Chicago Public Schools unveiled a proposed
“With equity as our focus, the district is making investments that will impact students in every part of the city through academic programming, building renovations, modernization and pre-K expansion,” said CPS Chief Executive Officer Janice Jackson, who was joined by Mayor Lori Lightfoot at a Thursday afternoon news conference to unveil the budget for the fiscal year that began July 1.
Jackson was named to the post by former Mayor Rahm Emanuel and was retained by Lightfoot when she took office in May.
CPS, which carries three junk ratings, projects it will take in $6.1 billion of operating revenues, up $198 million from the operating budget for 2019. The larger, all-funds budget is up $117 million from the fiscal 2019 plan.
CPS reports in budget documents it can afford the higher spending “thanks to the district’s improved financial situation, which is due to the historic state education funding reform.” Additional aid and pension help in 2017, along with new and higher local tax levies between 2016 and 2017, helped the district whittle down a $1 billion deficit.
While budget pressures have eased and reserves are being rebuilt, the district’s liquidity woes continues and its reliance on short-term borrowing to manage operations, spending pressures, and unfinished labor negotiations are concerns for investors and rating agencies.
The budget earmarks $3.8 billion for local school budgets. It relies on $97 million of tax-increment financing surplus revenues but the city must first declare a surplus to free up the funds. That figure is up from $22 million in 2019. The budget also taps $56 million from its fund balance.
The fiscal plan includes appropriations to pay $700 million of debt service for its alternate revenue source general obligation bonds, capital improvement tax bonds, and Public Building Commission-issued bonds for school projects. Overall, that’s up from an estimated $624 million in fiscal 2019.
The district will receive $3.1 billion in property tax revenue in fiscal 2020. Once earmarked deductions are made for debt service and pensions, the increase from 2019 is $127 million and includes $39 million from the district’s decision to seek the maximum increase in the education levy allowed under state tax caps which is tied to inflation.
Capital
The budget authorizes up to $821 million for infrastructure, although not all would be spent in fiscal 2020. The district will focus on critical facility needs, interior improvements, educational programs, site improvements, and IT and security upgrades, according to budget documents.
The capital plan directs $619 million in capital spending to fund "critical building improvements" for more than 300 school buildings with much of it going to fund work at schools that serve majority low-income students. The other $202 million would be funded primarily with $191 million of anticipated state funding that was approved as part of the state’s multi-year $45 billion infrastructure package adopted during the spring session.
The district is allocating the state funds in the 2020 budget but acknowledges that the money will be doled out over multiple years by the state.
CPS expects to spend just $150 million of the total 2020 authorization by the end of the fiscal year and a total of $694 million on projects after tapping various authorizations from past years that have been carried over. Last year’s capital plan authorized a record $989 million projects while $481 million was spent.
Overall, the capital plan would be financed by anticipated bond offerings and other capital funds totaling $552.8 million, $191 million of potential state capital funds, $50.4 million of Federal E-Rate revenue for technology upgrades, with local external funding making up the remainder. Those external sources include tax-increment financing and local aldermanic funds.
Jackson said at the news conference borrowing plans to fund the capital budget would be discussed at future board meetings. The board at its July meeting approved a $430 million refunding.
Debt
At the close of fiscal 2019, the district had $8.4 billion of outstanding long-term GO and capital improvement tax-backed debt and $450 million of outstanding short-term debt. The capital improvement tax authorized by the city council in 2016 generated $45 million and it will rise to $60 million in 2020.
CPS’ short-term, tax-anticipation note issuance peaked at $1.55 billion but the district cut that level to $1.1 billion in 2018 and to $844 million last year, which trimmed $33 million off borrowing costs. “CPS will continue to issue tax anticipation notes in FY2020 to cover operating cash flow needs, which are repaid from property taxes,” the budget notes without providing a specific number on the maximum borrowing amount outstanding at any one time.
The district reports having at the close of fiscal 2018 $335 million in cash on hand while $450 million of short-term TAN debt was outstanding, still a negative variance.
The district expects to have closed out fiscal 2019 with a $365 million balance, up from what was originally projected to be a $261 million balance. It anticipates closing out fiscal 2020 at $309 million after using $56 million to fund the 2020 budget.
The district’s teachers’ pension contribution for fiscal 2020 will hit $854.4 million, up from $809 million in fiscal 2019, with much of the payment now covered by a special pension tax levy totaling $477 million and a state contribution of $257 million. The funded ratio is expected to decline to 47.85% based on 2018 results from 50.10% in 2017 and the $10.9 billion 2017 tab is expected to grow by $622 million, due to a decrease in the assumed rate of return to 7.00% from 7.25% and other actuarial changes.
While the ratings remain stuck in junk territory, spreads have narrowed sharply over the last two years. Several long Chicago Board of Education bonds recently traded at a spread of about 140 to 154 basis points over the AAA benchmark, according to IHS Markit strategist Edward Lee.
Rates on the district’s last competitive cash flow note sale landed at 1.95% and 2% on two tranches of an unrated $250 million sale of tax anticipation notes that come due in October. The district paid punishing rates of 4.8% in prior fiscal years.
The long 28-year bonds in the district’s last GO sale in December landed at a spread of just over 200 basis points to the AAA benchmark. The district saw a punishing 480 bp spread on its long 29-year bond in a GO sale just ahead of mid 2017 passage of new state aid.
The district has enjoyed positive rating actions since the state approved new funding. In July 2018, S&P Global Ratings
Contract
Teacher contract negotiations are ongoing and Lightfoot said Thursday “there’s no reason why we shouldn’t get a deal done” before school starts despite the ongoing “rhetoric.”
The Chicago Teachers Union has slammed a city/district $300 million contract offer that provides a 14% raise implemented over five years and it wants a commitment on additional school nurses and social workers, librarians, and smaller classrooms built into the contract, not just the budget where some additional funding is proposed in fiscal 2020.
“There’s such a long history of broken promises. That contract is the most important document there is about guaranteeing the way our working conditions look,” CTU President Jesse Sharkey said in statement.
The school year begins Sept. 3, the day after Labor Day, but the earliest teachers could strike is Sept. 26 based on required legal procedures.
Budget hearings will be held later this month with a vote by the board of education at its monthly meeting on Aug. 28.
