CHICAGO – Junk-rated Chicago Public Schools will unveil a balanced budget next month to pave the way for the district to replace expiring credit lines and return to the municipal market to raise funds for needed capital work, the district's leader said Wednesday.
Borrowing to cover operations for budget relief, which has been commonplace in recent years, is off the table, CPS chief executive officer Forrest Claypool said Wednesday at a news conference to discuss the distribution of individual school budgets.
Thanks to recently approved state aid and other measures, local school budgets will be held steady at the funding level they closed out the 2015/2016 year at and should be shielded from any further cuts or efficiencies under consideration to erase a remaining $300 million deficit ahead of the release next month of a fiscal 2017 spending plan. Individual school budgets were cut mid-year to help CPS with its liquidity.
Borrowing is "off the table for operating purposes" but "we will continue to borrow for capital" projects, Claypool said.
He did not comment on the timing or size of such a borrowing.
The district earlier this year was forced to delay a planned bond sale after the market was spooked by comments from Illinois Gov. Bruce Rauner suggesting Chapter 9 is a reasonable option for the financially troubled district.
Such a filing by CPS or any local government entity is not possible under current Illinois law.
CPS officials and Mayor Rahm Emanuel's administration scrambled to persuade investors to participate in the sale in part by stressing what the district contends is its bond structure's ability to withstand a bankruptcy filing. The district returned a week later with a downsized issue that sold at a punishing spread and nearly hit a 9% state interest rate cap.
After the sale, Claypool said he wasn't certain the district could return to the capital markets anytime soon. He said Wednesday the restricted access "showed the level of risk" and highlighted the district's "critical" need to balance its books.
"The balanced budget allows us to get back access to the capital markets" to borrow "for capital to repair schools and deal with overcrowding," Claypool added.
A renewal of existing credit lines that must be repaid in August – when the district receives a big property tax payment – still looms but Claypool said he's "confident" new agreements can now be struck.
"The issue with the line of credit was the absence of a balanced budget," Claypool said. He had been warning that without more state help the district would be unable to reach new agreements.
The district has $870 million in existing credit lines. The borrowing has been structured as tax anticipation warrants and has carried an interest rate of 3.25%, expensive for such a short term structure.
The district relied on the warrants to get through the last fiscal year and to help cover a $676 million teachers' pension payment by the end of June. The district – which drained its once flush reserves in recent years – closed out the fiscal year with about $83 million in hand. It had previously projected an even narrower ending balance of just $24 million.
While Claypool repeatedly referred to the upcoming budget as being balanced, some pieces remain uncertain and it's unclear whether the market or rating agencies will agree. The district's full budget for the fiscal year that began July 1 is expected next month ahead of an end of August deadline.
The fiscal 2016 budget's reliance on $480 million of additional state aid that did not materialize triggered further credit deterioration and heightened talk over the district's solvency initially spurred by Rauner's repeated Chapter 9 comments.
As part of a state legislative package agreed to in late June that included a stopgap budget and education funding, CPS will receive about $130 million more in grant funding. Lawmakers signed off on a $250 million property tax increase for teacher pensions. That's in addition to a Chicago City Council-approved $50 million property tax increase for capital. The state also committed to providing $205 million to help cover teacher pension payments, help it already provides to other school districts across the state.
The $250 million won’t flow into CPS coffers immediately because it must be levied and there would be a delay in its collection. The district could tap credit lines in the interim. The $205 million relies on state lawmakers – who have been bitterly divided over a state budget – reaching agreement in early 2017 on pension reforms. Given the partisan legislative divide that has prevented passage of full-year budgets for fiscal 2016 or 2017, such an agreement is a gamble.
The various measures plus previously announced cuts and management efficiencies have whittled the deficit down to about $300 million. Claypool refused to show the district's hand on how it intends to fully erase the remaining red ink but the ball is clearly in the Chicago Teachers Union's court as negotiations over a new contract continue.
The district's previous offer that was rejected would have ended the district's coverage of 7% of the teachers' 9% pension contribution, which would save the district at least $150 million. In exchange, the contract offered raises. The union has called the elimination of the pension coverage a pay cut and said such a move could prompt a strike this September.
Claypool said the district has cut spending, taxpayers will be hit with a property tax hike, and the state will provide more money, so now it's the union's turn to compromise.
"We need a contract with the teachers union that contributes to the reduction of the deficit" while still providing "healthy" raises for the teachers, Claypool said.
The district operates on a $5.7 billion budget and its liabilities include $9.6 billion of unfunded pension obligations and nearly $7 billion of bond debt.
The district paid a high yield of 8.5%, near the state legal cap of 9%, on its $725 million issue early this year. The deal was scaled back from the $875 million it sought to issue just a week earlier and even further reduced from the more than $1 billion it was eyeing late last year. The cost was punishing with a big discount offered on the bulk of the sale in a 2044 maturity that landed at 8.5%, 580 basis points over the top-rated Municipal Market Data benchmark.
The deal reimbursed the district for capital spending, retired short-term debt used to cover swap termination payments. It also included a scoop-and-toss restructuring that pushed off principal coming due this past February.
