of 59.9%. Contentious contract talks loom as teachers union president Karen Lewis said Monday the union is unlikely to exercise its option for a fourth year on the contract signed in 2012. The contract ended the first teachers' strike in two decades.

The board last year adopted a $6.6 billion budget that closed its deficit through a property tax increase, spending cuts and the use of $700 million in unrestricted and restricted reserves, including a first time draw on a debt service account.

The use of reserves, a non-recurring revenue source, left the district with a structural imbalance and projected $900 million gaps again in fiscal 2015 and 2016. The district's reliance on one-shots like reserves and debt restructuring to balance recent budgets has driven several rounds of credit downgrades.

A more than $400 million spike to $613 million in Chicago Public Schools' teacher pension contribution in fiscal 2014 also contributed to the gap. The increase followed the expiration of a state-approved three-year partial payment holiday. The district is also struggling with flat to declining school aid, the cost of a 2012 teachers' contract, and rising healthcare expenses.

The budget drained the district's unrestricted reserve of $604 million. Officials drew another $39 million from a restricted tort fund balance and $54 million from a debt service fund reserve, marking a first time use of that account to cover rising debt service.

Reserves were drained to balance the fiscal 2013 budget but are flush again primarily because of the timing associated with the collection of certain revenues. Property taxes came in early and the state's catch-up on its chronically late aid payment was better than expected. As part of its effort to rein in costs, the district previously announced last year the closing of nearly 50 schools.

Moody's Investors Service downgraded the board's rating on the $6.3 billion of debt one notch to A3 and left a negative outlook on the credit on the same day the 2014 budget was unveiled. Moody's downgraded the board's rating again in March to Baa1 and assigned a negative outlook.

The latest downgrade reflected its "close governance ties to the city of Chicago," which has seen its ratings sink over its pension woes. Moody's said CPS financial profile is strained by its shared reliance on the same tax base as Chicago in addition to its own challenges.

Standard & Poor's rates the board A-plus and stable. Fitch Ratings downgraded the board in September, lowering it to A-minus with a negative outlook.

The Chicago Board of Education, whose members are appointed by Mayor Rahm Emanuel, must approve the capital plan. The district is the nation's third largest and operates 658 schools that serve 400,000 students.

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