Cash Management 2020

CPS does not receive revenues when it pays expenses. As a result, CPS’ cash flow goes through peaks and valleys throughout the year, depending on when revenues and expenditures are received and paid. Further, revenues are generally received later in the fiscal year while expenditures, mostly payroll, are level across the fiscal year, with the exception of debt service and pensions. The timing of these two large payments (debt service and pensions) occurs just before major revenue receipts. These trends in revenues and expenditures put cash flow pressure on the district.

In FY2019, $3.8 billion, or 70 percent of CPS’ revenues excluding non-cash items, were received after February, more than halfway into the fiscal year. The annual debt service payment is made in mid-February, just prior to the receipt of approximately $1.3 billion of the first installment of property tax revenues. The annual pension payment is made in late June, just before CPS receives approximately $1.2 billion of the second installment of property taxes (which are due August 1).

Historically, approximately 43 percent of the Chicago Board of Education’s budgeted expenditures are for payroll and associated taxes, withholding, and employee contributions. These payments occur every other week, primarily during the school year from September through June. In addition, the Board’s recurring expenses for educational materials, charter school payments, health care, transportation, facilities, and commodities total approximately 46 percent of the Board’s budgeted expenditures. The timing of these payments is relatively predictable and spread throughout the fiscal year.

Most organizations set aside reserves in order to weather these peaks and valleys in cash flow. Board policy requires that the Board maintain an operating reserve of at least 5 percent of the total operating and debt service budget, and the Government Finance Officers Association (GFOA) recommends reserve levels between 5 and 15 percent of spending. Recent financial challenges have caused CPS to draw from its reserves, but as of June 30, 2019, the district projected that fund balance totaled $365.4 million and that CPS has approximately $335 million of cash with $450 million in short-term borrowing outstanding.

Revenues

CPS has three main sources of operating revenues: local revenues, state revenues, and federal revenues.

• Local Revenues: Local revenues are largely made up of property taxes. CPS receives $3.1 billion of property taxes every year, of which $2.6 billion is issued to the Board’s operating fund, $477 million is distributed to the Chicago Teachers’ Pension Fund through the pension levy and $61 million is allocated to capital projects through the Capital Improvement Tax levy. The Board’s operating property taxes are received in two installments, 96 percent of which are received from February onwards, over halfway through the fiscal year. The first installment of approximately $1.4 billion is due March 1st and is received in late February or March. The second installment of approximately $1.2 billion is typically received in July or August, depending on the deadline. Property tax receipts have grown from $2,352.1 million in FY2012 to $3,132 million in FY2020, a compounded growth rate of 3.6 percent.
• State Revenues: State revenues are largely comprised of Evidence-Based Funding and state grants. Evidence-Based Funding is received regularly from August through June in bi-monthly installments. In FY2019, Evidence-Based Funding totaled approximately 74 percent of the state revenues received by CPS, up from 57 percent in FY2017 before Evidence-Based Funding was created. This increase improves cash flow due to the consistency of the payments. Block grant payments are distributed sporadically, and in FY2019, approximately $37 million of block grants were vouchered but not disbursed to CPS as of June 30, 2019.
• Federal Revenues: Federal revenues can be received only once the grants are approved by the state, which administers categorical grants on behalf of the federal government. In three of the last four fiscal years, this approval has not occurred until about halfway into the fiscal year. In FY2019, more than approximately 90 percent of the $732 million of federal revenues will be received on or after December 2018.
• Working Capital Short-Term Borrowing: The district has the ability to issue short-term borrowing in order to address liquidity issues. Short-term borrowing allows the Board to borrow money to pay for expenditures when cash isn’t 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). In FY2019, CPS issued a maximum of $844 million in TANs to support liquidity, a decrease of $250 million from FY2018 which saved $33 million in interest expenses. CPS achieved this decrease due to historic statewide education funding reform, budgetary savings, improved cash flow forecasting, and active cash management. These TANs are repaid from the district’s operating property tax levy. In FY2020, CPS plans to issue similarly-sized TANs to support liquidity. Short-term borrowing requires that CPS pays interest on these bonds. In FY2020, the Board has budgeted approximately $12 million in interest costs for the TANs, compared to $21 million in FY2019 and $68 million in FY2018.

Expenditures

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: Approximately $3.2 billion of CPS’ expenditures are payroll and associated taxes, withholding, and employee contributions. These payments occur every other week, and most of the expenditures are paid from September through July. Approximately $1.8 billion of CPS vendor expenses are also relatively stable across the year.
• Debt: Debt service is deposited into debt service funds managed by independent bond trustees. These debt service deposits are backed by Evidence-Based Funding and are deposited once a year. In FY2019, the debt service deposit from Evidence-Based Funding was approximately $283 million in mid-February. The timing of this debt service deposit comes just before CPS receives approximately $1.3 billion in property tax revenues. The remainder of the bonds are paid by personal property replacement taxes and/or property taxes and are deposited directly with the trustee and do not pass through the district’s operating fund from a cash perspective. The timing and amount of these payments are dictated by the bond documents. Once the trustees have verified that the debt service deposit is sufficient, they provide a certificate to the Board which then allows the Board to abate the backup property tax levy that supports the bonds.
• Pensions: In FY2019, approximately $110.3 million of the pension payment was made on June 28, 2019, the last business day of the fiscal year, while approximately $16.6 million of the pension payment was made throughout the rest of the year. The timing of the bulk of the pension payment comes just before CPS receives approximately $1.2 billion in property tax revenues. In FY2019, a dedicated pension levy directly intercepted $440.7 million in revenue to the Chicago Teachers’ Pension Fund — these revenues do not pass through the district’s operating funds from a cash perspective. The dedicated pension levy plus the state funding for pensions included in last year’s education funding overhaul means that 84 percent of CPS’ pension obligation is currently funded by structural funding sources.

Forecasted Liquidity

The chart below provides CPS’ liquidity profile from FY2017–19. As shown in the chart below, the district spent approximately five months in a net positive cash flow position in FY2019. As noted earlier, the total short-term borrowing was lowered by $250 million in FY2019 — from $1.095 billion of maximum borrowing in FY2018 to $844 million in FY2019. The maximum short-term borrowing in FY2019 from June–August is currently projected as $694 million, which is a $6 million improvement from FY2018.

Chart 1: FY2017 - 2019 Operating Liquidity Position