Chicago Public Schools Fiscal Year 2014 Budget

Debt Management

Budget Overview

 

Chicago Public Schools’ Capital Improvement Program includes the rehabilitation and maintenance of existing facilities as well as the construction of new schools when appropriate. The Capital Improvement Plan, described in the Capital chapter, is funded primarily through the issuance of bonds. Bonds are debt instruments that are similar to a loan, requiring annual principal and interest payments. Most of these bonds are repaid from General State Aid. Since General State Aid is also a major revenue source to support core academic priorities, we face a continuing challenge to balance the day-to-day classroom needs with the need for quality education facilities. 

DEBT OVERVIEW

The Board of Education currently has $6.3 billion of outstanding debt. The FY2014 budget includes appropriations from the trusteed Debt Service Funds of $484 million for payments on existing debt and $129.1 million from the assigned fund balance for a total of $613.1 million in debt service fund appropriations. CPS continually reviews the affordability of its capital program, minimizes debt issuance costs, and monitors existing debt for any cost-saving opportunities as part of its efforts to meet budget challenges.

To minimize cost, CPS will fund capital expenditures on an interim basis by utilizing available fund balance to the greatest extent possible, and then a $300 million line of credit. Cash that CPS maintains earns less interest than its cost of borrowing.  Interest on a line of credit will be lower than on fixed rate bonds.  Therefore, CPS will use these mechanisms until capital expenditures reach a threshold of approximately $300 million, at which time CPS plans to sell fixed rate bonds to takeout the line of credit.  The timing of the fixed rate bonds depends on the timing of capital expenditures and market conditions.  CPS plans to pay for interest incurred on the line of credit through proceeds of the fixed rate bonds to minimize the debt service impact on the FY2014 budget. 

While the capital program, as described more fully in the Capital chapter, has been significantly scaled back for FY2014-FY2018, the FY2014 bond issue reflects the amounts needed to cover projects in the FY13 supplemental capital plan, many of which will support Welcoming Schools and other schools impacted by school actions. These new bonds have not been included in the debt projections below and will increase debt service costs in the future. 

Debt Profile

CPS has established the following debt management goals to balance costs, risks and liquidity needs:

  • To borrow at the lowest cost of funds balanced against acceptable risk levels
  • To maintain an appropriate allocation of debt products and to refinance existing debt when current market conditions are advantageous
  • To maintain strong credit ratings, which keeps interest rates lower
  • To fund a capital plan that balances the need for new construction with the affordability of additional debt issuance 

 

Types of Obligations

The Board is authorized by state law to issue notes and bonds and to enter into lease agreements for capital improvement projects.  General Obligation Bonds are a type of financing tool frequently used by local governments and school districts, which are typically repaid from a property tax levied specifically to repay those obligations. However, CPS uses only non-property tax revenues to repay its bonds, which keeps the property tax burden low.  Legally, CPS bonds have two dedicated revenue sources: property taxes and specific alternative revenue.  Thus, CPS bonds are a special kind of general obligation bonds: Alternate Revenue General Obligation Bonds. The Board is authorized to issue Alternate Revenue Bonds after adopting a resolution and satisfying public notice publication and petition period requirements in lieu of a voter referendum, which is typical in other school districts.

The non-property tax revenue supporting CPS bonds are General State Aid, Personal Property Replacement Taxes, and revenues derived from intergovernmental agreements with the City of Chicago. The majority of CPS bonds are backed by General State Aid.  No property taxes have been used to pay CPS-issued bonds, although the Public Building Commission (PBC), a local government entity which constructs schools, has in the past sold a modest amount of bonds which do rely on property tax levies.  These PBC bonds are CPS’ responsibility and represent the only CPS obligations that rely solely on property tax levies.  The FY2014 budget includes $52 million in payments for principal and interest on these bonds. 

CPS has benefitted from issuing certain types of bonds in which much of the interest costs are paid by the U.S. Government, resulting in a very low cost of borrowing for CPS.  These include Qualified Zone Academy Bonds, which provide capital funding for schools in high-poverty areas at reduced interest rates; Qualified School Construction Bonds (QSCBs); and Build America Bonds (BABs).  The American Recovery and Reinvestment Act of 2009 created two types of bonds that CPS was able to take advantage of: QSCBs, which were bonds which only school districts could sell and provided some of the lowest interest cost financing CPS has ever achieved; and BABs, which were available to school districts and other governments which provide a substantial subsidy. 

