CHICAGO — The Chicago Board of Education late Wednesday adopted an amended $6.5 billion fiscal 2011 budget after the district’s administration scraped plans to fully wipe out reserves to help eliminate a $370 million deficit by instead restructuring some debt.

The spending plan includes a $5.28 billion operating budget.

“The fiscal 2011 budget is a realistic spending plan that involved a lot of shared sacrifice and difficult decisions,” Board of Education President Mary Richardson-Lowry saidn a statement . “Staff has worked very hard to create a budget that can weather this national recessionary crisis and preserve, to the greatest extent possible, our educational program.”

The administration’s original proposal to tap all $190 million of the district’s ending fund balance to address the deficit had come under fire from a local government-accountability organization – the Civic Federation of Chicago and on Wednesday some school board members raised objections and the alternative proposal to look at some debt restructuring was announced.

“Restructuring debt is a complex endeavor that should not be entered into frequently or taken lightly,” chief financial officer Diana Ferguson told the board. “It is possible that the restructuring will be perceived as a weakening of the district’s credit profile by some external stake holders.” Additional details as to the size of the restructuring and level of reserves that will remain intact were not immediately available.

To keep a long-term $5 billion capital program on track, the budget includes plans to borrow $600 million — down from $665 million proposed in the current budget — to support an $807 million fiscal 2011 capital budget for new school construction, ongoing facility maintenance, and other upgrades.

About $400 million in new-money debt planned in fiscal 2010 won’t be sold until fiscal 2011, boosting expected new money borrowing levels to $1 billion in the new fiscal year.

Chicago Public Schools — which operates 675 schools and serves 417,800 students — has $4.6 billion of outstanding debt that carries AA-minus ratings from Fitch Ratings and Standard & Poor’s and Aa2 from Moody’s Investors Service.  While debt restructuring is not viewed favorably by rating analysts, neither is the one-time use of reserves.

The district earlier this year warned that a $1 billion deficit loomed. About $400 million was trimmed off that figure by Illinois pension reform legislation that reduced the size of district pension payments over the next three years. Then CPS was spared $230 million in state budget cuts, leaving the hole at $370 million.

To achieve a balanced budget, the district earlier this month announced plans to tap all $190 million of its ending fund balance. In addition, the budget eliminated more than 1,000 administrative positions and 800 teacher positions.

District officials had said they could replenish the fund balance — which has served as a reserve and eases cash-flow management — when the state gets caught up on $236 million in overdue grant payments. The board voted earlier this summer to establish an $800 million line of credit to provide liquidity.

Illinois has delayed paying $6 billion in bills, owed before its fiscal year closed June 30, due to its own liquidity and budget crisis.

CPS will collect an additional $100 million in federal funds from the recently approved federal jobs bill, but those funds would go to lower the number of teacher layoffs.

Even as the district has struggled annually with deficits, its fund balance has totaled at least 5% of its operating and debt-service budget. An internal policy set in 2008 requires a balance of between 5% and 10%.

The fund balance is cited by rating agencies as a significant credit strength.

Under the original budget plan, the district had said it could restore the fund balance in two years, but that time could shrink if state lawmakers approve an income tax hike next year that would provide new school funding.

Another potential revenue funding source could come from a pot of $700 million of surplus tax-increment financing revenues some city leaders believe should be freed up.

The Civic Federation announced earlier this week its support for the budget as it will allow schools to open on time but the group warned of mounting fiscal pressures next year due to the district’s heavy reliance on one time revenues.

“Chicago Public Schools had few options available to close a budget deficit that at one point totaled nearly $1 billion,” federation president Laurence Msall said.

The group warned that the district’s decision to drain its reserves would threaten daily operations and it’s concerned that plans to replenish the reserve are risky given its reliance on the state catching up with its payments or new city revenues.

“It is not sound policy to build a plan for replenishing a reserve fund on possibilities, not certainties,” the federation wrote.

The federation also is worried over the district’s reliance on other one-time revenues like $300 million in federal funds and $52 million from its debt service fund balance.

The federation also cited concerns over the partial pension-funding holiday that will shave $400 million of the district’s payments owed to its teachers’ union annually over the next three years.

The reduction will “exacerbate the underfunding of the pension system and create a budget gap of at least $400 million in fiscal 2014 when the regular funding schedule resumes,” the group wrote.

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