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Chicago Public Schools Fiscal Year 2013 Amended Budget

Debt Management

Debt Management

 

As Amended November 14, 2012

 

Chicago Public School's (CPS) 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.

 

The FY2013 budget was amended in October, 2012 to reflect the costs of collective bargaining agreement with the Chicago Teachers' Union. Several changes in the Debt Service budget plan have occurred since the budget was initially adopted by the Board in August, 2012. This chapter has been updated to reflect those changes.

 

Debt Overview

The Board of Education currently has $6.4 billion of outstanding debt. The FY2013 budget includes appropriations from the Debt Service Funds of $399.8 million for payments on existing debt. 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.

 

CPS sold approximately $470 million of new bonds during FY2013 to finance the capital program. These bonds will fund ongoing capital projects from FY2012 and FY2013. While the capital program, as described more fully in the Capital chapter, has been significantly scaled back forFY2013-FY2015, the FY2013 bond issue reflects the amounts needed to cover capital expenses paid out during FY2013, including for projects started in prior years. These new bonds have been included in the debt projections below.

 

The amended Budget anticipates that the Board will restructure a portion of its outstanding debt in FY2013. Proceeds from the issuance of new refunding bonds will be used to retire principal coming due in the near term. This refunding will decrease the amount of General State Aid that must be set aside in FY2013, thereby freeing funds for the Operating budget. These new restructuring bonds have not been included in the Schedule of Debt Service Requirements to Maturity below.

 

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, has sold a modest amount of bonds in the past to fund schools which do rely on property tax levies. These PBC bonds are CPS's responsibility and represent the only CPS obligations that rely solely on property tax levies. The FY2013 budget includes $53 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. In total, CPS has paid less than one-third of total typical interest costs on these specialized bonds due to the subsidized nature of the instruments.

 

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 modest, not predictable each year and can be subject to delays, but since 2002, CPS has received $450 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.

 

FY2013 Debt Service Costs for all Obligations

As shown in the table below, FY2013 includes appropriations of $18.2 million for new debt issued in August, 2012, $2.5 million for the restructuring bonds to be issued, and $381.5 million for existing alternate bonds and PBC payments (included with existing bonds) for a total of $402.3 million for debt service. This represents an increase relative to FY2012 due to the inclusion of FY2013 new bonds; in FY2012, estimated actual expenditures were below budget due to lower FY2012 new bond expense and reduced variable interest rate costs.

 

CPS is required to set aside debt service nine months to one year and a half (depending on the revenue source) prior to the actual date that payments are due to the bondholders. These payments are held in trust with an outside trustee, as required by the bond indentures. Hence, each year that debt service costs are increasing, the amount of revenue needed will necessarily exceed the amount expended and is so reflected in the budget.

 

In August, 2012, CPS issued $470 million in new bonds. Typically, this would have required funds to be set aside during FY2013 to pay debt service. Accordingly, the FY2013 budget, prior to this amendment, included $13 million of General State Aid. However, by using "capitalized interest," a portion of the bond proceeds were set aside to pay interest on the new debt. This frees up General State Aid, which then does not need to be set-aside for debt service. Similarly, the proposed restructuring will provide bond proceeds to pay debt service costs that would otherwise come from General State Aid. An estimated $42 million will be freed for the Operating budget.

 

Finally, since the budget was adopted in August, CPS has put on the market surplus property estimated to generate $15 million. These funds are reflected as "Other" revenue in the "Summary of Debt Service Funds" table below.

 

FY2010 - FY2012 Summary of Debt Service Funds (In Millions)

 

  FY2011 Actual FY2012 Estimated Actual FY2013 Budget
Beginning Year Fund Balance
 Restricted Fund Balance
 Assigned Fund Balance
Fund balance to be appropriated
$499.8 
(375.2)
(124.6)
0.0
$503.1 
(271.6)
(231.5)
0.0
$575.7 
(316.2)
(243.6)
15.9
Revenues:
 Property taxes
 PPRT
 General State Aid
 State capital reimbursement
 Other local (City IGA)
 Federal interest subsidy
Other