Finally, when available, CPS uses a state revenue source for its bonds.  CPS receives state revenue for school construction through the state’s Capital Development Board (CDB).  This funding is relatively modest, not predictable each year and can be subject to delays.  Since 2002, CPS has received $510 million from the CDB.  In the current budget, CPS projects it will receive approximately $54 million in CDB funds which will be used to fund debt service costs.

Additionally, as a result of the passage of new legislation (PA 98-0018), CPS expects to receive approximately $18.4 million up front and $13.3 million annually from the State School Infrastructure Fund as part of the State School Construction Program, as discussed in more detail in the Capital section.  These revenues will be applied toward the funding of the construction of new schools, likely through a bond financing. 

FY2013 Debt Service Costs for all Obligations

As shown in the table below, FY2014 includes appropriations of $484.0 million for existing alternate bonds and PBC payments (included with existing bonds) and $129.1 million from the assigned fund balance for a total of $613.1 million in debt service fund appropriations. The appropriation for debt service represents an increase relative to FY2013 due to the inclusion of new bonds issued in 2013. The appropriation from the assigned fund balance has been set aside for various purposes including backup funds for the line of credit, a cushion for variable rate payments, fees, and providing support to the operating budget. 

CPS is required to set aside debt service nine months to one year and a half prior to the actual date that payments are due to the bondholders.  The deposit occurs in February for the payment of debt service starting April of that year through March of the following year.  These payments are held in trust with an outside trustee, as required by the bond indentures.  Therefore, the FY14 Revenues shown for the Debt Service Funds (DSF) represent the amount that is to be set aside for these future debt payments.   In contrast, the majority of the appropriations for FY14 represent the amount that is to be paid during FY14 from revenues set aside in the prior year.  Therefore, we have varied from a more traditional presentation of Revenues, Appropriations, and Net Change in order to illustrate current year revenues supporting future year spending.  The more relevant presentation is the flow of funds into and out of the Debt Service Funds in FY14, which is the presentation below.   

The chart below provides information on the debt service fund balance at the beginning of the year, the expenditures that are made from the debt service fund, and the revenues that are deposited to the fund to largely fund the debt service requirements for the following fiscal year.

FY2012 - FY2014 Summary of Revenues Set Aside and Appropriations for Debt Service Funds
(In Millions)

 

FY2012 Actual

FY2013 Estimated

FY2014
Budget

 Beginning Restricted Fund Balance  

           271.6

338.2

      373.3

 

 

 

 

Fund Outflows:

 

 

 

Appropriations

 

 

 

   Existing Bond Principal payment

             88.5

           76.7

        148.3

   Existing Bond Interest payment

           275.7

          298.1

        332.1

   Total Existing Bond Debt Service

           364.2

         374.8

        480.4

   Fees

             10.3

              5.7

            3.6

Total Appropriation for Debt Service Funds

           374.5

         380.5

       484.0

 

 

 

 

Transfer to DSR

             23.6

            20.8

                -  

 

 

 

 

Fund Inflows:

 

 

 

Revenues

 

 

 

   Property taxes

             57.0

            53.2

          52.0

   PPRT

            55.1

            57.7

          57.0

  General State Aid

           146.6

          147.7

        120.1

   State capital reimbursement

             60.9

            60.0

          54.1

   Other local (City IGA and interest earnings)

           118.2

            92.1

          97.1

   Federal interest subsidy

             26.8

            25.7

          24.5

   Other

               0.1

                 -  

                -  

Total Revenue

           464.7

          436.4

        404.8

 

 

 

 

   Ending Restricted Fund Balance

           338.2

          373.3

        294.1

In addition to the presentation on Debt Service Funds, we are also presenting a separate table showing the use of the Debt Service Reserve (DSR) Fund.  This new presentation of the DSR separate of the DSFs provides a clearer picture of the uses of the two funds.  This fund is used for multiple purposes, including acting as a reserve for unexpected debt payments and a revolving fund to provide liquidity for debt financing activities.  For example, the DSR provides for changes as a result of variable rate bonds.   It will also be used in FY14 to help establish a line of credit as described above.  When the line of credit has been repaid from fixed rate bonds, the amount set aside for the line of credit will be returned to the DSR.  Because of this, we have labeled some of the appropriations from this fund as “Revolving.”  In addition, there are appropriations that represent actual expenditures and will be permanent draw down of the funds.  These are shown separately as “Expended.”

