January 28, 2025
By Daniel Vesecky
As contract negotiations between the Chicago Public School District (CPS or the “District”) and the Chicago Teacher’s Union (CTU) continue, how to pay for the increases in salaries and other contract demands remains an outstanding question. One idea CTU representatives have suggested is using CPS’ general fund balance or reserve funds. In its fiscal year (FY) 2024 financial audit, the District listed a fund balance of approximately $1.3 billion on June 30, 2024. A common misperception is that CPS can draw from these reserves to pay for additional costs arising from a new collective bargaining agreement. Using such funds to pay for an increase in normal operating costs, like labor costs, is not a best practice that the Civic Federation generally would endorse. More important at the moment, however, is that the District’s stated reserves are not actually available to draw from. This summary will explain why.
The first thing to understand is that CPS’ reported general fund balance does not reflect the amount of cash actually available at any given point in time. Most government entities maintain a “rainy day” reserve of funds to cushion the blow of a financial emergency that demands increased expenditures or an unexpected reduction in revenue. This “rainy day fund” is typically reported within the general operating fund balance at the end of the year on the balance sheet of a government’s financial audit. When governments conduct their annual audit, changes in fund balance from year to year are reported based on how revenues and expenditures end up performing. A surplus results in an increase in the reserve fund balance, and a deficit results in a decrease in the fund balance compared to the prior year. However, due to accounting rules as explained further below, these annual changes in fund balance and the accumulated total does not result in an equal amount of available rainy-day funds.
The Government Finance Officers Association recommends that most governments generally maintain two months of unrestricted general operating fund balance, although this may vary depending on each government’s specific circumstances. Typically, these reserves sit unused until they are needed. If this were the case for CPS, its reserves would be available for use by the School Board to cover unforeseen expenditures. However, CPS’ financial reserve system does not work this way.
Although the fund balance amount as it is listed in CPS’ financial audit is often spoken of as a reserve, in reality it reflects an accounting mechanism that represents projected future income, not actual cash on hand. Because of a policy change enacted in FY2015, the District extended its revenue recognition period from 30 days after the close of the fiscal year to 60 days after the close of the fiscal year. This accounting mechanism allows the District to record anticipated property tax revenue received in August after the beginning of the fiscal year. At the time this was implemented, CPS stated that this change would reduce property tax collection volatility. However, it was primarily used as a means to close FY2015’s $876 million budget deficit, while at the same time leaving a gaping budget hole of the same size in the following 2016 fiscal year. By then, the District had already spent down its entire budgetary reserve (general operating fund balance).
As a result of the revenue recognition policy, the fund balance of $1.3 billion, as reported in CPS’ FY2024 balance sheet, has no bearing on the amount of cash actually available on hand at year-end. Based on the same balance sheet, CPS only had $66 million in cash and investments on hand at year-end FY2024, enough to cover only approximately three days of operating expenses.
One might assume that, once the second installment of property tax revenue arrives in August, CPS’ cash reserve would be replenished to the same $1.3 billion level reflected on paper. But this is not the case.
The second important thing to understand is that CPS’ cash flow problems are so severe that the reserve fund never actually gets replenished. CPS has ongoing operational costs that must be covered throughout its fiscal year, such as payroll and contractual services. The District also must make two large payments throughout the year—one for debt service on long-term bonds in February and one for the teachers’ pension contribution in June. However, nearly half of the District’s revenue comes from property taxes and is received in just two lump sums—one in March and one in August shortly after the fiscal year ends on June 30. The timing of these revenues and expenditures leads to a cash flow problem as the District continues to spend on constant costs while waiting for the next tranche of property taxes. In effect, the District spends about half of the year in a negative cash position.
To provide cash flow to cover these costs while waiting to receive expected property tax revenue, CPS uses short-term borrowing through a line of credit. The District issues Tax Anticipation Notes (TANs), which are short-term debt backed by budgeted future property tax revenues. After property tax revenues come in, the TANs are paid back. Of course, like all debt, these TANs carry an interest cost, budgeted at $9.5 million for FY2025.
Because the property tax revenue is already spoken for to repay the TANs, it is not available for other purposes. This means that the District is effectively unable to build up a reserve and draw on its fund balance to pay salaries, contractors, or any emergent expenses. Although the fund balance might be called a reserve or “rainy day” fund, it does not meaningfully act as one—it is not available for emergency expenditure because it is instead spent to cover operating costs throughout the year.
In summary, any additional costs resulting from the teacher contract or other unforeseen expenditures could not come from the reserve fund, as those funds are already committed for TAN repayment and do not represent cash that CPS has on hand for expenditures. Funding for increased expenditures due to negotiations with the union would have to come from elsewhere in the CPS budget, either by increasing revenues or decreasing other expenses.
In an ideal scenario, the District would rely on its budgetary reserves during periods of low cash flow to make payroll and vendor payments consistently throughout the year rather than needing short-term borrowing such as TANs. Yet, to reach meaningful fund balance levels, the District would need an additional $1 billion in cash. Without an immediate massive influx in revenue or a significant decrease in expenditures, the District’s cash flow situation remains tenuous. To rectify this, the District could gradually build up a meaningful operating reserve fund little by little over the course of a long-term plan. Additionally, CPS says that more frequent inflows of property tax revenue—for example, on a quarterly basis rather than twice yearly—could help alleviate cash flow challenges throughout the year.
Read more about the financial landscape of Chicago Public Schools here.