Chicago Public Schools budget needs federal aid to balance

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The Chicago Board of Education signed off on a $6.9 billion operating budget amid warnings that hard decisions lay ahead if the federal government doesn’t come through with more coronavirus-related fiscal relief.

The budget banks on $343 million of future federal aid. The junk-rated district received $206 million from the CARES Act signed March 27. It carried $128 million of that aid into fiscal 2021 which began July 1.

An aerial view of Gwendolyn Brooks College Preparatory Academy High School in Chicago. The city's school district built its budget assuming it will get federal aid.

“Without these federal dollars that we are assuming at this point we’re going to get…we will be making some very, very tough decisions,” Board President Miguel del Valle said ahead of the vote at Wednesday's board meeting. He pressed the public and local leaders to pressure federal leaders to get behind a new relief package as negotiations remain stalled.

The board’s unanimous vote for the $6.9 billion operating budget, with one abstention on the $758 million capital plan, came amid calls from the Chicago Civic Federation for more detail on a backup plan to deal with the shortfall if new federal funding doesn’t arrive.

The expenditure of $711 million for debt service is the final piece that makes up the fiscal 2021 $8.4 billion budget.

“Given the significant financial challenges facing nearly all state and local governments right now, CPS has presented a reasonable spending plan for the next fiscal year,” said Civic Federation President Laurence Msall said. “However, the uncertainty of relied-upon federal funding, among other contingencies, means that the district must publicly present a comprehensive Plan B so that parents, staff and the public know what to expect if any of the proposal’s elements does not fall into place.”

CPS budget director Heather Wendell told board members that the district does “have options” and would look to one-time measures such as the use of available reserves, grants, spending cuts, and other sources to close the potential hole. She stressed the funding level is a “conservative” guess based on the discussions going in Washington D.C.

The federation counters that more specific “details have not been made public.”

The federation said it supports the budget for an improved level of general operating reserves, transparency on revenue challenges, livestreaming meetings and holding remote meetings during the COVID-19 pandemic.

The Chicago Civic Federation's Laurence Msall says Chicago Public Schools need a budget Plan B.

In addition to the risk of relying on uncertain federal aid and the challenges posed by state funding and property tax funding that could be pressured by the pandemic, the federation said its concerns include a continued need to use short term borrowing, the lack of a five-year capital planning process, and increasing personnel levels and expenses amid declining enrollment.

A series of local tax levies to cover pensions and capital along with new state aid and pension funding helped the district close a $1 billion structural deficit and it’s been rewarded with several rating hikes that have moved it closer to investment grade.

Moody’s Investors Service in June warned in a special report that progress was threatened by the pandemic's potential impact on state aid and a property tax levy for pensions. Moody’s rates the district four rungs below investment grade at B1 with a stable outlook. It cut its outlook from positive in May.

S&P in April revised the outlook on the BB rating to stable from positive. Fitch Ratings assigns a BB rating and stable outlook. Kroll Bond Rating Agency assigns BBB and BBB-minus ratings to various CPS GO bonds, with a stable outlook.

The district's borrowing costs have also come down but its secondary bond market trading levels are up from its last new issue.

The March and early April flight to liquidity saw investors pull out from the market amid the amplifying pandemic. Spreads soared.

“Spreads have tightened since then but remain higher than before the pandemic as we are not yet out of the woods,” Daniel Berger, a senior market strategist, wrote in MMD-Refinitiv analyst team’s Municipally Speaking column this week.

The Chicago school board’s bonds saw spreads in the 140 basis point range to the Municipal Market Data’s AAA benchmark when a new issue was priced last September. The spreads ballooned to more than 400 bps in the spring as the market turmoil took root. This week, bonds traded at a roughly 213 bp spread, improved from the spring but still a far more bruising level than last year.

Continued progress is threatened by the COVID-19 pandemic’s tax blows. The state’s fiscal 2021 budget did not include a scheduled increase in aid funding that will cost the district up to $65 million.

Wendell said the district will continue to rely on short-term borrowing to manage cash-flow and will find itself in a negative cash position through much of the year. The district has $500 million of tax anticipation notes outstanding. They are due in December. The district has cut by $700 million the amount outstanding at any one time over the last three years from a high of $1.55 billion.

The district carried a general fund balance of $524 million into the new fiscal year. It will use $22 million of the balance in fiscal 2021.

The district’s $758 million capital plan relies on local-sourced funding of $653 million. Another $50 million in state capital funds would fund a new high school and another $55 million comes from “external” sources. The local portion is funded with $410 million of fiscal 2021 bond proceeds.

Schools officially open the day after Labor Day but without any students in them. The district, because of the coronavirus pandemic, will stick with virtual learning for its first quarter with the potential to move to an online/in-person hybrid instruction plan in late fall.

The board also voted four to two to maintain the district’s contract using Chicago police officers in the role of school resource officers. The contract was reduced to $12 million from $33 million. The district is deferring to local school councils to vote on whether their individual school will continue using officers. The issue has received heightened scrutiny over allegations of heavy-handedness by officers and whether they unfairly subject teens to the criminal process.

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Board of Education of the City of Chicago Coronavirus Budgets Public school funding School bonds Speculative grade bonds Illinois