Fund 602 Debt Service Reserve (DSR) Fund Presentation

 

2012
Actual

2013 Estimated

2014 Budget

Beginning Fund Balance

231.4

255.0

249.0

  Fund Balance Appropriated for Permanent Draw

 

6.0

59.1

  Fund Balance Appropriated for Revolving Draw

 

 

70.0

 

 

 

 

Revenues

 

 

 

  State capital reimbursement

 

 

21.7

  Excess DSF Transfer to Fund 602

23.6

20.8

-  

  Total Revenues

23.6

20.8

21.7

Appropriations

 

 

 

  Revolving

 

 

           70.0

  Expended

  -  

            26.8

           59.1

  Total Appropriations

                -  

26.8

129.1

 

 

 

 

Ending Fund Balance

           255.0

         249.0

       211.6

Long-Term Fiscal Challenges

The graph below illustrates the fiscal challenges stemming from CPS’ debt obligations.  After a dip in debt service payments in FY12 and FY13 due to recent restructuring financings, revenues required for debt service increases to nearly $516 million in FY2015 and $553 million in FY2015.    The graph below shows the debt service payments for the currently outstanding bonds only; this graph does not show the impact of any future bonds required to support future capital budgets.

Resources needed to pay bondholders are in direct competition with resources needed to ensure we continue to fund priorities that drive academic achievement.  Below is a chart which illustrates expected revenues needed to pay debt service over time. 

Measuring Debt Burden

External stakeholders such as taxpayers, unions, parents, government watchdog groups, rating agencies, and bondholders frequently review CPS’ debt profile to gauge its size and structure as a crucial component of CPS’ financial position.  In addition to evaluating the total amount of debt outstanding and the annual debt service payments, those evaluating CPS’ financial picture also look at our “debt burden.” The purpose is to gauge how much taxpayers bear in debt costs and determine how much debt is affordable for residents, which establishes true debt capacity.  Several methods of measuring debt burden are commonly employed for school districts including comparing existing debt to legal debt limits, measuring debt per capita, and measuring debt as a percentage of operating expenditures. 

Legal Debt Limit

The Illinois School Code imposes a statutory limit of 13.8 percent on the ratio of the total outstanding property tax-supported debt that a school district may borrow compared with a school district’s equalized assessed value, which generally represents a fraction of total property value in the district.  Because the Board has issued alternate revenue bonds for which property tax levies are not extended, these bonds do not count against the legal debt limit imposed by the Illinois School Code.  Therefore, total property tax supported debt was extremely low at less than 1 percent of the legal debt limit.

Debt Per Capita

The Board’s per capita debt burden, or total debt divided by the City of Chicago’s population, has increased in the last decade.  As reported in the FY2012 Comprehensive Annual Financial Report, debt per capita reached $2,075. This is considered moderate to slightly above average relative to other comparable school districts.

Debt as a Percent of Operating Expenditures

Another way of measuring the total debt burden is by dividing annual debt service expenditures by operating fund expenditures. Based on this method, the debt burden for FY2013 and FY2014 are estimated at 7.5 and 8.7 percent of total operating expenditures respectively, reflecting the increased debt burden as a result of the FY2012 and FY2013 bond issues.

 

Credit ratings and Debt Management Policy

The Debt Management Policy of CPS provides guidance for debt management as well as capital planning and supports the Board’s ability to manage its debt in a conservative and prudent manner.  One of the goals of the policy is to ensure that CPS maintains the highest possible credit rating among the three credit agencies. These agencies are independent entities and their purpose is to give investors, or bondholders, an indication of the creditworthiness of a government entity.  A high credit score can lower the cost of debt issuance, much the same way a strong personal credit score can reduce the interest costs of loans and credit cards.  Ratings consist of a letter “grade”, such as AA or A, and a credit “outlook”, or expectation of the direction of the letter grade.  Thus, a “negative outlook” anticipates a downgrade to a lower letter grade, a “stable outlook” means the rating is expected to remain the same, and a “positive outlook” may signal an upgrade to a higher, better rating.

CPS meets frequently with the credit rating agencies about its budget, audited financial results, debt plan, and management initiatives to ensure the agencies have the most updated information possible.  The primary rating factors for CPS concern management, debt profile, financial results and economic and demographic factors.

Since the FY13 Amended Budget, the rating agencies have confirmed CPS’ ratings at A2, A+ and A by Moody’s Investor Service, Standard and Poor’s and Fitch Ratings as a part of the Series 2013A refinancing.  Moody’s and Fitch Ratings both hold CPS with a negative outlook.  The rating agencies have commented on CPS’ weakened financial profile, highlighted by a $1 billion budget gap for FY14, reduced fund balances and an impending spike in pension payments.  Just as a high credit rating can mean lower borrowing costs, deterioration in credit rating will increase interest expenses. 

