CHICAGO – Chicago Public Schools unveiled a $5.4 billion
The budget for fiscal 2017, which began July 1, puts the junk-rated district on "a clear path forward to long-term financial stability," Forrest Claypool, CPS' chief executive officer, said at a news conference Monday to release the plan.
A series of public hearings are expected ahead of a vote on Aug. 24 by the Chicago Board of Education.
"With this budget, we'll move the district on to stronger footing and stand ready to partner with leaders in Springfield to advance long-term education funding reform and pension equity," he said.
In addition to the operating budget, the district will spend $338 million on capital, up $160 million from fiscal 2016. The capital program relies on $266 million in borrowing – that's in addition to a recent $150 million private placement the district closed on with JPMorgan – and $72 million in federal and city funds.
Claypool said the district intends to return to the capital markets with a public debt offering for infrastructure work that includes deferred maintenance, modernization projects and new construction to ease overcrowding. The district also remains open to future private placements, he said.
Some or all of the fiscal 2017 borrowing would be backed by a new dedicated revenue stream in the form of the $45 million capital improvement property tax levy the Chicago City Council authorized last fall. Any borrowing would mark the first leveraging of those funds and depending on the structure could garner stronger ratings and investor interest, market participants said. The levy is allowed to grow at the consumer price index and steps up by $143 million in fiscal 2032, according to
Much is at stake for the district as rating agencies and market participants dissect the budget and the administration's assertions. If its ratings fall deeper into junk territory, CPS could face heightened risks of losing market access and the ability to replace $900 million in expiring credit lines.
THE DEFICIT
Budget documents outline the district's closure of a $1.1 billion deficit through a mix of cuts and savings from various efficiencies and labor changes, new tax-increment financing funds, improved Medicaid collections, and additional state funding. Extra state funding approved earlier this summer trimmed the gap to about $300 million.
New cuts and savings come on top of $250 million in previously announced spending reductions. Claypool characterized most as recurring revenues that would not lead to future deficits and said spending is down $232 million from the previous year.
Without solving the state's larger budget impasse ongoing, Gov. Bruce Rauner and lawmakers approved partial stopgap funding for state services and schools in a package that provided CPS with an additional $130 million in state poverty grants and about $215 million for pension payments. The package also cleared the way for the City Council to approve a $250 million property tax levy for pensions.
The extra grant funding is approved only for fiscal 2017 as lawmakers intend to work on an overhaul of education funding over the next year and the pension help is reliant on Rauner and lawmakers agreeing to state pension reforms early next year.
"This budget assumption presents risks, in our view, given the state's continuing inability to adopt a budget for fiscal years 2016 and 2017. The district's budget assumptions on labor costs also will be notable, given ongoing negotiations with the teachers' union on a contract that expired at the end of fiscal 2015," S&P Global Ratings said in a recent report extending the district's CreditWatch period until after the budget's release.
"We know work remains to be done in the future," Claypool said of the state aid issues, but he added that the district takes state lawmakers "at their word" on the pension funding. The district did not disclose any backup plans should the pension help fall through.
The district has nearly $10 billion of unfunded liabilities and it will pay $721 million toward teachers' pensions. That figure rises to more than $800 million in 2021 and more than $1.5 billion in 2059.
DEBT AND RESERVES
The district's various fund balances remain deeply strained after the system drew down in fiscal 2016 a general fund balance of $181.2 million in unrestricted funds to help offset a $480 million shortfall because the state did not come through with extra funding as the district had hoped in fiscal 2016.
The district entered the new fiscal year in negative general fund balance territory and with a negative operating fund balance of $26.9 million. The school district expects to close out the year with a narrow general fund balance of $28.3 million.
In fiscal 2017, Chicago Public Schools will pay $563 million in debt service on its $6.7 billion of outstanding debt. The district's combined principal and interest totals $13.3 billion. In addition, the district has about $870 million in short-term credit outstanding.
The district will use $373 million, or about 47% of its general state aid, for debt service. By 2021, that number will grow to $467 million, accounting for nearly half of its state aid.
Claypool stressed that the district's borrowing won't include any scoop-and-toss debt restructuring. In recent years, it has relied heavily on the tactic, in which new debt is issued to pay off maturing debt.
The district remains in negotiations on new credit lines, which are structured as tax anticipation note issues. The district tapped out its lines in fiscal 2016 and Claypool portrayed the district's future use of those lines solely as a cash management tool as it awaits twice-annual property tax payments totaling $2.3 billion.
Claypool declined to the total size of the credit line size the district was seeking but the budget earmarks $35 million in interest this year for such borrowing. A cash flow chart in budget documents shows the district will struggle with liquidity landing in negative territory throughout fiscal 2017.
CPS issued $1.1 billion in TANs during fiscal 2016. The short-term borrowing has been structured as tax anticipation warrants with an interest rate of 3.25%, expensive for debt that such a short-term structure.
The district has paid punishing rates to borrow, including 8.5% on its most recent public offering earlier this year and 7.25% on its recently closed private placement.
A draft version of the bond purchase agreement for that placement appeared to leave the district at risk of rate increases – 0.5% if downgraded by Fitch Ratings or S&P Global Ratings to B-minus – and by 1% if dropped into the CCC category ahead of the deal's "posting date." The document did not define the posting date. An official statement is expected to be published in September.
The district is rated B-plus by Fitch and S&P, B2 by Moody's Investors Service and carries one investment grade rating of BBB-minus from Kroll Bond Rating Agency. All assign a negative outlook.
UNION
The district's books assumes that a multi-year teachers' contract phasing out over two years the district's coverage of 7% of the teachers' 9% pension contributions is eventually accepted. Union leaders earlier this year gave initial approval to the deal only to have a larger negotiating body reject it.
The district would save about $130 million by phasing out the contribution although Claypool declined to put a figure on fiscal 2017 savings because the issue is the subject of negotiations.
The Chicago Teachers' Union has warned that the move could trigger a strike this fall. The district is banking on public pressure pushing teachers to agree to the concession since the state has agreed to raise funding and property owners face a bigger tax hit.
"It's time for the teacher union to be part of the solution," Claypool said.
Union chief Karen Lewis countered later Monday: "Chicago teachers do not seek to go on strike. We want to return to clean, safe, resourced schools. We want a fair contract…cutting our pay is unacceptable," she said.
The union has proposed an alternative menu of taxes to raise more revenue including such as reinstating a corporate head tax on employees that Emanuel phased out, and a financial transaction tax.
