February 28, 2014
This week, Chicago Public Schools released its FY2013 Comprehensive Annual Financial Report for July 1, 2012 to June 30, 2013. In it, the District reports a year-end FY2013 deficit of $119 million that was closed using fund balance. This is smaller than the $273 million deficit that was anticipated when the District released its FY2014 budget. One of the main drivers behind the positive variance was also the cause of a significant increase in fund balance last year: the District received property tax revenues earlier than expected. As the Federation noted in our blog post last year, it is important to recognize that the positive outcome for the District’s FY2013 finances does not reflect an increase in revenues available to fund District operations. As the District prepares its budget for FY2015, it still faces enormous financial pressures due to increased pension fund contributions and salary increases.
Timing of the Second Installment Property Tax Bills
In 2013—for the second consecutive year—second installment Cook County property tax bills were sent out on time. Over the previous thirty years, second installment bills had generally been due several months later than the statutory deadline of August 1st. Accounting rules state that the District must include revenues received within 30 days of the end of the fiscal year (June 30th) as revenue for that fiscal year. This means that property tax revenue received July 1-July 30 in 2013 must be counted as FY2013 revenue rather than FY2014 revenue even though it was received after the start of the 2014 fiscal year.
In July 2013 the District received $105 million more in property tax proceeds than it received over the same period during the previous year. Again, this is not new or extra revenue to the District. Instead of allocating the extra revenue to its fund balance, as it did in FY2012, CPS used the advance property tax revenues to reduce its FY2013 deficit. There is also a side effect that less fund balance was needed to cover the FY2013 deficit and is therefore available to help cover future deficits. This is reflected in the Balance Sheet of the Governmental Funds in the FY2013 CAFR as part of the unassigned fund balance. However, for this fund balance to be available for FY2015, the same amount of CPS property tax revenue as was received in July 2013—approximately $350 million—must be received in July 2014.
Property taxes are not an economically sensitive government revenue source. The unexpected increase in revenue received by CPS for FY2013 is not related to economic performance. Chicago Public Schools is subject to tax caps and is entitled, under state law, to increase the amount they bill their taxpayers by a certain defined amount of money each year. The amount levied (subject to certain exceptions) can grow each year by the lesser of 5% or inflation. Therefore, it is not possible for the total amount of property tax revenue received by Chicago Public Schools to grow by more than what the District levied for that year; rather, the timing of when it is received is what has varied.
This change in the timing of the receipt of property taxes also does not affect the District’s plan to draw down its budgetary reserves to close its FY2014 deficit. However, a development since the approval of the FY2014 budget will make the job of closing a previously projected FY2015 deficit of $1 billion that much harder: the amount the District must contribute toward its teachers’ pensions will increase significantly next year.
Investment Return Assumption Reduction Leads to Larger Obligations and Higher Contributions
Last September, the Chicago Teachers’ Pension Fund trustees voted to follow the recommendation of their actuary and reduce the fund’s expected rate of return on investment to 7.75% from 8.0%. As noted in this blog post from last fall, many State and Chicago area funds have also recently reduced their expected investment returns. The assumed rate of return on investment, also called the discount rate, is used to calculate the present value of the future obligations of the systems. Reducing the rate increases the present value of future commitments to employees and retirees and results in higher liabilities and lower funded ratios. At the Chicago Board of Education meeting on Wednesday, February 26th, CPS CEO Barbara Byrd-Bennett said the District’s FY2015 contribution will now be $84 million higher than the FY2014 payment, adding to CPS’ FY2015 budget deficit.
The District’s limited ability to raise property taxes, the fact that its fund balance will be significantly depleted by June 2014 and ongoing increases in its operating expenses, especially pensions, all highlight the need for reform of Chicago teachers’ pensions. At the Board meeting CEO Byrd-Bennett also noted that if the General Assembly enacted the same pension reform provisions for Chicago teachers’ pensions that were passed in December 2013 for the downstate teachers’ pension fund, the District’s FY2014 contribution would have been reduced by $250 million.
Clearly, pension reform alone will not close the District’s deficit. However, it is a necessary component to a plan to put the District on a more sustainable financial path.