CHICAGO – Warnings over school cash flow struggles 22 months into Illinois’ historic budget impasse and Chicago Public Schools’ ongoing fiscal ills cast a shadow over gains made by some districts in fiscal 2016.
More districts earned the state’s top fiscal designation in fiscal 2016 but the good news ended there in the Illinois State Board of Education’s 2017 fiscal report card of 852 public kindergarten-through 12th grade school districts.
Districts have warned the state about their current fiscal year struggles to make ends meet amid delays in some portions of their aid. The state is $1.4 billion behind in payments. Also, the cash-strapped Chicago Public Schools – which has warned that schools could close early in June without additional state aid – posted its worst ever financial score.
“School district administrators facing major cash flow difficulties continue to make hard choices,” the report warns. Districts have cut costs by forgoing supplies, delaying facility repairs and maintenance, and delaying the purchase of replacement buses and have increased cash balances by issuing debt or restructuring debt.
“Districts are now at a point where additional budget reductions are going to be very difficult to realize without impacting the education of students,” the report said. “Because of the delayed payments, district administrators continue to make difficult choices of decreasing expenditures, incurring debt and/or eroding fund balances.”
Gov. Bruce Rauner’s Superintendent of Education Tony Smith will present the 2017 report, which is based on districts’ fiscal 2016 finances, to the State Board of Education at its monthly meeting Thursday. The board will review it and is expected to act on the financial watch list.
The latest report marks the 14th year the state has issued such a report card. In addition to their current cash flow struggles, districts are facing greater uncertainty over potential aid and local tax changes the state might enact as part of a budget solution should lawmakers eventually bridge their political differences. There’s also bipartisan political support to increase aid but whether that will be part of a final package is uncertain.
While the 2017 analysis focuses on fiscal 2016 results, it reports that the number of districts operating in the red in the current fiscal year is projected to rise to 409 from 382 in fiscal 2016.
Fiscal 2017 state payment delays have risen from fiscal 2016 levels as the state’s own cash grows more precarious and its bill backlog has hit $13 billion. As of March 20, ISBE has not received payments of $1.4 billion owed to Illinois public school districts, according to the report.
The financial profile data also doesn’t fully incorporate the impact of the delays as the data is adjusted to include delayed state payments. That means the cash flow “hardship” is not truly reflected in the scores, the report noted.
School districts submit a deficit reduction plan if their budgets are not balanced and they lack an adequate fund balance to erase the red ink. Of the 409 districts that project deficits in fiscal 2017, 34 school districts were required to submit a deficit reduction plan.
The state will review the results and decide whether a certification of financial difficulty -- which allows for greater state intervention is warranted.
“Districts move in and out of categories, but overall there are fewer districts in the three lowest categories of Financial Review, Financial Early Warning, and Financial Watch,” reads the report.
The improved results are due to increased property values and other revenue increases “but it must be understood that these accomplishments were also realized through increased borrowing,” the report noted.
District long-term borrowing for operations leaped to $452.9 million in fiscal 2016 from $307.2 million in fiscal 2015. Districts borrowed $356.5 million in 2014, $284.5 million in 2013, and $239.4 million in fiscal 2014. “This increase could also be a result of district-issued debt in preparation for potential tax and debt legislative limitations,” the report read.
The state’s 852 public school districts fall into four categories based on a scoring system that evaluates five financial metrics including a district’s fund balance to revenue ratio, expenditure to revenue ratio, days cash on hand, and the percentage of remaining short-term and long-term borrowing ability.
A total of 632 districts won placement in the top category of “financial recognition,” up from by 64 from the last report. Another 154 fell into the next category of “financial review,” down by 42. Another 47 landed in “financial early warning,” down by 14 from last year. And, 19 fell under the weakest category of “financial watch,” down by 13. The number of districts fell by five due to consolidations.
Of the 19 districts put in the financial watch category, 12 districts received the same designation last year. The data shows that districts in financial watch are reliant upon state funding, taxing at a higher rate than the median tax rate for like districts, some are seeking improvement, are relying on borrowing for operations.
Schools earning the top designation of “financial recognition” require little or no review or SBOE assistance while those in the middle categories are monitored for downward trends.
The weakest category is “financial watch” and districts that receive that designation are closely monitored and technical assistance offered. After two consecutive years with the label, the state can request detailed information from the district that could lead to a declaration of “financial difficulty” which can lead to greater oversight.
Districts saw a second consecutive year of improved property values, which rose 2.1% in 2016. Overall, total operational revenues across districts rose by $553.5 million, a 2.4% gain. That figure does not include delayed state categorical payments of $405.6 million. Operating expenditures rose by $193 million, or 0.8%.
The number of districts winning the top designation of “financial recognition” rose by 64 to 632 compared to last year’s report due to increased funding and other economic improvements but borrowing for operations – which must be repaid – also contributed to the improved financial metrics.
The number of district with the financial recognition designation increased each year beginning in 2004 through 2009 when it peaked at 670 and then declined over the next few years before rising in the 2016 report to 568 and then again in the current report to 632.
CPS District 299, which relies heavily on short term borrowing to stay afloat, again landed in the “financial watch” category for a third year. Its financial score of 2 marked its lowest in 14 years. The district’s operational fund balance is equal to a negative 1.5 % of the revenue received.
Notably, the district recorded its first negative operational fund balance -- $71.7 million -- in fiscal 2016. “For every dollar of revenue it receives, it spends $1.092,” the report said of the district’s deficit spending. The district spent $530.8 it didn’t have, according to the report.
At the close of fiscal 2016 last June 30, the district had only 12 days cash on hand in its operational funds. That compares to 18 days the previous year. The district’s fiscal 2017 budget anticipates adding $68.7 million to the negative operating fund balance, bringing it to a negative $140.4 million.
CPS is exempt from the most stringent sanctions under the code that would allow for state oversight although it must submit information for review. Last year, Rauner and CPS bickered over state powers including whether he could block CPS borrowing. CPS argued the only consequence of a “financial difficulty” ranking is that the information must be reported to Rauner and city hall.
Rauner’s administration had taken the position that CPS’ exemption expired years ago with the repeal of Chicago School Finance Authority legislation. CPS argued the exemption still applied. State Attorney General Lisa Madigan issued an analysis of state law last spring siding with the district.
CPS is struggling to fully erase a $215 million hole created with Rauner’s veto of aid to help the district make its teachers’ pension payment due in June. The aid was tied to passage of state pension reforms which had stalled. CPS filed a lawsuit against the state alleging discriminatory funding practices and is hoping for court intervention absent state approval of the pension help.