CHICAGO — The Chicago Board of Education unanimously approved a $6.6 billion budget for fiscal 2014 that closes a nearly $1 billion 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, leaves 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 downgrades.
A more than $400 million spike to $613 million in Chicago Public Schools' teacher pension contribution in fiscal 2014 contributed to the gap. The increase followed the expiration of a state-approved three-year partial payment holiday. With action on a state level pension overhaul faltering this past spring, the district sought relief from the increased contribution, but the effort failed.
"The final budget passed today reflects the difficult decisions that needed to be made to close a historic billion-dollar budget gap, while protecting the critical investments necessary to allow our students to thrive and succeed in the classroom," CPS' chief executive officer Barbara Byrd-Bennett said in a statement Wednesday.
The overall fiscal 2014 spending plan includes a $5.6 billion for the operating budget, another $349 million for the capital budget and $600 million going to debt service. The budget is up from $5.8 billion in fiscal 2013.
In addition to the pension payment hike, the deficit stems from flat to declining school aid, the cost of a new teachers' contract struck last year after the district's first strike in more than two decades, and rising healthcare expenses.
The administration cut $112 million in the central office and administrative spending and another $68 million from local school budgets to help balance its books. It will raise its tax levy by the maximum amount allowed under state law for an additional $89 million.
The budget drains the district's unrestricted reserve of $604 million. Officials will draw another $39 million from a restricted tort fund balance and $54 million will come from a debt service fund reserve, marking a first time use of that account to cover rising debt service.
The depletion of unrestricted reserves violates the district's 2008 internal fund balance policy and officials plan to put off its replenishment for at least two additional years. "This proposal is an irresponsible stopgap to the district's larger ongoing structural deficit," the Chicago Civic Federation organization wrote in its recent analysis of the spending plan.
The debt service accounts hold $333 million in restricted funds and $255 million in unrestricted funds. Use of the unrestricted cash allows the district to free up state aid for operations that otherwise would have gone to cover debt service.
Reserves were drained to balance the budget last year 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.
Moody's Investors Service downgraded the board's rating on the board's $6.3 billion of debt one notch to A3 and left a negative outlook on the credit on the same day the budget was unveiled by CPS last month. No major financial changes were made to the final budget.
Standard & Poor's rates the board A-plus and stable. Fitch Ratings assigns an A rating and negative outlook.
The district, like Chicago and its other sister agencies, had hoped the General Assembly would act on pension reforms for local governments this spring but lawmakers have been stymied by political gridlock over how to change the state's system.
While its sister agencies face rising unfunded liabilities that have driven a series of downgrades by Moody's, CPS' situation was more acute given the 2014 payment hike. CPS' teachers' pension fund has $6.8 billion of unfunded liabilities for a funded ratio of 59.9%. Chicago faces a $600 million increase in 2015 for its two public safety pension plans.
"We can't cut our way out of this crisis. We need meaningful pension reform that can generate significant savings and prevent devastating future cuts to our schools," Byrd-Bennett said.
As part of its efforts to rein in costs, the district previously announced the closing of nearly 50 schools. The board would sell up to $300 million of new money bonds this year to finance its ongoing capital program and improvements at schools taking in students from those shuttered.
Administration officials stressed that the budget protects the longer school day adopted during the 2012-2013 school year, an expansion of early childhood education, full day kindergarten, and other academic programs.
Critics include parents upset over the local school cuts and the Chicago Teachers Union, which in an analysis accused the district of spending on initiatives that promote instability.
The Civic Federation withheld its endorsement and took the district to task for not proactively developing its own pension reform plan and pushing for state support. "The district knew this budget crisis was coming and should have been aggressively advocating for its own pension reform proposal tied to a long-term financial plan to stabilize their budget," Civic Federation president Laurence Msall said. "Silence on these critical issues is a grave disservice to the district's students, parents, teachers and taxpayers."
"Investors should continue to monitor management's budget updates, operating reforms, and relationship with union membership closely as they will be vital to the financial health of the district through the midterm," Morningstar Inc. municipal analyst Elizabeth Foos said in the firm's municipal research newsletter this week.