CHICAGO – Chicago Public Schools, in its latest financial report, warns of more red ink to come this year and "difficult" decisions next year without additional state help.

"The long-term future sustainability of the district at its current operating level is dependent on new revenue sources or major reductions in costs," the district warns in a footnote about "future sustainability" in its comprehensive annual financial report for fiscal 2016, which ended June 30. The report was submitted to the Chicago Board of Education last week.

State pension funding help and pension reforms are crucial to help keep the district afloat. Coupled with district cuts and other cost saving initiatives CPS says it can return to the black.

"Without these actions, CPS may be in a deficit cash position in fiscal year 2017 and without additional funding, CPS will need to make difficult decisions to balance fiscal year 2018 and future budgets," it says.

The district's 2017 budget relied on $420 million in additional state funding although $215 million is at risk. Gov. Bruce Rauner vetoed the funding late last year in the absence of a state agreement on pension reforms.

A Senate plan to break the state's 18-month-old budget impasse would resurrect that funding but its fate is uncertain. The proposal also includes an overhaul of state aid funding formulas based on the recommendations expected as soon as this week from a special commission.

CPS closed the books on fiscal 2016 with an operating deficit of $537 million, down from a gap of $710 million in fiscal 2015. Its fund balance landed at a negative $127 million and it unrestricted net position – which looks more fully at its fiscal picture and includes assets and outstanding obligations -- was at a negative $12 billion, an increase of $759 million from fiscal 2015.

The district collected $2.4 billion in property taxes in fiscal 2016, $104 million more than in fiscal 2015 after raising its levy to the maximum under state tax caps. The district will see a bigger boost this year after state lawmakers approved a $250 million tax levy for teachers' pensions.

Since 2007, the percentage of property tax revenue comprising the total budget has steadily increased from 36.7% in fiscal year 2007 to 45.7% in 2016. The district's other two primary funding sources are state aid and federal money.

The district's $6.7 billion of general obligation debt is part of a $20.1 billion overlapping debt tab that includes the city, Cook County and its forest preserve district, the park district, City Colleges of Chicago, and the water reclamation district.

"Despite credit rating downgrades, CPS continues to have borrowing capacity and will continue to access the long term credit market," the report says.

The district struggled with market access early last year and was forced to scale back a planned borrowing, ultimately paying 8.5% tax-exempt interest. The district returned in December with a new security that offered a revenue-backed credit supported by a capital improvement property tax levy approved by the City Council. The levy was initially set at $45 million.

The district tapped $1 billion in short term credit lines in fiscal 2016. The board raised the authorization to $1.5 billion for the current fiscal year. "Management has no reason to believe CPS will not receive an extension of their existing variable lines of credit," the report says.

The report lays bare the district's heavy reliance on short term lines to pay its bills – including a big debt service payment due in February and the teachers' pension payment in June – as it has drawn down reserves to erase past red ink.

The current budget funds a $733 million teachers' pension contribution, up from $676 million in fiscal 2016. The payments skyrocketed after the expiration in 2014 of a three-year partial pension holiday that also required the district reach a 90% funded ratio by 2059. CPS has $10 billion of net pension liabilities for a 51.8% funded ratio.

"Although we were able to make our full fiscal year 2016 pension payment... we needed to borrow an additional $200 million to do so," the district reported. Interest on the borrowing added $24 million in debt. CPS's total interest costs rose by $33 million to $365 million in fiscal 2016.

CPS' GOs are rated junk by Fitch Ratings, Moody's Investors Service, and S&P Global Ratings. Its CIT bonds were rated A by Fitch. Kroll Bond Rating Agency rates both forms of CPS debt in the triple-B category.

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