As part of the Debt Management Policy, CPS is authorized to use a number of tools to manage its debt portfolio. Some of the tools and techniques employed are refunding of existing debt, using derivative instruments, issuing fixed or variable-rate bonds, and issuing short-term or long-term debt. These tools are used to manage various types of risks, to generate cost savings, and to assist capital asset planning. 

Typically, CPS issues fixed-rate bonds which pay a set, agreed-upon interest rate according to a schedule established at the time of debt issuance.  However, about 20 percent of CPS’ debt is variable rate, which means that the interest rate is not set and can fluctuate.  The interest rate on variable rate debt is often lower than what can be achieved in a fixed rate market, but the rate can be highly volatile.

An interest rate swap is an agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount.  The Board’s swaps generally convert the variable rate paid to bondholders to a fixed rate cost of capital through the exchange of interest payments with its counterparties.  CPS only enters into transactions with a highly rated, credible and diverse group of counterparties. 

Since the execution of the swaps, CPS has saved approximately $70 million in interest costs on its swap and variable rate portfolio. 

The average rate on the CPS swap portfolio is about a 4.60%.  This cost of capital is attractive as compared to the fixed rates that were available at the time the swaps were executed.  The swaps have served as an effective financial tool to lower CPS’ debt costs as well as mitigate interest rate risk. 

A copy of the Debt Management Policy is available at the Board’s website at http://policy.cps.k12.il.us/download.aspx?ID=42

