CHICAGO – The junk-rated Chicago Board of Education Wednesday authorized up to $1.5 billion in short-term and $945 million of long-term borrowing and signed off on a $5.4 billion budget despite warnings that the plan relies on precarious assumptions.
"The board’s priorities for this budget were to protect our classrooms, reduce our administrative footprint, and make sure that our students can continue their solid progress – and while this budget isn’t perfect, it does represent an important step forward for the district, the state and most importantly, our students,” board President Frank Clark said in a statement after the vote.
The board, which is appointed by Chicago Mayor Rahm Emanuel who also hand-picked Chicago Public Schools chief executive officer Forrest Claypool, also approved a $2.74 billion property tax levy, up from $2.4 billion last year.
The budget for the school year that begins Sept. 6 includes a state-approved $250 million pension levy, a renewed $45 million levy for capital approved by the city council last fall, and the maximum increase in its regular levy allowed by state property tax caps.
The district intends to directly pledge the $45 million capital levy to upcoming borrowing under the new $945 million general obligation bond authorization although more detailed structural details have not been released. The short-term authority adds about $400 million to the district's expiring $1.065 billion of credit line capacity. Negotiations are ongoing with banks.
The budget relies on spending cuts and efficiencies, additional state funding, and labor savings to erase a $1.1 billion deficit, resulting in an overall $232 million drop in spending.
Of the additional state funding, the district can count on $130 million in supplemental grant funding this year only and another $215 million in support for teacher pensions is contingent on state lawmakers tackling state pension reform in 2017.
Spending cuts, property tax hikes, and additional state help only go so far, the Chicago Civic Federation wrote in a review that counters the district's assessment of its budget as balanced.
"The district's fiscal year 2017 budget represents a small step back from the edge of the insolvency cliff," said federation president Laurence Msall. "However, CPS once again counts on unsustainable funding sources to close a billion-dollar deficit without detailing a practical long-term plan for ending its ongoing financial crisis."
The civic organization called on the district to develop contingency plans in the event revenue sources fail to materialize. "CPS still faces severe fiscal challenges, including a gaping structural deficit, a pension funding crisis and a below investment grade credit rating that makes borrowing extremely expensive," the group wrote.
The federation raised concerns about the district's red ink in various fund balances because the budget relies on using $80.8 million of a general fund balance and nearly all of its remaining debt service fund balance. The budget leaves the district's stabilization fund balance at a negative $158.9 million.
CPS policy targets an assigned stabilization fund balance at a minimum of 5% of the operating and debt service budgets. The district has said it plans to outline a plan to restore fund balances to targeted levels by fiscal 2019.
The federation praised the district's reduced spending, plans to phase out its coverage of 7% of teachers' 9% pension contribution, and the lack of any scoop-and-toss debt restructuring which the district has leaned on heavily for budget relief in recent years.
The district's so-called pension pick-up of teachers' contributions costs nearly $130 million annually and it's part of ongoing contract negotiations. The Chicago Teachers' Union has threatened to strike over the district's move. A strike could come as soon as October.
The federation is pressing the district to push a consolidation of the teachers' pension fund with the state's Teachers' Retirement System. The Chicago teachers fund is carrying $9.5 billion of liabilities for a 52% funded ratio compared to the state fund's $62.7 billion of liabilities for a funded ratio of 42%.
The federation remains concerned over the growth of CPS debt levels, which rose by 48.4%, or $1.9 billion, between fiscal 2006 and 2015 to more than $6 billion. The federation wants the district to first outline a five-year capital improvement plan before pursuing any new borrowing.
The district tapped $725 million of a previously approved $1 billion authorization earlier this year with interest rates hitting a high of 8.5%, just under a 9% state legal cap.
The district was forced to delay its last sale a week, lobby investors, and scale down the size to complete the transaction. It paid 7.25% on a recently closed $150 million private placement with JPMorgan, a provider of one expiring credit line and underwriter on its last deal.
Richard Ciccarone, president of Merritt Research Service, found the credit line increase troubling because it poses fresh risks.
"The greatest threat to their debt repayment is the short term borrowing," he said. "It's worrisome."
Such short-term borrowing further subjects the district's solvency to the whims of third-party banks and keeps the pressure elevated despite gains in securing more state help and making spending cuts, Ciccarone said.
The district issued $1.1 billion in tax anticipation notes during fiscal 2016 that paid rates of 3.25%, expensive for debt of a short duration. The fiscal 2017 budget earmarks $35 million for interest on short-term borrowing.
The district is rated B-plus by Fitch and S&P Global Ratings, 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.
Several investors contacted about the district agree that the budget advances efforts to shore up the district's shaky finances but said it falls far short of stabilizing the district's fiscal foundation due to the uncertainty of some revenue streams.
Several investors said using the $45 million levy as a dedicated repayment stream could help improve the district's market access and rates, but it will depend on the final structuring and how insulated investors perceive the revenue is from the district's woes and bankruptcy.
Gov. Bruce Rauner has previously called the district a candidate for Chapter 9 although the state has no such statute that would permit a filing.
The district adopted a $338 million capital budget but is expected to propose a supplemental plan in the fall.
In a review of the city and CPS' recent fiscal developments, Municipal Market Advisors said this week it sees little risk associated with city bond repayment but CPS "is a materially riskier bet, presenting outsize and persistent headline and downgrade risk in the absence of an actual credible plan for both near- and long-term management."
MMA said longer-term investors should not assume consistent liquidity but CPS' alternative revenue pledge security "along with currently low prospects for a chapter 9 bankruptcy filing, also imply that full repayment at par is still the most likely scenario for CPS bondholders."
