CHICAGO – Chicago Public Schools unveiled the “framework” for a $5.75 billion fiscal 2018 budget Friday that relies on $300 million of new state money that’s still up in the air and $269 million of unidentified new “city resources.”
The cash-strapped, junk-rated district is relying on those funds to erase about $550 million of red ink in the new fiscal year that began July 1. It’s the third consecutive year the district budget has assumed additional state funding. Such funding fell through in the last two years.
About $300 million more in state general aid and help in covering its teachers’ pension payment remains in limbo due to Gov. Bruce Rauner’s amendatory veto of Senate Bill 1, which overhauls distribution formulas.
“The budget we released today is more of an outline than a traditional budget as we wait for the resolution of the education funding stalemate in Springfield,” CPS’ chief executive officer, Forrest Claypool, said at a news conference Friday.
The fiscal 2018 state budget package pushed through by the General Assembly’s Democratic majorities with the help of some GOP members who broke with the Republican governor only allows for general state aid to be released under a new evidence-based formula such as the one in SB1. The state missed its Aug. 10 payment owed to schools.
The Senate will attempt to override Rauner Sunday. Democrats hold the required three-fifths super-majority there and there’s widespread support for the package. Success in a House vote slated for Wednesday is uncertain because some GOP support is needed. If an override fails, that would send both parties back to the bargaining table.
“When the dust has cleared in Springfield, like many other districts CPS will release a budget that incorporates any changes or revisions required, if necessary at that time,” Claypool said.
Claypool stressed that schools will “open on time and stay open” regardless of when general state aid begins to flow. Some districts have warned they might not be able to stay open for long as they deplete reserves and borrow money just to open their doors.
Claypool said 268 districts fare better than CPS under SB1 in per pupil funding levels, a position the district has highlighted to counter Rauner’s portrayal of SB1 as a “bailout” for CPS. His amendatory veto trims about $100 million off the extra $300 million CPS would receive.
Even if the state comes through with the funding, CPS still needs city help. Mayor Rahm Emanuel during questioning Thursday and Claypool on Friday remained quiet on what form the $269 million of city help might take.
Past reports have suggested the city was considering freeing up more tax-increment financing assistance or levying a new tax on high net worth individuals or downtown businesses.
"There are many options for local resources to fill this gap….this is not the time and place to discuss them,” Claypool said. “Our focus right now is on Springfield."
Moody’s Investors Service recently put the city’s Ba1 rating on review for a downgrade over CPS’ woes and the potential burden any future help might pose. Moody’s also has the district’s B3 rating on review for a downgrade as it grapples with late state aid and other strains.
The district has whittled down a structural imbalance of more than $1 billion with new property tax revenue and spending cuts. On expenses, it’s facing an additional $99 million in teacher salary and benefits and a $52 million increase in its fiscal 2017 $733 million teachers’ pension payment.
The district is also relying on $71 million in additional property taxes by raising its levy by the maximum allowed by the state and it relies on $22.3 million from the city’s now annual declaration of a TIF surplus. That’s down from $87.5 million in fiscal 2017 when a larger surplus was declared to help cover the cost of a new teachers’ contract. Reserves fall to $57.3 million from $80.8 million.
The budget does not anticipate any new general obligation or capital improvement tax-backed borrowing, Claypool said, but that could change especially given the district’s large capital maintenance needs. The capital budget totals just $136 million, down sharply from $938 million.
The district may raise its short term borrowing authority, he added.
CPS issued $1.55 billion of tax anticipation notes in fiscal 2017 that are to be fully retired by December. The district had previously said it would limit short term borrowing to its current $1.55 billion authorization but in a recent offering statement said it may go up to its statutory cap of 85% of its fiscal 2017 tax levy of $2.37 billion.
The district also recently issued nearly $400 million of state grant backed notes. While general state aid has generally been on time, the state is far behind in grant payments. The state comptroller said this week she had released a new quarterly payment.
The district doubled its planned $250 million sale of unrated general obligation new money, refunding, and restructuring bonds in July as high yield buyers were drawn by attractive rates and an added security feature.
As of June 30, the board had $7.7 billion of outstanding long-term debt and $1.3 billion of outstanding short-term debt. About $594 million will go to repay alternate bonds, capital improvement tax bonds and public building commission related debt, including $396 million from general state aid, according to budget documents.
The district pays punishing yield penalties on all its borrowing. The latest GOs landed at yields in the low to mid 7% range. Its GO sale last year landed at 8.5%. Its new capital improvement tax bonds landed at a high yield of 6.25%. CPS paid initial rates in the 6% range on the GANs and they will be reset at LIBOR plus 550 basis points. On its most recent TANs, it paid LIBOR plus 400 bp.
The last offering statement laid out the district’s rocky finances warning the district will continue to operate with a negative cash position and will rely on short term lines to fund its “operating and cash flow needs” in fiscal 2018.”
The district will hold public hearings on the budget later this month and the Chicago Board of Education will vote on the plan at its meeting Aug. 28 to meet a state deadline.
