Chicago schools plot next bond sale, federal coronavirus aid spending

Chicago Public Schools laid out a proposed $9.3 billion fiscal 2022 budget that directs $707 million towards capital and spends down about $1 billion of the district’s $2.6 billion of federal relief to recover from the COVID-19 pandemic.

The proposed budget for the fiscal year that began July 1 raises spending by about $900 million from fiscal 2021 providing an additional $225 million for individual school budgets and putting federal dollars to work while leaving a pot for future budgets through fiscal 2024.

“As we prepare to offer in-person learning five days a week in the fall, our top priority is to ensure that schools most impacted by the COVID-19 pandemic have the resources they need to fully support students,” said José Torres, the district’s interim chief executive officer. Mayor Lori Lightfoot tapped Torres to run the district until a permanent replacement is found. Predecessor Janice Jackson’s contract expired June 30 and she departed after three years in the position.

The district is receiving $2.6 billion in what’s known as ESSER II and ESSER III funding from Elementary and Secondary School Emergency Relief Fund provisions in the Coronavirus Response and Relief Supplemental Appropriations Act signed in December and the American Rescue Plan Act signed in March, respectively.

The 2022 budget would use $267 million to fund the first year of a two-year, $525 million plan dubbed Moving Forward Together that focuses on getting students up to speed academically.

An additional $132 million would support student re-engagement and school opening costs in the fall, $100 million would support projects focused on improving air quality by renovating and replacing school mechanical systems, $288 million would support school-based programmatic investments, $178 million would fund school-based instructional positions, and $95 million would provide a proportionate share of ESSER funding to charter and contract schools.

The $707 million capital plan guarantees $672 million of funding to pay for building repairs, maintenance, upgrades, accessibility projects, information technology infrastructure, and other projects. The capital plan relies on $554 million of past and future borrowing, primarily from general obligation bonds, $100 million in federal relief funds, $17 million in other identified funding and $35 million in not-yet-identified external funding.

“We are going to be issuing debt …closer to late fall or beginning of winter and we are probably looking at the same size that we did” in the last bond sale which provided $450 million of new money, said Miroslava Mejia Krug, the district’s chief financial officer.

CPS operates 522 campuses and 798 buildings with the average facility age at more than 80 years, and says it has $3 billion in needed investments. Over the last five years, CPS has earmarked $3 billion for capital.

Last year’s capital plan totaled $758 million and CPS currently projects lower capital spending of about $553 million annually in future years.

The district currently carries about $8.4 billion of debt with $763 million earmarked in the budget for debt service. The district is allocated $12 million for interest on short-term borrowing as it anticipates a continued reliance on tax anticipation note borrowing — a negative factor that weighs on the district’s ratings.

The budget doesn’t outline a maximum amount of borrowing planned in fiscal 2022. Recent levels have fallen from highs of $1.5 billion in 2017, which has contributed to upgrades to the district’s still junk-level bond ratings. Tax anticipation note issuance was up in 2021 at $950 million from $830 million in 2020, according to budget documents.

The district won one-notch upgrades last year from Moody’s Investors Service and S&P Global Ratings to Ba3 and BB and stable, respectively, as the spigot of federal aid allowed the district to manage pandemic-related costs and invest in programs. Both assign stable outlooks.

The district is receiving $1.8 billion from the ARP Act and $800 million from the CRRSA Act. That’s in addition to $206 million from the CARES Act signed in March 2020. Further upgrades will require maintaining balanced operations, reducing TAN borrowing, managing a “combative union relationship,” and successful navigation of the pandemic including its reopening schedule, S&P said.

Fitch Ratings rates the district BB and Kroll Bond Rating Agency assigns the only investment grade ratings at BBB-minus and BBB, depending on legal opinion on pledged revenues.

The district last sold bonds in January with a $560 million new money and refunding deal that saw spreads hit a low for recent years of 117 basis points over Municipal Market Data’s AAA benchmark on the 10-year, buoyed by the December federal aid package and a market hungry for higher yielding paper.

The district expects to close the fiscal 2021 budget with a $43 million boost in its fund balance that was $566 million at the close of fiscal 2021. The district had $244 million of TANs outstanding at the time — an improvement from $500 million a year ago — and $183 million in cash on hand. About $10 million is tapped from the reserve in fiscal 2022.

The district began rebuilding its drained reserves after winning additional local and state pension help and the state’s overhaul of aid levels in 2017.

The district this year raised its underserved fund balance target in the future to 15% of the operating and debt budget, which totals $7.8 billion. The 15% target would require setting aside $1.1 billion.

The budget relies on a $137 million tax-increment surplus declaration by the city. That’s up from $97 million expected in the fiscal 2021 budget a year ago at this time. That number actually rose to $127 million when the city proposed its 2021 budget. The city will propose its next budget this fall.

The district’s budget relies on an additional $114 million of property taxes including $77 million from the levy hike allowed under state-imposed tax caps.

The teachers’ pension funded ratio declined to 46.7% as of June 30, 2020, from 47.4% in 2019 primarily due to changes to the actuarial assumptions used in the fund’s valuation a cut in the assumed rate of return to 6.75% from 7%. The unfunded actuarial accrued liability grew by $603 million to $12.8 billion, according to budget documents.

CPS will contribute $667 million towards pensions with $464 million coming from a special city levy reinstated in fiscal 2017. In addition to the district’s $667 million share, the state will cover $277.4 million in contributions.

The city began in fiscal 2020 requiring the district to cover a portion of its non-teacher contributions for employees who participate in the city’s municipal employees’ fund. That will cost the district $100 million in fiscal 2022.

City help in covering those contributions is among the aid provided by the city that Lightfoot has argued should give the city a continued say in CPS governance. The total tab amounts to about $500 million annually. A special commission required under the legislation will review the financial “entanglements.”

Despite Lightfoot’s protest, the district is expected to move away from mayoral control.

House Bill 2908 was recently sent to Gov. J.B. Pritzker and he has said he will sign it. The legislation moves the district to a partially elected school board in 2025 with 10 elected members and 11 appointed by the mayor and then to a fully elected board in 2027. Lightfoot currently appoints the seven-member board and handpicks the CEO.

Hearings are set this month on the operating and capital plans and the Board of Education will vote at its July 28 meeting on the budget package. The district has an enrollment of 340,658. The district was stung by a 14,500 drop in fiscal 2021 after a 6,000 loss in fiscal 2020.