Fund Balance Statement
Maintaining a baseline level of fund balance, or financial reserve, enhances financial stability for any individual or organization. Just as individuals keep a balance in their checking accounts in case of emergencies, Chicago Public Schools (CPS) seeks to maintain a baseline amount of funds within its operating account to ensure smooth day-to-day operations. Additionally, financial reserves provide a cushion for year-to-year fluctuations in financial performance. External stakeholders consider a baseline fund balance a hallmark of prudent financial management and a best practice for governmental organizations. Just like individuals experiencing financial challenges cannot maintain a checking account balance, CPS’s financial challenges have meant that we, too, are unable to maintain a fund balance.
CPS adopted its Fund Balance and Budget Management policy1 in August 2008. The goals of this policy are to maintain adequate fund balances in the various funds to provide sufficient cash flow for daily financial needs, to offset significant economic downturns or revenue shortfalls, to provide funds for unforeseen expenditures related to emergencies, and to secure and maintain strong credit ratings. The definition of fund balances in this context is assets in excess of liabilities that can be spent in times of need. To achieve these goals, the Board established the stabilization fund, an assigned fund balance (under Governmental Accounting Standard Board Statement No. 54) within the Operating Fund. The stabilization fund target baseline is a minimum of five percent of the operating and debt-service budgets.
Many external stakeholders, such as rating agencies and government watchdog groups, consider five percent a minimum level of reserves. Rating agencies commonly view fund balances in excess of five percent as appropriate, and the Government Finance Officers Association recommends fund balance levels between five and 15 percent of spending.
While CPS acknowledges the importance of maintaining a minimum level of fund balance, it must balance this with advancing its core mission of ensuring that every child graduates college- and career-ready, even in the face of declining state revenues and statutorily-required increasing pension payments. Accordingly, in FY 16 CPS will continue to draw on reserves and will not maintain the stabilization fund balance at the target levels.
Use of Fund Balance
In FY15, CPS changed its revenue recognition policy from 30 days to 60 days to reduce volatility at the end of the fiscal year and to better match revenue timing with expenditures. With the new policy, CPS was projected to have an additional $648 million available in fund balance at the beginning of FY15. Most of this was projected to be used to close the FY15 budget gap. Based on our end-of-year projections, most of the funds will be used in FY15, leaving only $72 million in the stabilization fund for FY16. Of this, $8.5 million will be used to close the operating fund gap, leaving $63.5 million to meet the General Fund Stabilization target, obviously falling well short of the recommended balance. We are also anticipating ending FY15 with $9.5 million more in Workers’ Compensation/Tort Fund balance than we budgeted, which we will draw down to cover expenses within that fund, keeping the fund balance at approximately $19.8 million, where we ended FY14. Again, this is well short of the target for this fund.
Table 1: Estimated Use of Fund Balance
|Fund Balance by Type
||FY14 Actual Balance
||FY15 Estimated Use
||FY15 Estimated End of Year Balance
||FY16 Budgeted Use
||FY16 End of Year Balance
|General Fund-for Appropriation
|General Fund-for Stabilization
|Workers’ Comp/Tort Fund (adjusted for revenue recognition)
|Supp’l General State Aid (SGSA)2
|Other Special Revenue Funds
|Not Available for Appropriation3
|Total Operating Fund
|Debt Service Stabilization Fund
Fund Balance Targets
The fund balance targets established in the policy address the General Fund, Workers’ Compensation/Tort Fund, Supplemental General State Aid (SGSA) Fund, Debt Service funds, and Capital Projects funds. For the General Fund, the fund balance target is set between 5 and 10 percent of the total operating and debt service budgets. For the Workers’ Comp/Tort Fund, the fund balance target is between 1 and 2 percent of the operating budget. For SGSA, the fund balance target is the full fund balance from the prior year. For the debt service funds, the amount should be sufficient to cover potential risks, as determined by the Treasury Department. All capital projects funds are re-appropriated for capital projects.
Given these targets and the fund balance estimates above, Table 2 below summarizes the fund balance status compared to targets.
Table 2: Fund Balance Falls Short of Targets
||Estimated Balance at 6/30/2015
||FY16 Fund Balance Target
||Estimated Balance at 6/30/2016
|Workers’ Comp/Tort Fund
|Supplemental General State Aid Fund
|Debt Service Stabilization Fund
||Enough to cover risks
Once again, the General Fund and the Workers’ Comp/Tort Fund will not meet the fund balance targets at the end of FY16. CPS will ask the Board to extend the deadline to replenish the fund balance for FY16 and FY17 while it continues to seek a solution to the pension inequity and restore financial stability to the District.
As the district replaces its variable rate debt with fixed rate and exits from swaps, the need for the Debt Service Stabilization Fund becomes minimal.
FY16 Plans for Replenishing the Fiscal Stabilization Fund
In addition to developing a long-term strategic plan to restore fiscal stability, CPS will continue the following policies in FY16:
- Partner with the Governor, the General Assembly, and the Chicago Teachers Union to secure pension equity so that Chicago taxpayers do not pay twice for teacher pensions, once for Chicago teachers and also for all other teachers.
- Encourage the state to reprioritize funding for education.
- Provide limited capital investment funded by CPS, consistent with the proposed FY16-20 Capital Improvement Program, and seek outside sources of funding wherever feasible.
- Secure private foundation grants to pay for enrichment programs as much as possible.
- Closely monitor spending to achieve savings and efficiencies wherever possible.
1 Board Report 08-0827-PO8
2 This fund balance must by statute be re-appropriated to the schools in the budget year where it was unspent in the current year.
3 This includes funds set aside to pay for open purchase orders, services/goods received but not yet paid, and non-spendable fund balance, including endowments and prepaid assets.
4 Fund balance is estimated to be $48.3 million, but $8.6 million is expected to be held in obligations