32.5
25.4
252.4
0.0
114.1
19.1
0.0

51.9
55.1
149.4
60.9
88.5
50.3
0.0

53.2
57.7
143.2
54.1
92.1
26.8
15.0
Total Revenue 443.5 456.1 442.1
Expenditures:
 Existing Bond Prinicipal Payment
 Existing Bond Interest Payment
 Total Existing Bond Debt Service
 FY2013 New Bond Debt Service
 FY2013 Restructuring Bond Debt Service
 Fees

70.8
250.0
320.8
 
 
11.3

88.5
284.1
372.6
 
 
10.9

74.9
298.1
373.0
18.2
2.5
8.6
Total Appropriation 332.1 383.5 402.3
Other Financing Sources/ (Uses)
 Restricted Fund Balance
 Assigned Fund Balance

(108.1)
271.6
231.5

0.0
316.2
259.5

41.6
413.5
243.6
End of Year Balance $503.1 $575.7 $657.1

 

Long-Term Fiscal Challenges

The graph below illustrates the fiscal challenges stemming from CPS's debt obligations. After a dip in debt service payments in FY2011 and FY2012, debt service increases to nearly $475 million in FY2014. The graph below shows the debt service payments for the currently outstanding bonds only, including the bonds already issued in FY2013; this graph does not show the impact of any future bonds required to support future capital budgets nor the impact of the anticipated restructuring which is expected to reduce debt service payments in FY2014 and FY2015, while increasing debt service in future years, particularly in FY2034-FY2036.

 

Resources needed to pay bondholders are in direct competition with resources needed to ensure we continue to fund priorities that drive academic achievement.

 

 

Measuring Debt Burden

External stakeholders such as taxpayers, unions, parents, government watchdog groups, rating agencies, and bondholders frequently review CPS's debt profile to gauge its size and structure as a crucial component of CPS's financial position. In addition to evaluating the total amount of debt outstanding and the annual debt service payments, those evaluating CPS's 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; these include 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. Total property tax supported debt was extremely low at less than 1 percent of the legal debt limit because CPS pays debt service from sources other than property taxes to keep the property tax burden low.

 

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 FY2011 Comprehensive Annual Financial Report, debt per capita in FY2002 was $930; by FY2011, debt per capita reached $1,947.This is considered moderate to slightly above average relative to other comparable school districts; nonetheless, the rate of increase is significant.

 

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 FY2012 and FY2013 are estimated at 7.9 and 7.6 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, including student enrollment.

 

In July 2012, Moody's Investors Service lowered its rating to "A1" from "Aa3" with a "negative outlook." In August 2012, Standard & Poor's lowered its rating from "AA-" to "A+" with a "stable outlook," and Fitch Ratings changed its outlook to "negative," while maintaining its "A+" rating. These actions reflected budgetary pressures including limited financial flexibility due to the FY2013 drawdown of reserves, increasing pension requirements, and a moderate to above-average debt burden, compounded by slow amortization. After CPS reached a tentative agreement with the Chicago Teachers' Union, Moody's lowered its rating again in September 2012 from "A1" to "A2" and Fitch lowered its rating from "A+" to "A." Both rating agencies maintained their "negative" outlooks. The agencies cited constrained financial flexibility as a result of the costs associated with the new contract. As this amended budget demonstrates, CPS has made recurring spending reductions in addition to using limited one-time revenues to cover the costs of the contract. 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's 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: CPS uses interest rate swaps to reduce the volatility inherent in variable rate debt, yet still achieves cost savings when compared to traditional fixed rate debt. 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 generally pays a fixed rate to a counterparty and receives a variable rate from the same counterparty, which is intended to offset the amount paid to its variable rate bondholders.CPS only enters into transactions with a highly rated, credible and diverse group of counterparties.

 

A copy of the Debt Management Policy is available at the Board's website at policy.cps.k12.us/documents/404.1.pdf PDF icon..

