Maintaining a baseline level of fund balance, or financial reserve, enhances financial stability for any individual or organization. Just as individuals keep a balance in their checking accounts in case of emergencies, 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 Fiscal Year 2018, the Board projects a $505 million improvement to fund balance due to a $274 million in debt financing, $111 million increase in state grants over budget due to more timely payments, and $51 million of lower short-term borrowing costs and $69M in other improvements to budget including general underspend. Additionally, if the State pays a remaining $69 million in State grants before the end of the District’s revenue recognition period (August 29) as it has in years past, then fund balance will be further improved.
CPS adopted its Fund Balance and Budget Management policy1 in August 2008. The goals of this policy are to maintain adequate fund balances in the various funds to provide sufficient cash flow for daily financial needs, to offset significant economic downturns or revenue shortfalls, to provide funds for unforeseen expenditures related to emergencies, and to 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 FY2018 estimated year end fund balance represents a significant turnaround from past years, when the district was forced to deplete its cash reserves in order to protect gains being made in the classroom. Moving forward, the revenue structure reflected in the district’s FY2019 budget, which better aligns revenue and expense growth, will allow the district to continue to improve its financial footing.
Use of Fund Balance
Certain of the Board’s fund balance includes restricted prior year revenues that went unspent. Because these prior year revenues are restricted, those fund still need to be spent in a current year on those restricted purposes. As a result, even in a balanced budget, the District will still show a use of general fund balance, as is this case with Fiscal Year 2019. In FY2019, $63 million of the $5.98 billion operating budget is funded by fund balance from these restricted funds.
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.
| FY2018 Amended Budget | FY2018 Estimated Year-End | FY2019 Proposed Budget | |
|---|---|---|---|
| Fund Balance, beginning of period | ($275.2) | ($275.2) | $230.6 |
| Total Revenue | 5,642.0 | 5,717.0 | 5,921.6 |
| Total Expenditures | (5,699.3) | (5,485.1) | (5,984.2) |
| Operating Surplus/(Deficit) | (57.3) | 231.8 | (62.6) |
| Transfers In | 361.1 | 274.0 | - |
| Net Change in Fund Balance | 303.8 | 505.8 | (62.6) |
| Fund Balance, end of period | 28.6 | 230.6 | 168.0 |
| Delayed State Grants** | 69.0 | 69.0 | |
| Fund Balance with Catch-Up in State Grants | 299.6 | 237.0 | |
*2018 Estimated Year-End target is higher than Amended Budget due to state block grants being received faster and lower interest rates and less interest expense on short-term credit line.
**Receipt of outstanding $69 million in state categorical grants before the end of the FY2018 revenue recognition period would raise the FY2018 estimated year-end fund balance to $299.6 million.
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’ Comp/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.
| Fund Type | FY2019 Fund Balance Target |
|---|---|
| General Fund | $329.5 (5%) |
| Workers’ Comp/Tort Fund | $59.8 (1%) |
| Debt Service Stabilization Fund | Enough to cover risks |
Despite significant improvements in operating fund balances, the General Fund will not meet the fund balance targets at the end of FY2019. The Worker’s Comp / Tort Fund will meet fund balance targets at the end of FY2019. 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, the need for the Debt Service Stabilization Fund becomes minimal.
FY2019 Plans for Replenishing General Fund Balance
CPS projects ending FY2017 within $30 million of the General Fund Balance Target assuming the timely payment of State Grants. This is after a $604M improvement in fund balance from Fiscal Year end 2017 to Fiscal Year end 2018. CPS will continue the following policies in FY2019:
- Continue the push for additional funding from the state of Illinois
- Closely monitor spending to achieve savings and efficiencies wherever possible and continue streamlining administrative expenses
- CPS’ improved financial situation is expected to lower borrowing costs. Lower debt service versus budgeted costs would improve financial performance and fund balance.
- Conservative budgeting assumptions will allow CPS to improve financial performance and fund balance.
1 Board Report 08-0827-PO8