Chicago Public Schools' fiscal prospects hinge on state and feds
The Chicago Board of Education votes next week on an $8.4 billion budget as the district tries to navigate the COVID-19 pandemic’s toll on academics and local, state, and federal funding.
The spending plan for the fiscal year that began July 1 is up from $7.84 billion in fiscal 2020. It includes a $6.9 billion operating budget, $758 million capital plan, and $711 million to fund debt service.
The junk-rated district will see some local-sourced revenue fall and the state did not fund a scheduled annual increase in aid, so the CPS plan banks on the federal government coming through with at least $343 million in a relief package that went nowhere in the GOP-controlled Senate.
That’s in addition to $206 million it received from the federal CARES Act signed March 27, of which $128 million will be used in fiscal 2021.
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.
“We remain confident that we will receive additional funding” based on the congressional discussions and bipartisan support for school relief, CPS Chief Executive Officer Janice Jackson said on a call with reporters last week after the budget was unveiled.
“If we find ourselves in a position where those funds don't come through we would be looking at some one-time options that we could utilize in order to balance our budget,” Jackson said. “We remain optimistic but we have been thinking about what some of those backup strategies might be in the event we don’t receive additional funding.”
They include dipping into a debt service stabilization fund. The district drove its structural deficit up to $1 billion by relying on one-time revenues like reserve use, debt restructuring, and accounting gimmicks to cover rising pension and operating expenses.
The approval of several local capital and pension tax levies, state pension help, and the 2017 overhaul of the state’s aid formula helped eliminate the structural gap and lifted the district’s ratings closer to investment-grade territory.
The current situation is more fluid.
“It’s more expensive to operate under these conditions and the revenues are less certain. They are hoping for the best and I’m not sure how much they are preparing for the worst. It’s a risk,” said Howard Cure, director of municipal bond research at Evercore Wealth Management. “This sets them back.”
“Generally, I think weaker credits are more exposed to rating downgrades given how precariously their budgets are balanced," Cure said. "Consequently, further upgrades seem like a long way off. Waiting for the federal government to fund state/local/school districts entities has really devolved into a political battle with working class families suffering the most.”
The district has little room to cut given the language in its teachers’ contract and state aid pressures could persist in a recession especially if voters don’t approve Gov. J.B. Pritzker’s push on the November ballot to move to a progressive income tax rate structure from the current flat structure raising another $3 billion annually, Cure said.
The move to virtual learning could also set back academic strides — a universal worry but more acute in Chicago as the district tries to stem enrollment declines and the city tries to avert population losses.
“The district has been making some real improvement and this really exposes inequities in the system,” Cure said.
Revenue and Expenses
The district considers the state’s ability to fully fund the evidence-based formula adopted in 2017 as “the greatest revenue challenge that CPS will face in the near future.”
While the state is withholding only the scheduled increase this year without a new federal relief package that makes up for lost state tax revenue, Pritzker has warned of deep cuts.
If the state receives a multi-billion-dollar infusion of federal funds to make up for tax losses it could reverse course and restore the $350 million increase in scheduled aid of which the district would receive about $60 to $65 million.
The district’s operating budget relies on $130 million in additional property tax revenue from a hike allowed under state tax caps, $96.9 million from a not-yet-declared tax-increment financing surplus, $1.3 billion in federal funds and about $1.6 billion in state pension and aid funds.
The TIF surplus revenue is down from $163 million this year. The proposed $96.9 million could grow or shrink depending on what the city declares when it releases its 2021 budget in October.
The district will spend $75 million on COVID-19 related purchases for computers, internet service and protective equipment and cleaning supplies. The budget allocates an additional $13 million to hire nurses, social workers, and special education professionals all of which were items the Chicago Teachers Union pressed in the new contract reached last year.
It cuts the prior $33 million of annual spending on school police officers in half. That's due to the lack of police officers needed as the district will start the year with campuses closed and students online. It will decide in the coming months whether to move to a hybrid plan in November. The board earlier this year said it was up to local school councils to decide on whether to continue using police officers at their schools.
Debt and Capital
The district has $500 million of tax anticipation notes outstanding. They are due in December. It will continue to rely on cash flow borrowing.
Rating agencies and the buyside view such borrowing as a sign of the district’s precarious fiscal health but CPS has cut down the level with the maximum amount authorized to be outstanding trimmed by $700 million over the last three years from a high of $1.55 billion.
“Despite the unprecedented circumstances related to COVID-19 in the last quarter of FY2020, the district continued to make progress on improving its cash flow by relying less on short-term borrowing and saving approximately $2 million in short-term interest costs,” budget documents read.
CPS made an additional, albeit modest, reduction in fiscal 2020 to $830 million from $844 million in fiscal 2019. CPS spent approximately four months of the year without short-term borrowing.
About 35% from the next installment of property taxes due this month will be delayed because the county extended the payment deadline but officials said they can manage the delay without additional cash flow borrowing.
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 $410 million of fiscal 2021 bond proceeds, according to budget documents.
CPS expects to sell new money debt in the fall but the size has not been set, said Chief Financial Officer Miroslava Mejia Krug.
Its bonds are trading at a more than 200 basis point spread to the triple-A benchmark.
"We have seen a few block size trades in Chicago BoE bonds" with one zero coupon bond trading at a 270 bp spread this week compared to a 320 bp spread last month. Higher coupon bonds have recently traded at spreads of 224 bps and 233 bps, said Tozar Gandhi, lead of the high-yield pricing team at IHS Markit.
The district closed out the last fiscal year with $8.1 billion of outstanding long-term debt and $500 million of outstanding short-term debt.
It finished fiscal 2020 with a $41 million surplus as a decline of $137 million in operating costs more than offset a $40 million revenue shortfall. 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 leaving a $502 million estimated balance at the close of fiscal 2021 if spending and revenues remain on target.
After several years of upgrades, 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.
Chicago Public Schools serves 355,000 students in 638 schools. It is the nation’s third-largest school district.