CPS receives revenues at different times than when it pays expenses throughout the year. As a result, CPS cash flow experiences peaks and valleys throughout the year depending on when revenues and expenditures are received and paid. Further, revenues are generally received later in the fiscal year while expenditures, mostly payroll, are level across the fiscal year, with the exception of debt service and pensions. The timing of these two large payments occur just before major revenue receipts as well. The impact of these trends in revenues and expenditures causes cash flow pressures for the District.
In FY2016, $3.8 billion or 75 percent of CPS’ revenues were received after February, more than halfway into the fiscal year. Payroll and vendor expenses make up 87 percent of the District’s expenditures and are spent relatively equally from September through July, the timing for payments across the school year. The annual debt service payment is made in mid-February, just prior to the receipt of $1.2 billion of the first installment of property tax revenues. The annual pension payment is made in late June, just before CPS received $1.1 billion of its second installment of property taxes due August 1. These variations in when the District receives revenue and make payments puts pressure on CPS’ liquidity and creates significant peaks and valley for cash flow.
Most organizations set aside reserves in order to weather these peaks and valleys in cash flow. The Board policy requires that the Board maintain an operating reserve of at least 5 percent of the total operating and debt service budget and the Government Finance Officers Association recommends reserve levels between 5 and 15 percent of spending. However, given the financial challenges facing the District and in order to make the annual pension payment, CPS h ad drawn down on its reserves since FY13. By FY15, reserves had been drawn down and the Board began to use a line of credit to cover cash flow needs. When reserves are depleted, CPS no longer has the cash reserves available to weather the volatility of cash flow.
Starting in FY15, in order to address these liquidity issues, the District issued a working capital line of credit. A working capital line of credit allows the Board to borrow money to pay for expenditures when cash isn’t available and then repay the borrowing when revenues become available. The State statute provides CPS with the ability to issue this type of cash flow borrowing through a Tax Anticipation Note (TAN). In FY16, CPS issued a total of $1,065 million in TAN to support liquidity. CPS plans to issue a TAN in FY17 to support liquidity.
Borrowing from a line of credit requires that CPS pay interest on these bonds. In FY17, the Board has budgeted approximately $35 million in interest costs for the TAN.
CPS has three main sources of operating revenues: local revenues, state revenues and federal revenues. Below we describe the timing of receipt of each of these revenue sources.
Local Revenues. Local revenues are largely made up of property taxes. $2.3 billion of property taxes a year are received in two installments, 96% of which received from February onwards, over half way through the fiscal year. The first installment due March 1 of approximately $1.2 billion is received in the late February and March timeframe. The second installment of approximately $1.1 billion in recent years is received in the July and August timeframe. The second installment of receipts is dependent on when the second installment due date is set – over the last four years this due date has been August 1-3.
State Revenues. State revenues are largely made up of General State Aid and Block Grants. General State aid makes up approximately 64 percent of the state revenues and are received regularly from August through June in bi-monthly installments. Block Grant payments are not distributed regularly, and in FY2016, over 73 percent of these block grant payments were received on or after January 2016, in the second half of the fiscal year.
Federal Revenues. Federal revenues can only be received once the grants are approved by the State, which administers block grants on behalf of the federal government. Over the last two fiscal years, this approval hasn’t occurred until about half way into the fiscal year. In FY2016, about $613 million of federal revenues were received on or after December 2015, or 83 percent of the total.
CPS expenditures are largely predictable and the timing of these expenditures can be broken down into four categories: payroll and vendor, debt service and pensions.
Payroll and Vendor. On the expenditures side, $2.4 billion of CPS’ expenditures is payroll and associated taxes, withholding and employee contributions. These payments occur every other week and most of the expenditures pay from September through July. Another $2.6 billion of CPS vendor expenses are also relatively stable across the year.
Debt. Debt service is deposited into debt service funds managed by independent bond trustees once a year in mid-February. The timing and amount of these payments are dictated by the bond documents. Once the trustees have verified that the debt service deposit is sufficient, they provide a certificate to the Board which then allows the Board to abate the backup property tax levy that supports the bonds. In FY16, the debt service deposit from General State Aid was $43 million in mid-February. This debt service deposit was significantly lower due to the $200 million restructuring that the Board executed in the Series 2016A financing. The timing of this debt service deposit comes just before CPS receives approximately $1.2 billion in property tax revenues.
Pension. CPS makes the bulk of the pension payment in late June. In FY16, approximately $15 million of the pension payment was made throughout the year with the remaining $658 million made on June 30, 2016, the last day of the fiscal year. The timing of this pension payment comes just before CPS receives approximately $1.1 billion in property tax revenues.
Forecasted Liquidity. The chart below provides CPS’ liquidity profile in FY16 and FY17. The FY2017 liquidity forecast is based upon the proposed FY2017 budget as discussed more fully in the overall budget book.