November 17, 2023
At the Chicago Public Schools (CPS) Board of Education’s monthly board meeting in October, the CPS Office of Finance updated the Board on the District’s current financial status and the FY2025 budget forecast. The District is expecting to see a $391 million budget shortfall next fiscal year once the remaining $300 million of federal COVID relief dollars are spent. The District has received a total of $2.8 billion in COVID relief dollars since FY2021 and used $1.82 billion, or 65% of the funds through FY2023. In the current FY2024 budget, the District allocated another $670 million of the remaining federal funds to support school-level funding and academic and social and emotional programming. CPS reported that it plans to address the FY2025 budget shortfall through several methods, including asking the State of Illinois for additional revenue support in addition using the remaining $300 million in federal relief dollars to partially fill the budget gap.
Like many local governments in the State of Illinois that received federal funding during the pandemic, CPS will have to plan how to best support the District once federal funds are spent by the end of FY2025. The District has relied heavily on federal funds to support ongoing operations, including hiring hundreds of staff positions and increasing educational investments in individual schools. CPS also receives some financial support from the City of Chicago, including for debt-funded capital projects and a subsidy that covers part of the cost of pensions for CPS employees who are members of the Chicago Municipal Employees Annuity and Benefit Fund. These and other financial entanglements between the City and CPS are detailed in a June 2023 Civic Federation blog post.
The Civic Federation has called on CPS leadership and its Board to create a long-term financial plan that addresses the relationship between CPS and the City and outlines solutions to solve the massive looming budget gap. This is especially important as the District will become a fully independent government by 2027 once the fully elected school board is phased in.
This blog post will describe in detail CPS’ current financial status in fiscal year 2024 as well as financial projections for FY2025.
FY2024 Financial Update
One of the major issues that has impacted Chicago Public Schools funding is enrollment because the District has typically funded individual schools based on enrollment levels. Since FY2019, CPS has begun to move away from enrollment-based budgeting and has increased direct school funding despite enrollment declines in an effort to move toward a more equitable funding model. Between FY2019 and FY2024, CPS has increased direct school funding by $1.13 billion from $3.71 billion in FY2019 to $4.84 billion in FY2024. At the same time, enrollment has declined by approximately 38,000 students from 361,314 students in FY2019 to 323,291 students in FY2024. In FY2024, approximately 39% of school funding within the District is based on enrollment and 61% is based on student and school need. The District is continuing to reduce relying on enrollment-based school funding and is focusing on providing funds based on school and student need.
Much of the increase in school spending since FY2019 has been allocated to hire more personnel across a variety of positions, including teachers, counselors, nurses, social workers, instructional coaches, case managers, advocates for students in temporary living situations, athletic directors, custodians, engineers and security guards. Between FY2019 and FY2024, CPS increased the number of custodians by 575, social workers by 383, nurses by 339, case managers by 306 and instructional coaches by 212 budgeted positions. CPS also increased the number of teacher positions by 2,348, from 20,775 teachers in FY2019 to 23,123 teachers in FY2024. Salary expenses increased between FY2019 and FY2022 by $595 million for teachers and by $190 million for Educational Support Personnel.
FY2025 Budget Forecast
The Chicago Public Schools FY2024 budget includes the use of $670 million in federal relief dollars from the Elementary and Secondary School Emergency Relief (ESSER) fund. However, the District is projecting it will need to allocate the remaining $300 million of ESSER funds in the FY2025 budget. If the District uses the remaining $300 million in ESSER funds to fill the budget gap next year, CPS anticipates a budget deficit of $391 million in FY2025. If those funds are not used, the District could have an even larger structural deficit of $691 million.
Outside of the ESSER funds, CPS projects that property tax revenues will increase in FY2025 by $102 million if the District increases its property tax levy by the maximum allowed under State law and by another $64 million by levying for new and updated property. This will be partially offset, however, by reduced levels of the Personal Property Replacement Tax (PPRT). The FY2025 forecast projects that CPS’s share of PPRT revenues is expected to decline by $118 million from FY2024 based on updated current year projections from the State of Illinois. The District also anticipates an increase of $23 million in Evidence-Based Funding (EBF) and $31 million in additional pension support from the State of Illinois. Overall, revenues are projected to grow by $102 million in FY2025, but these will be outweighed by anticipated growth in expenditures.
In FY2025, CPS is projecting its expense obligations to increase by $123 million due to $52 million from EBF funding to debt service, an increase of $28 million in healthcare costs, a $20 million increase in investments to charter schools and a $30 million increase in operational inflationary costs based on the Consumer Price Index (CPI). These are offset by a projected decline of $7 million in the amount the District will contribute to the Chicago Teachers’ Pension Fund. The District noted that the increases only account for expenses that are out of the District’s control. They do not include any additional investments in school resources, future collective bargaining agreements or new capital investments.
In order to close the District’s structural deficit of nearly $700 million, CPS will need to find additional revenues or reduce expenses to balance the FY2025 budget. The Office of Finance also noted that any additional costs for expenditures that are beyond the District’s mandatory obligations will add to the projected deficit they need to close. The Board of Education stated that the District will continue to advocate for additional sources of revenue at the local and State level to support ongoing investments to schools.
CPS Liquidity and Long-Term Debt Service
The Office of Finance also presented to the Board of Education information about trends in the District’s liquidity and fund balance. Staff noted that compared to other school districts in surrounding states, Chicago Public Schools’ liquidity is extremely low and is a top concern for investors and rating agencies. CPS’ net cash as a percentage of expenditures declined significantly beginning in FY2014. The District now spends the majority of the year in a negative cash position due to the timing of the receipt of property tax revenue, which means CPS does not have enough liquidity to fund 18 of its 26 payroll dates. To fund payroll throughout the year, the District uses short term borrowing, known as Tax Anticipation Notes (TANs). CPS ended fiscal year 2023 with approximately four days of cash on hand as of June 30, 2023, and a fund balance amount of $1.3 billion.
The District’s long-term debt service profile consists of multiple funding sources, including EBF, federal interest subsidies, Capital Improvement Tax, PPRT, intergovernmental agreements, capitalized interest and other types of funds. Currently, CPS has 34 series of long-term bonds, which is equivalent to approximately $9.6 billion of debt that has been issued to fund capital needs. The District uses about 20% of State aid and PPRT revenues to pay for debt service and is on annual repayment of principal at approximately $250 million per year. Despite the District’s improved financial performance over the last six fiscal years, CPS is still considered a non investment grade issuer. CPS’ latest credit ratings for General Obligation bonds are BB+ from Fitch and S&P, Ba2 from Moody’s and BBB from Kroll. Kroll rated the District as BBB+ for Capital Improvement Tax and Fitch rated the District A.
CPS leadership noted in this presentation that they are aware of the upcoming financial cliff and the financial challenges facing the incoming elected school board. The City of Chicago and CPS officials have said they will appeal to Springfield lawmakers to help close the projected budget gap and avoid cuts next year. The Civic Federation will continue to monitor the financial challenges facing the District. The Federation urges the Board, the City, and the State to work together to develop a long-term financial plan to resolve the dire structural deficit it’s facing in FY2025. This effort should include seeking efficiencies as well as additional sources of revenue to continue supporting investments funded by ESSER funds, as well as preparing the elected school board with clear guidance on the City’s financial responsibility to CPS after 2024.