Chicago Public Schools is running out of money and expects to end the 2016 school year with only $33.15 million in the bank, according to the offering documents on the school district’s sale later this month for $857 million in general obligation bonds. The offering documents contain extensive details on CPS finances to satisfy federal Securities Exchange Commission (SEC) financial disclosure laws.

Download offering document PDF.

The Board of Education’s operating fund balance has declined significantly over the past three years. At the start of 2013, the Board had $1.07 billion in the bank. At the end of 2015, it only had $360 million.

The documents also show the Board will use the timing of this month’s bond offering to get through a major cash crunch. CPS reports it will have a low of $89.9 million cash on hand in January, a number that would be negative except for $347.4 million it plans to take in from the bond offering. On February 15, the school system will make $261 million in debt payments. Semi-annual property tax revenues begin to arrive from the Cook County Treasurer on February 20.

“With its operating reserve depleted, the Board projects spending the majority of FY 2016 in a negative cash flow position,” the offering document forecasts.

But the money from the new bond sale will barely cover CPS’ cash flow problems, and it won’t go toward any new expenditures for capital improvements. Instead, the lion’s share of the money raised will cover debt service payments due annually on February 15th. Besides the February debt payments, the Board plans to make a $661 million payment in June to the pension fund and $15 million in dispersed pension payments throughout the year, for a total of $937 million.

Anticipated proceeds* of the $857 million in GO bonds to be raised:
*Note: these amounts are subject to change when the bonds are sold

  • $206M – for debt restructuring (principal & interest)
  • $134.5M – to convert variable rate debt to a fixed rate
  • $86.4M – in swap termination fees
  • $55.3M – for capitalized interest, pay cost of issuance (i.e. to pay the cost of borrowing)
  • $392.6M – to reimburse the BOE’s General Operating Fund for capital expenses made in FY 2013-2015. (note that this will pay for projects already committed)

CPS has $4.17 billion in outstanding revenue bond debt and $1.4 billion in outstanding long-term debt, according to the offering documents. The Board had operating deficits in FY 2013, 2014, 2014, and projects another deficit for 2016.

If CPS fails to get the state aid it needs or lower its pension obligations through action in Springfield, the district anticipates a $1 billion operating deficit through 2020. Over that same period, the Board expects a greater portion of the its annual budget will be diverted from operational costs–money that goes into the classrooms–to funding debt service and pension obligations.

CPS Spending and Revenues Limited By External Factors

The offering document mentioned multiple times that most of how CPS directs its spending is out of its control. The Board, the document says, will be forced to make cuts to “expenditures under its control.”

CPS can’t increase property taxes without state approval under the Property Tax Extension Limitation Law (PTELL), nor can it file for bankruptcy. There is a bill pending in Springfield to do the latter. Any movement by the city to further increase property taxes to fund its fire and police pensions (which the document says is likely) could hurt CPS’ levy in future years.

CPS can’t control a substantial portion of its operating expenses. To put that in perspective, in FY 2015, $1.953 billion, or 34% of their operating budget, went to wages and benefits; $634.4 million, or 11%, went towards pension payments; and $533.5M, or 9.5%, went toward long-term debt payments. This point is especially concerning for CPS as it renegotiates its contract with the Chicago Teachers’ Union.

CPS also projects a decline in state aid over FY 2017-2021 and is still waiting on $480 million from the state. That money is already included in this year’s budget.

Plans For Cuts Detailed

To mitigate the growing budget hole over the next few years, CPS plans a mixture of cuts and borrowing. One of the more drastic cuts would be to the student-based budgeting formula the district uses to disperse funds to schools across the city. The formula, which ties a dollar amount to enrollment in each school, could see a 5% reduction as soon as 2017. For every 5% CPS cuts from that formula, the district could save $100 million, the document estimates. To mitigate those cuts, the district points to schools that have already implemented online courses and increased class sizes and suggests a greater reliance on those two options in future budgets.

Additional cuts to administrative services are also planned. More cuts to the central office could save the district an additional $50 million for 2017, the document estimates. It also details plans to reduce vendor spending by issuing more competitive bids and renegotiating existing contracts; cut personnel costs by permanently eliminating vacant positions and promoting early retirement of certain employees; and increase state aid by improving Medicaid reimbursements and poverty grants by enrolling more kids in programs covered by that aid.

CPS has already eliminated the so-called “pension pick-up” for non-union employees. That move is saving about $11 million a year. CPS argues if they could do the same for unionized workers, as it has proposed in ongoing negotiations, the district could save an additional $170 million annually.

As for new revenue, the Board floated the idea of reinstating a dedicated property tax levy for its pension fund. A 0.26% property tax levy could generate an additional $170 million for the district in 2017, but requires state approval. The original levy for the pension fund was eliminated in 1996.