Federal COVID relief props up Chicago Public Schools' proposed budget

Chicago Public Schools' proposed $8.5 billion fiscal 2024 operating budget relies on the ongoing spend down of federal COVID-19 relief funds, with longer term fixes needed to solve a looming gap that threatens the district's progress toward restoring its investment-grade ratings.

The budget package totals $9.4 billion. That includes the $8.5 billion operating budget, up $500 million from the current fiscal year that ends June 30, along with $777 million for debt service and $103 million in capital spending.

Direct funding allocated to schools totals $4.8 billion, which is up $240 million.

"This proposed budget is a step toward fulfilling CPS' commitment to providing resources for every school community so that our students are healthy, safe, engaged, and on the path to long-term success," said Chicago Mayor Brandon Johnson, who is a former organizer for the Chicago Teachers' Union, in a statement.

Bloomberg News

The district — which has three junk ratings and one investment grade level — received $2.8 billion in federal pandemic relief including $1.8 billion from the American Relief Plan Act, $206 million from the CARES Act, and $796 million from the December Consolidated Appropriations Act. It will have about $970 million remaining at the end of the current fiscal year.

The next budget draws down the remaining $970 million pool of funds by $670 million, with the remainder being reserved for fiscal 2025.

District leaders have been sounding alarms of a gaping $600 million estimated budget hole that looms once federal COVID-19 aid runs out.  

CPS is lobbying for higher levels of state funding. The budget notes the state continues to fund teacher pensions outside the district at a higher level than what's provided to CPS, and direct school aid still falls more than $1 billion short of goals despite a statewide $350 million annual increase.

The district also must use its state aid to help pay off bonds as its levy is capped by state law and it has few other revenue-raising options. "The district's long-term financial stability is made more complicated by continued inadequate and inequitable funding by the state of Illinois," reads the budget.

CPS expects to close out the current fiscal year with a clean slate on short-term borrowing for a second year in a row. The board reduced its maximum outstanding tax anticipation note, or TAN, borrowing to $800 million in 2022 from a peak of $1.55 billion in 2017 and $950 million in fiscal 2021. It ended fiscal 2022 without any outstanding TANs and positive net cash for the first time in seven years.

Cook County's late property tax billing delayed collections as a new computer system was implemented, driving TAN borrowing up to $1.15 billion this year.

"CPS can continue to further decrease its reliance on TANs in FY24 if property tax bills are due on time," the budget notes. "The board ended FY22 with a positive cash balance and no TANS outstanding for the first time in eight years and expects to build upon this in FY23. However, more work is still needed as there is not enough cash on hand to last until property tax receipts are typically received in August."

CPS has budgeted $19.5 million for interest on anticipated TAN borrowing in the next budget.

The budget relies on an additional $123 million in property taxes after raising its levy by the maximum under state caps and it anticipates that the city will declare a similar tax-increment financing surplus in its next budget — which runs on a calendar year — so that it receives the same $97 million captured in fiscal 2023. State aid rises by $51 million while federal funds fall by $131 million.

Salary expenses rise by $229 million "driven by major investments in school-based instructional and support staff, along with the cost of contractual increases for union employees," according to budget documents.

The district will trim new capital spending $155 million in fiscal 2024 — including $100 million from its budget with the remainder coming from outside sources — with the focus on immediate facility needs.

"The district will soon launch a comprehensive review of all facility needs that will include robust stakeholder engagement to develop an Educational Facilities Master Plan. A supplemental FY24 capital plan with funding identified for priority projects will be released later in the 2023-24 school year once this process is complete," according to budget documents.

CPS expects to spend $553 million annually on capital improvements in fiscal 2025 through 2028. CPS operates 522 campuses and more 800 buildings with the average facility being over 80 years-old with the price tag on critical needs at $3 billion.

All but one of the district's GO ratings remain at junk levels, although the district has climbed the speculative grade ladder and two ratings are one notch away from investment grade.

Kroll Bond Rating Agency rates the GOs BBB to BBB-plus, depending on the series. Moody's Investors Service rates the GOs Ba2 with a positive outlook. Fitch Ratings and S&P Global Ratings rate the bonds BB-plus with a stable outlook. S&P raised the rating one notch earlier this year.

"The rating upgrade reflects our view of the board's materially strengthened reserves, supported by consecutive operating surpluses, which are expected to be sustained at levels that we view as strong in the next couple of years," said S&P analyst Ying Huang. "The speculative-grade rating continues to reflect our view of the board's significant short- and long-term challenges," S&P said.

The district has $8.9 billion of outstanding long-term debt, most in GO form, with $1.4 billion backed by a capital improvement tax. The CIT bonds carry ratings of BBB-plus from Kroll and A from Fitch. Both are stable. The district  last borrowed in February, tapping its CIT credit for a $529 million issue, and has authorization to sell up to $600 million of GOs.

CPS lost its investment grade ratings between 2015 and 2016 as it drained reserves and relied on one-time maneuvers like scoop-and-toss debt restructuring to balance its budget. New levies and a state aid funding overhaul in 2017 helped the district turn the corner.

CPS pensions carry a $13.8 billion unfunded liability. A $1 billion payment is owed in fiscal 2024 with the state and a local pension levy covering all but $143 million which will fall on the district to pay.

Johnson holds sway over the district's leadership as board membership terms expire but change is afoot under the 2021 elected school board legislation, which Johnson during his tenure at the CTU worked to pass. The district moves to a hybrid board in 2025, with 10 mayor-appointed members and 10 elected members and a president appointed by the mayor. In 2027, all members will be elected, with 20 members coming from single-member districts and a president elected city-wide.

S&P currently considers the shift to an elected board as "neutral," but said the reliance on the "city's subsidy on non-teacher pension contributions (although not a legal responsibility of the board), which, if fully transitioned to the board, could create additional budgetary stress."

A report the district published last year says the looming severance of governance ties between CPS and the city adds strains to the district's "fragile" fiscal health as federal COVID-19 pandemic relief is being exhausted and structural costs are mounting.

Johnson supports ongoing city support and while the district and he will press the state for more aid, they could also ask state lawmakers for new tax levy authority, similar to independent suburban and downstate districts, which allows voters to cast a decision on borrowing for capital.

The district will hold public hearings next week with a vote expected by the board of education at its meeting later this month.