 

Outstanding debt as of October 1, 2012

 

Debt Outstanding at 6/30/12
Chicago Public Schools
Closing Date Maturity Date Principal Outstanding At 6/30/12 Pledged Funding Source for Debt Service
PBC Series A of 1992

1/1/1992

1/1/2020

$186,525 ,000

Property Tax

PBC Series B of 1999

3/1/1999

7/1/2018

113,255 ,000

Property Tax

Unlimited Tax G.O. Series 1997A*

12/3/1997

12/1/2030

30,653,579

IGA / PPRT

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

10/28/1998

12/1/2031

286,395,386

IGA / PPRT

Unlimited Tax G.O. Series 1999A*

2/25/1999

12/1/2031

467,683,966

IGA / PPRT

Unlimited Tax G.O. Series 2000BC D

9/7/2000

3/1/2032

95,100,000

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

40,225,000

IGA

Unlimited Tax G.O. Series 2003A

2/13/2003

12/1/2016

6,795,000

State Aid

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

12,240,000

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

320,775,000

State Aid

Unlimited Tax G.O. Series 2007BC

9/4/2007

12/1/2024

203,385,000

IGA / PPRT

Unlimited Tax G.O. Series 2007D

12/13/2007

12/1/2029

203,865,000

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

214,175,000

State Aid

Unlimited Tax G.O. Series 2008C

5/1/2008

12/1/2032

464,655,000

State Aid

Unlimited Tax G.O. Series 2009A

3/18/2009

3/1/2026

130,000,000

State Aid

Unlimited Tax G.O. Series 2009BC

6/25/2009

3/1/2031

75,410,000

State Aid

Unlimited Tax G.O. Series 2009D

7/29/2009

12/1/2022

63,210,000

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

23,750,000

State Aid / Federal Subsidy

Unlimited Tax G.O. QSCB Series 2009G

12/17/2009

12/15/2025

254,240,000

State Aid

Unlimited Tax G.O. Series 2010A

2/17/2010

3/1/2035

48,910,000

State Aid

Unlimited Tax G.O. Series 2010B

2/17/2010

3/1/2036

157,055,000

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

Series 2010G

 

 

 

 

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

468,915,00

State Aid

Total Principal Outstanding

 

 

$6,362,380,731

 

 

*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

 

 

 

 

 

 

 

 

 

 

2013

 

40,973

297,143

 

338,116

 

51,963

 

390,079

2014

 

147,632

305,554

 

453,186

 

51,982

 

505,168

2015

 

157,542

302,506

 

460,048

 

52,029

 

512,077

2016

 

161,191

298,897

 

460,088

 

51,997

 

512,085

2017

 

157,518

294,877

 

452,395

 

52,020

 

504,414

2018

 

172,767

279,544

 

452,311

 

52,069

 

504,380

2019

 

178,875

273,205

 

452,080

 

52,099

 

504,179

2020

 

191,621

280,693

 

472,314

 

30,636

 

502,949

2021

 

216,950

288,700

 

505,650

 

 

 

505,650

2022

 

203,398

281,736

 

485,134

 

 

 

485,134

2023

 

212,098

274,508

 

486,606

 

 

 

486,606

2024

 

216,997

263,189

 

480,186

 

 

 

480,186

2025

 

225,483

254,813

 

480,296

 

 

 

480,296

2026

 

502,773

243,956

 

746,729

 

 

 

746,729

2027

 

258,915

230,842

 

489,757

 

 

 

489,757

2028

 

268,245

219,531

 

487,776

 

 

 

487,776

2029

 

227,667

261,872

 

489,539

 

 

 

489,539

2030

 

491,232

245,444

 

736,676

 

 

 

736,676

2031

 

270,124

228,025

 

498,149

 

 

 

498,149

2032

 

235,916

259,796

 

495,712

 

 

 

495,712

2033

 

106,205

79,032

 

185,237

 

 

 

185,237

2034

 

94,275

74,041

 

168,316

 

 

 

168,316

2035

 

82,920

69,265

 

128,739

 

 

 

69,265

2036

 

85,330

64,710

 

150,040

 

 

 

150,040

2037

 

124,600

58,912

 

183,512

 

 

 

183,512

2038

 

149,460

51,368

 

200,828

 

 

 

200,828

2039

 

157,890

42,697

 

200,587

 

 

 

200,587

2040

 

166,800

33,606

 

200,406

 

 

 

200,406

2041

 

176,070

24,076

 

200,146

 

 

 

200,146

2042

 

185,860

14,473

 

200,333

 

 

 

200,333

2043

 

195,275

4,882

 

200,157

 

 

 

200,157

 

 

 

 

 

 

 

 

 

 

 

 

$6,062,603

$5,901,892

 

$11,964,495

 

$394,793

 

$12,359,288

* Does not reflect anticipated FY13 restructuring bonds.

 

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