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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  .
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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