CHICAGO – Delays in state grants are adding to the strains faced by the junk-rated Chicago Public Schools as it seeks – with the city’s help -- to close a $129 million deficit, avert an early close to the school year, and meet its $700 million obligation to the teachers’ pension fund.

“This is an extremely complex issue and the solution will be complex as well. CPS and the city continue to review all options and hope to have a final solution in the coming weeks,” said city finance department spokeswoman Molly Poppe.

The warnings from Mayor Rahm Emanuel’s administration and the district over grant payment delays further fuel tensions between the district and Gov. Bruce Rauner’s administration and it has dragged into the mix state Comptroller Susanna Medoza, who manages state bill payments.

Chicago Mayor Rahm Emanuel at Trump Tower in New York, U.S., on Wednesday, Dec. 7, 2016.
Chicago Mayor Rahm Emanuel blamed Illinois Gov. Bruce Rauner for the Chicago schools' fiscal problems. Bloomberg

The district is working to fully close a $215 million hole in its fiscal 2017 budget caused by Rauner’s veto of pension help.

The district whittled the gap down to $129 million and said it could cut no further without closing schools early in June unless the courts acted. A Cook County Circuit judge recently tossed a district lawsuit against the state on school funding extinguishing hopes of court intervention.

Mayor Rahm Emanuel stood with schools chief Forrest Claypool after the ruling and said students would remain in school until the scheduled end of the year as the city worked with the district on a plan to cover the deficit.

This week, the city warned that the district’s fiscal pressures have become even worse with CPS still owed $466.5 million as of April $665.2 million in non-general state aid grant funding for fiscal 2017, which ends June 30. Delays have been longstanding throughout the state's nearly two-year-old budget impasse so it's unclear why the issue is now being raised and city officials could not say how far behind the state was last year at this time or why it was not raised last year.

In response to questions from reporters on Wednesday as to why the city and CPS did not earlier warn that payment delays would impact CPS’ ability to meet its obligations for the fiscal year, Emanuel blamed Rauner for his refusal to adopt a budget that doesn't include his policy demands and said the governor should stop blaming others. The state is “adding insult to injury to not only be dead last on funding education but then to be behind on your payments so dramatically that you are affecting the ability” for us to keep moving forward academically," Emanuel said.

The figure includes block grants for early childhood education, special education services, bilingual education and other services. They are separate from the general state aid, or GSA, appropriation for school operations. The state is mostly up to date on GSA as it receives priority payment during the budget impasse while grant funding lags.

The state was behind $1.163 billion in total payments owed to districts based on vouchers submitted by the Illinois State Board of Education as of May 8, the SBOE said Wednesday.

The comptroller’s office said it recently paid the quarterly $450 million categorical grant appropriation for September including $135 million that went to CPS. It remains behind on the payments owed in December and March of which CPS would receive about $270 million. CPS said the comptroller’s figures don’t cover all its grant funds.

CPS’ $5.4 billion fiscal 2017 budget relies on $1.5 billion of state money.

The Rauner administration said it’s not to blame.

“CPS’ crisis is not due to the budget impasse, it’s due to decades of fiscal mismanagement. Any outstanding payments from the state lie with Comptroller Mendoza, and can be processed when her office chooses,” the administration said in a statement.

Mendoza, a Democrat, fired back at the Republican governor. “Like the check bouncer who yells at his bank for bouncing a check from an account he himself emptied, the governor disingenuously blames the comptroller for not writing checks from state coffers” he emptied by failing to offer a balanced budget, said Mendoza spokesman Abdon Pallasch.

About 90% of state spending goes on despite the lack of a full budget for the last two years due to continuing appropriations and legal mandates. Pallasch said the state had only about $160 million of funds on hand Wednesday. The state’s bill backlog stands at nearly $13 billion.

Mendoza told lawmakers Tuesday she could not guarantee that another quarterly categorical payment would be made before the fiscal year ends. Debt service remains a priority and a delay in monthly state pension payments is not currently under consideration.

CPS continues to look at ways to chip away at the deficit through payment delays or cuts and the city has said it is exploring some type of loan from tax-increment financing district surplus funds. The state could also come through on at least its $215 million of pension aid if the budget impasse is resolved in the coming weeks.

It’s unclear whether the district will seek to delay a portion of its full $733 million payment to the teachers’ pension fund. “I can’t identify one option over another as we continue to look at each and every option to determine its viability and possible impact on all stakeholders from families, taxpayers and teachers to investors and rating agencies,” Poppe said.

The fund is expecting the district to submit about $470 million of the payment by June 30. The state contributes $12 million and the other $250 million will come from a new property tax levy for pensions the county will collect over the summer.

The district relied on short-term borrowing to fully cover the payment last year and warned in filings with the courts that it needs to again tap those lines. Rating agencies watch closely the district’s ability to meet its $393 million February pre-funding of debt service for the next year and the pension contribution in June.

In addition to tapping available short-term debt capacity, the district could raise its authorization. Under state law, the board can leverage up to 85% of its tax levy which in 2016 totaled $2.34 billion.

The board previously raised the fiscal 2017 authorization by $400 million to $1.55 billion. It fully tapped the capacity in tranches for $325 million, $150 million, $475 million with JPMorgan and $600 million with PNC. The first three mature in December and the $600 million matured in March leaving that capacity open.

The district pays a steep penalty for its short-term lines 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 on recent short term borrowing 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 by Fitch and S&P and at a low investment grade by Kroll. All assign a negative outlook.

While the district struggled last year to clear the market with its last general obligation-backed issue, short term lines have remained attractive to banks as they are repaid quickly and pay an attractive rate.

Schools across the state have warned of the negative impact due to the delays but many have reserves to manage cash flow. CPS does not having drained most its reserves in one-time maneuvers to deal with past deficits.

Moody’s Investors Service warned in a report last month that delays are especially harmful to CPS and suburban Lincoln-Way schools, and Marion, et al Counties High School District 200. “These three districts' narrow cash reserves provide limited protection against continued delays,” Moody’s said.

The number of districts operating in the red in the current fiscal year is projected to rise to 409 from 382 in fiscal 2016, according to the SBOE.

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