OUTSTANDING DEBT
as of June 30,2013

Debt Outstanding at 06/30/2013
Chicago Public Schools

Closing
Date

Maturity
Date

Principal
Outstanding

Pledged Funding Source for Debt Service

PBC Series A of 1992

1/1/1992

1/1/2020

166,875,000

Property Tax

PBC Series B of 1999

3/1/1999

12/1/2018

100,455,000

Property Tax

Unlimited Tax G.O. Series 1997A*

12/3/1997

12/1/2030

23,746,222

IGA / PPRT

Unlimited Tax G.O. Series 1998B-1*

10/28/1998

12/1/2031

276,011,786

IGA / PPRT

Unlimited Tax G.O. Series 1999A*

2/25/1999

12/1/2031

454,416,931

IGA / PPRT

Unlimited Tax G.O. Series 2000BC D

9/7/2000

3/1/2032

91,400,000

State Aid

QZAB Series 2000E

12/19/2000

12/18/2013

13,390,000

State Aid

QZAB Series 2001B

10/24/2001

10/23/2015

9,440,000

State Aid

Unlimited Tax G.O. Series 2002A

9/24/2002

12/1/2022

37,820,000

IGA

QZAB Series 2003C

10/28/2003

10/27/2017

4,585,000

State Aid

Unlimited Tax G.O. Refunding, Series 2004A

4/6/2004

12/1/2020

202,420,000

PPRT / State Aid

Unlimited Tax G.O. Series 2004G

12/1/2004

12/1/2022

11,970,000

IGA

Unlimited Tax G.O. Series 2005AB

6/27/2005

12/1/2032

246,180,000

PPRT / State Aid

QZAB Series 2006A

6/7/2006

6/1/2021

6,852,800

State Aid

Unlimited Tax G.O. Series 2006B

9/27/2006

12/1/2036

305,875,000

State Aid

Unlimited Tax G.O. Series 2007BC

9/4/2007

12/1/2024

203,040,000

IGA / PPRT

Unlimited Tax G.O. Series 2007D

12/13/2007

12/1/2029

187,375,000

State Aid

Unlimited Tax G.O. Series 2008A

5/13/2008

12/1/2030

262,785,000

IGA / PPRT

Unlimited Tax G.O. Series 2008B

5/13/2008

3/1/2034

205,175,000

State Aid

Unlimited Tax G.O. Series 2008C

5/1/2008

12/1/2032

464,655,000

State Aid

Unlimited Tax G.O. Series 2009D

7/29/2009

12/1/2022

52,465,000

State Aid

Unlimited Tax G.O. BAB Series 2009E

9/24/2009

12/1/2039

518,210,000

State Aid / Federal Subsidy

Unlimited Tax G.O. Series 2009F

9/24/2009

12/1/2016

12,325,000

State Aid / Federal Subsidy

Unlimited Tax G.O. QSCB Series 2009G

12/17/2009

12/15/2025

226,604,487

State Aid

Unlimited Tax G.O. QSCB Series 2010C

11/2/2010

11/1/2029

257,125,000

State Aid

Unlimited Tax G.O. BAB Series 2010D

11/2/2010

12/1/2040

125,000,000

State Aid

Unlimited Tax G.O. Refunding Series 2010F

11/2/2010

12/1/2031

183,750,000

State Aid

Taxable Unlimited Tax G.O. Refunding Series 2010G

11/2/2010

12/1/2017

72,915,000

State Aid

Unlimited Tax G.O. Series 2011A

11/1/2011

12/1/2041

402,410,000

State Aid

Unlimited Tax G.O. Refunding Series 2011C

12/20/2011

3/1/2032

95,100,000

State Aid

Unlimited Tax G.O. Refunding Series 2011D

12/16/2011

3/1/2032

95,000,000

State Aid

Unlimited Tax G.O. Series 2012A

8/21/2012

12/1/2042

468,915,000

State Aid

Unlimited Tax G.O. Series 2012B

12/21/2012

12/1/2035

109,825,000

State Aid

Unlimited Tax G.O. Series 2013A

5/22/2013

3/1/2036

$403,980,000

State Aid

Total Principal Outstanding

 

 

$6,298,092,226

 

*Excludes accreted interest accrued on 0% coupon capital appreciation bonds.

 SCHEDULE OF DEBT SERVICE REQUIREMENTS TO MATURITY*

($ in Thousands)

Fiscal Year Ending June 30

 

Total Existing General Obligation Bond Principal

Total Existing General Obligation Bond Interest

 

Total Existing G.O. Bond Debt Service

 

 PBC Leases

 

TOTAL

 

 

 

 

 

 

 

 

 

 

2014

 

113,882

314,478

 

          432,049

 

51,982

 

   484,030

2015

 

118,237

313,125

 

          435,052

 

52,029

 

   487,081

2016

 

161,191

310,398

 

          475,224

 

51,997

 

   527,221

2017

 

157,518

306,177

 

          467,335

 

52,020

 

   519,354

2018

 

172,767

290,813

 

          467,219

 

52,069

 

   519,289

2019

 

178,875

284,438

 

          466,956

 

52,099

 

   519,055

2020

 

191,620

292,900

 

          486,955

 

30,636

 

   517,591

2021

 

216,950

302,121

 

          520,205

 

 

 

   520,205

2022

 

203,398

295,029

 

          499,562

 

 

 

   499,562

2023

 

212,097

287,681

 

          500,914

 

 

 

   500,914

2024

 

216,997

276,120

 

          494,252

 

 

 

   494,252

2025

 

225,483

267,531

 

          494,150

 

 

 

   494,150

2026

 

502,773

255,537

 

          759,445

 

 

 

   759,445

2027

 

258,915

242,165

 

          502,215

 

 

 

   502,215

2028

 

268,244

230,478

 

          499,858

 

 

 

   499,858

2029

 

227,667

272,469

 

          501,272

 

 

 

   501,272

2030

 

491,232

255,634

 

          748,001

 

 

 

   748,001

2031

 

270,124

237,530

 

          508,789

 

 

 

   508,789

2032

 

235,916

270,522

 

          507,280

 

 

 

   507,280

2033

 

106,205

89,767

 

          195,972

 

 

 

   195,972

2034

 

127,605

83,636

 

          211,241

 

 

 

   211,241

2035

 

118,675

77,049

 

          195,724

 

 

 

   195,724

2036

 

126,070

70,637

 

          196,707

 

 

 

   196,707

2037

 

124,600

63,912

 

          188,512

 

 

 

   188,512

2038

 

149,460

56,368

 

          205,828

 

 

 

   205,828

2039

 

157,890

47,697

 

          205,587

 

 

 

   205,587

2040

 

166,800

38,606

 

          205,406

 

 

 

   205,406

2041

 

176,070

29,076

 

          205,146

 

 

 

   205,146

2042

 

185,860

19,473

 

          205,333

 

 

 

   205,333

2043

 

195,275

9,882

 

          205,157

 

 

 

   205,157

 

 

 

 

 

 

 

 

 

 

 

 

$6,058,398

$5,891,249

 

$11,987,348

 

$394,793

 

$12,330,178

 

Page Last Modified on Thursday, August 28, 2014