CPS receives revenues at different times than when it pays expenses throughout the year. 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 occurs just before major revenue receipts as well. The impact of these trends in revenues and expenditures causes cash flow pressures for the District.
In FY17, $4.3 billion or 78 percent, of CPS’ revenues were received after February, more than halfway into the fiscal year. Payroll and vendor expenses make up 90 percent of the District’s expenditures and are spent relatively equally from September through July in conjunction with the school year. The annual debt service payment is made in mid-February, just prior to the receipt of $1.2 billion of the first installment of property tax revenues. The annual pension payment is made in late June, just before CPS receives $1.3 billion of the second installment of property taxes (which are due August 1).
Additionally, in FY17, the State delayed block grant payments by $330 million and did not provide an additional $215 million of state funding for pensions that was in the original budget. This delay in State funding put pressures on cash flow in FY17. To address this, the Board issued $387 million in Grant Anticipation Notes secured by the delayed State grants. This financing allowed the Board to pay the pension payment due June 30, 2017. CPS is the only school district in the State required to make this pension payment.
Most organizations set aside reserves in order to weather these peaks and valleys in cash flow. The 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 recommends reserve 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 reserves since FY13. By FY15, reserves had been drawn down and the Board began to use a line of credit to cover cash flow needs.
In FY18, the budget is balanced without the use of fund balance and as a result, preserves cash flow. Further, to the extent that the State returns to its historic pattern of more timely block grant payments, CPS will see a budgetary and cash flow improvement in FY18.
CPS has three main sources of operating revenues: local revenues, state revenues and federal revenues. Below is a description of the timing of receipt of each of these revenue sources.
Local Revenues: Local revenues are largely made up of property taxes. $2.5 billion of property taxes a year are received in two installments, 96 percent of which were received from February onwards, over halfway through the fiscal year. The first installment due March 1 of approximately $1.2 billion is received in the late February and March timeframe. The second installment of approximately $1.3 billion in recent years is received in the July and August timeframe. The second installment of receipts is dependent on when the second installment due date is set; over the last five years this due date has been August 1-3.
State Revenues: State revenues are largely made up of General State Aid and block grants. General State Aid makes up approximately 57 percent of the state revenues and is received regularly from August through June in bi-monthly installments. Block grant payments are not distributed regularly, and in FY17, over 50 percent of all block grants were not distributed to CPS by the end of the fiscal year, the longest delay since the inception of the block grants. This delay was due in large part to the lack of a State budget for two years. In June 2017, the State passed a budget and since that point, additional grants have been paid. At this point, CPS is delay $305 million. Due to the delay in block grant receipts, CPS issued Grant Anticipation Notes (GANs) totaling $387 million.
Federal Revenues: Federal revenues can be received only once the grants are approved by the State, which administers block grants on behalf of the federal government. Over the last two fiscal years, this approval has not occurred until about halfway into the fiscal year. In FY17, about $655 million of federal revenues were received on or after December 2016, or 92 percent of the total.
Working Capital Line of Credit: The District has the ability to issue a working capital line of credit in order to address liquidity issues. A working capital line of credit allows the Board to borrow money to pay for expenditures when cash isn’t available and then repay the borrowing when revenues become available. The State statute provides CPS with the ability to issue this type of cash flow borrowing through a Tax Anticipation Note (TAN). In FY17, CPS issued a total of $1,550 million in TAN to support liquidity. These TANs are repaid from the operating property tax levy of the District. CPS plans to issue TAN in FY18 to support liquidity of a similar size.
Borrowing from a line of credit requires that CPS pay interest on these bonds. In FY18, the Board has budgeted approximately $79 million in interest costs for the TAN.
Grant Anticipation Notes. In addition, the Board issued $387 million in GANs to ameliorate the impact of the delay in State grant payments. Since the issuance of the GANs, $161 million of grants have been paid, leaving $226 million of net GANs remaining to be paid. To the extent that the State continues to be delayed on state grant payments in FY18, the Board may issue additional GANs. In FY18, the Board has budgeted $18 million in interest costs for the GANs.
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: On the expenditures side, $2.4 billion of CPS’ expenditures is payroll and associated taxes, withholding and employee contributions. These payments occur every other week and most of the expenditures pay from September through July. Another $2.6 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 once a year in mid-February. 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. In FY17, the debt service deposit from General State Aid was $389 million in mid-February. The timing of this debt service deposit comes just before CPS receives approximately $1.2 billion in property tax revenues.
Pensions: CPS makes the bulk of the pension payment in late June. In FY17, approximately $19 million of the pension payment was made throughout the year and approximately $464 million was made on June 30, 2016, the last day of the fiscal year. The timing of this pension payment comes just before CPS receives approximately $1.3 billion in property tax revenues. In FY17, CPS approved a reinstated dedicated pension levy which allows the District to receive approximately $250 million in new revenue dedicated to the Chicago Teachers’ Pension Fund. These funds will be received through the second installment of property taxes in July and August.
Forecasted Liquidity: The chart below provides CPS’ liquidity profile in FY17 and FY18. The FY2018 liquidity forecast is based upon the proposed FY2018 budget as discussed more fully in the overall budget book.