CHICAGO – Cash-strapped Chicago Public Schools can complete the school year by borrowing $389 million against $467 million in block grants owed by the state, the city of Chicago’s chief financial officer, Carole Brown, said Friday.
The combination of some cuts and operating savings along with the borrowing proceeds “should generate cash flow through the end of the year” that allows the district to meet payroll, keep schools open, and make good on $470 million owed next month on its $733 million pension contribution, Brown said.
The state pays a small piece of the pension contribution and the remaining $250 million will come from a state-approved pension levy that will be collected over the summer.
The junk-rated district had previously warned that schools might close early in June due to red ink left after Gov. Bruce Rauner vetoed state pension funding help.
The district also is no longer planning on using $600 million in open capacity on $1.55 billion of Chicago Board of Education approved credit lines backed by tax collections, Brown said.
The district currently has $950 million of outstanding tax anticipation notes, or TANs, in three issues that mature in December. It had taken out a fourth issue for $600 million but it matured in March. It has paid in the 3% to 4% range over the last two years for credit lines.
The district previously had said in court filings it needed to tap remaining authority to make the pension payment.
The new, short-term fix “gets us through 2017,” Brown said, buying Mayor Rahm Emanuel and CPS leaders more time to work on a “permanent solution.”
While officials are banking on more state pension help and general aid, the city is also eyeing potential revenue sources as part of a long-term solution. “The city has a bunch of options on the table,” Brown said. Talk has circulated of reinstating a head tax on business or imposing a tax on high net-worth individuals.
The district’s current fiscal crisis was fueled by warnings from CPS chief executive officer Forrest Claypool that schools would have to close early in June without more state help or court intervention to make up for a remaining hole left by Rauner’s veto of $215 million in pension aid.
The district whittled the gap down to $129 million. Without a state budget agreement reinstating the funds, the district was hoping for a favorable court ruling in a lawsuit it filed earlier this year accusing the state of discriminatory funding practices. The courts tossed the lawsuit late last month.
Emanuel then stood with Claypool and vowed to help. The city considered options that would help without further damaging its own weakened ratings and speculation had circulated it might provide a tax-increment financing loan. Some aldermen called on the city to tap reserves. Delaying the pension payment was discussed but dismissed because it would likely trigger another CPS downgrade and raise short-term borrowing costs.
The city and CPS recently warned the gap was actually much wider, citing state grant payment delays. The district receives $665.2 million in annual block grants, which are separate from state operating aid. It’s received one quarterly payment for $198.7 million with another $466.5 million owed as the state’s overall unpaid bill backlog has hit $14 billion.
In the end, the near-term fix will rely an old and pricey standby for the district in the form of short-term borrowing. Brown said the current plan was reached after discussions that involved CPS “lending partners.”
The board will authorize the grant anticipation note issue at its May 24 meeting. Brown said the district can only leverage up to 85% of its grant funding and is required to advertise bids. It’s unclear how the deal would then proceed whether in the form of a private placement with negotiated terms and rates or bid through a competitive process.
One rating agency said its analysts have not heard from other districts that are considering borrowing against the delayed grants.
The numbers also don’t fully add up as presented Friday although Brown stressed that the plan provides the cash flow needed to cover CPS obligations.
Brown said a long-term fix is needed that doesn’t let the state off the hook. “This is not the way you manage an enterprise,” she said of the reliance on short-term patches. “We are hopeful that the state will live up to its responsibility.”
The district had previously warned of billion dollar deficits in the coming year absent new help. It operates on a $5.4 billion budget.
The district has trimmed some of its billion dollar structural deficit with cuts and it can count on $250 million in extra property tax revenues for pensions and an additional $50 million in property tax revenues annually by raising its levy by the maximum under state caps.
The CPS board previously authorized short term TAN borrowing of $1.55 billion for fiscal 2017. Under law, it can leverage up to 85% of its tax levy which in 2016 totaled $2.34 billion.
The district’s steep penalties are tied to the London Interbank Offered Rate plus an applicable spread. A fall out of the single-B category by Fitch Ratings, S&P Global Ratings, or Kroll Bond Rating Agency would drive up spreads to 4.75% from 4% and to a high of 6% at the CCC-minus level. It paid 3.25% on fiscal 2016 lines.
The district is rated in the single-B category and carries a low investment grade from one rating agency. All assign a negative outlook. The district struggled to sell its last general obligation issue in 2016 and the top rate landed at 8.5%, near a statutory 9% cap. It successfully returned with a new credit later in the year leveraging a $45 million capital improvement tax levy.
The plan didn’t surprise market participants who noted it provides a short-term salve.
“They have problematic liquidity and whether they are borrowing against future money from the state or from taxpayers there’s no difference to the district’s credit profile or to lenders,” said Matt Fabian, partner at Municipal Market Analytics. Banks will lend the district funds on a short-term based on attractive yields and reduced risks of a short maturity.
Long-term, the district and city “need to figure a way for the district to have a sustainable budget with minimal reliance on the state,” Fabian said.
“Borrowing against uncertain and late categorical funding from the state of Illinois may allow the district to remain open through the end of the school year and make its statutory pension payment, but it will come at a heavy price, both in terms of a high borrowing cost and the reputation of CPS. Worst of all, it does not help with the Chicago Public Schools’ budget shortfall next year and will, indeed, make it worse,” said Laurence Msall, president of the Chicago Civic Federation. “There are few choices left to the district given the deadlock in Springfield. Any long-term sustainable path for Chicago Public Schools will require the cooperation of the state, the city of Chicago and CPS.”
Later in the day, CPS defended the timing of the borrowing decision, saying it was not an option earlier available to the district.
“On the heels of Gov. Rauner’s veto of $215 million in funding, CPS was advised against any attempted borrowing because of market conditions at that time,” an official said. “Those market participants now believe there is a window now because CPS cut additional expenses and will make its pension payment.”
CPS also did not have a commitment for the short-term borrowing against the delayed state grants and was not certain whether lenders would agree to a GAN issue or any other form of short term borrowing.
Officials said they could not comment any further on the potential rate.
CPS said the $600 million of TAN authority is no longer available although it’s unclear why they said in court documents that the district planned to use additional short borrowing capacity to meet the teachers’ payment.
After the borrowing, CPS will end the year with a gap of between $40 to $90 million.