CPS cash flow experiences peaks and valleys throughout the year depending on when revenues are received and expenditures paid. Most revenues are received in the second half or later in the fiscal year – in FY15, 71 percent of CPS’ revenues were received after February. Expenditures, mostly payroll, however, are level across the fiscal year, with the exception of debt service and pensions. Both the massive pension and debt payments come due just before the receipt of approximately $1.1 billion of each installment of property tax revenues. The impact of these trends in revenues and expenditures causes cash flow pressures for the District.
Most organizations preserve fund balance in order to weather these peaks and valleys in cash flow. The Board policy is to maintain an operating fund balance of at least 5 percent of the total operating and debt service budget, and the Government Finance Officers Association recommends fund balance levels between 5 and 15 percent of spending. However, given the financial challenges facing the District and in order to make the annual pension payment, CPS has drawn down on its fund balance. With reserves depleted, CPS no longer has the cash available to weather the volatility of cash flow.
In order to address these liquidity issues, in FY15 the District issued a working capital line of credit. A working capital line of credit allows the Board to borrow money to pay for expenditures before cash is available and then repay the borrowing when revenues become available. State statute provides CPS with the ability to issue this type of cash flow borrowing through a Tax Anticipation Note (TAN) paid from property taxes. In FY15, CPS issued a $700 million TAN to support liquidity. In FY16, CPS plans to issue up to a $935 million TAN.
Borrowing from a line of credit requires that CPS pay interest on these bonds. In FY15, CPS expects to pay approximately $3 million in interest on the working capital line of credit. In FY16, the Board has budgeted approximately $24 million in interest costs for the TAN. These costs are reflected in the Operating budget.
CPS has three main sources of operating revenues: local revenues, state revenues and federal revenues. Below we describe the timing of receipt of each of these revenue sources.
Local Revenues. Local revenues are largely made up of property taxes. Approximately $2.3 billion of property taxes a year are received in two installments. The first installment of approximately $1.2 billion is received in late February and March. Receipt of the second installment is dependent on when the installment’s due date is set – over the last three years this due date has been around August 1. The second installment of approximately $1.1 billion is received in the July and August timeframe. Essentially, this means that 97 of local revenues are after February, more than halfway through the fiscal year.
State Revenues. State revenues are largely made up of General State Aid and Block Grants. At nearly $1 billion, General State Aid makes up over 60 percent of the state revenues, and is received regularly from August through June in equal semi-monthly installments. The approximately $600 million of Block Grant payments are not distributed regularly; their availability is often dependent on the state’s own cashflow. In FY15, nearly all (97 percent) of these block grant payments were received in the second half of the fiscal year.
Federal Revenues. Federal revenues can be received only when the grants for these funds are approved by the State, as the State administers these grants on behalf of the federal government. Over the last two fiscal years, there have been significant delays in State approval. In FY14, approval was delayed until March. In FY 15, grants were not approved until December. As a result, about $595 million of FY15 federal revenues, or 82 percent of the total, were received in December 2014 or later.
CPS expenditures are largely predictable, and the timing of these expenditures can be broken down into three categories: payroll and vendor, debt service and pensions.
Payroll and Vendor. $2.5 billion of CPS’ expenditures are payroll and associated taxes, withholding and employee contributions. These payments occur every other week and occur primarily from September through July. Another $2.5 billion of CPS vendor expenses are also relatively stable across the year. These expenses include, for example, textbooks, educational materials, charter school payments, healthcare, transportation, facilities, commodities and capital spending.
Debt. Debt service is deposited into debt service funds once a year in mid-February, right before CPS receives the first installment of property tax revenues of $1.1 billion. The timing and amount of these payments are dictated by the legal bond documents and therefore cannot be changed. In FY15, the debt service deposit was $232 million. With CPS’ structural deficit and draw-down of reserves, we are very dependent on the timing of revenues—or in recent years on cash flow borrowing—to ensure debt service is paid on time.
Pension. The timing of CPS pension payments also presents cash flow challenges. CPS typically makes small contributions throughout the year that coincide with the payroll for employees paid with federal funds. In FY15, this totaled approximately $15 million. The majority of the pension payment is made in late June, just before CPS receives approximately $1.0 billion in property tax revenues from the second installment. In FY2015, the remaining $619 million pension payment was made on June 30, 2015.
The chart below illustrates CPS’ liquidity profile in FY15 and FY16. It shows the peaks and valleys that CPS must manage. The high points in August and March reflect the two installments of property taxes. The low points in February and June reflect the debt service deposit and pension payment.
The overall trend of lower liquidity reflects the continued draw-down of fund balance. Continued structural budget gaps will only create further downward pressures on this cash flow picture. In FY15, CPS spent most of the year in positive territory, but ended the year significantly negative due to the use of fund balance in the FY15 budget. At the end of FY15, CPS expanded its existing $500 million line of credit by $200 million to $700 million in order to cover the year-end pension payment.
As the grey line illustrates, CPS expects to spend much of FY16 in a negative cash position. The negative cash flow will be covered by the $935 million FY16 line of credit, which is represented by the yellow dotted line. With the significant pension payment at the end of the year, CPS anticipates tapping nearly all of the line of credit to cover this payment. This chart illustrates why it is so crucial for there to be pension equity, so that CPS is able to return to a more sustainable cash flow position that is less reliant on short-term borrowing.
Chart 1: Without State Pension and Funding Equity CPS Must Rely on Unsustainable Cashflow Borrowing