Fund Balance Statement
Maintaining a baseline level of fund balance, otherwise known as a financial reserve, enhances financial stability for any individual or organization. Just as people keep emergency funds in their checking accounts, 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.
In FY2019, CPS projects an additional $42 million in the district fund balance due to $59 million in higher than anticipated levels of local and state revenue with expenditures $18 million above budget. The latter is due to additional spending on the district’s curriculum equity initiative offset by savings on healthcare and debt service, general underspend, and an increased vacancy rate.
CPS adopted its Fund Balance and Budget Management policy1 in August 2008. The goals of this policy are to maintain adequate fund balances in various funds to provide sufficient cash flow for daily financial needs, offset significant economic downturns or revenue shortfalls, provide funds for unforeseen emergency expenditures, and secure and maintain strong credit ratings. The definition of fund balances in this context is assets plus deferred outflows in excess of liabilities plus deferred inflows that can be spent in times of need.
The FY2019 estimated year-end fund balance builds on the FY2018 year-end total, which shows a significant turnaround from past years, when the district was forced to deplete its cash reserves in order to protect classroom resources. Moving forward, the revenue structure reflected in the district’s FY2019 budget better aligns revenue and expense growth, and will allow the district to continue to stabilize its finances.
Use of Fund Balance
The Chicago Board of Education’s appropriated fund balance is comprised entirely of unspent restricted prior year revenues. Due to the nature of these funds — which include federal nutrition funding, state funding for early childhood, and school-generated revenue — they can only be spent on the intended use and not for general expenses. As a result, even with a balanced budget, the district will still appropriate a general operating fund balance. In FY2020, $56 million of the $6.14 billion operating budget is funded by restricted fund balance.
Debt service funds and capital funds are recorded separately and used for their own restricted purposes. These funds are described more fully in the capital and debt chapters.
Table 1: Estimated Beginning and End-of-Year Fund Balance in the Operating Funds (in millions)
|Fund Balance, beginning of period
|Net Change in Fund Balance
|Fund Balance, end of period
Fund Balance Targets
The fund balance targets established in the Fund Balance policy address the General Fund, Workers’ Compensation/Tort Fund, Debt Service Funds, and Capital Projects Funds. For the General Fund, the fund balance target is set between five and 10 percent of the total operating and debt service budgets. For the Workers’ Compensation/Tort Fund, the fund balance target is between one and two percent of the operating budget. 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 targets.
Table 2: Fund Balance Targets (in millions)
||FY2019 Fund Balance Target
|Workers’ Comp/Tort Fund
|Debt Service Stabilization Fund
||Enough to cover risks
CPS projects that it will meet its fund balance target for the first time since FY2015. The Worker’s Compensation/Tort Fund will meet fund balance targets at the end of FY2019, and the district believes that its improved financial outlook will allow it to meet all of its fund balance targets in the foreseeable future.
As the district replaces its variable rate debt with fixed rate, and after fully exiting from swaps, there is a minimal need for the Debt Service Stabilization Fund.