Chicago's beleaguered public school system faces a likely increase in borrowing costs, tough bank negotiations and even calls for emergency state oversight after a major rating agency on Wednesday lowered the school district's debt rating to junk status.
The three-notch downgrade by Moody's Investors Service compounds Chicago's financial mess, coming just a day after Moody's lowered the city's debt rating to junk. The downgrades follow a court decision striking down a state plan to reduce pension costs, which also led Moody's to drop the Chicago Park District's rating to junk Wednesday.
With the Illinois Supreme Court decision, "the (school) district now has fewer options for reducing its own pension costs," Moody's said in a statement. Calling the district's financial situation "precarious," Moody's also noted the limited availability of state aid and a budget deficit CPS officials predict will exceed $1 billion.
Chicago Public Schools used the downgrade as an opportunity to call for additional funding from the state, reiterating a common refrain of Mayor Rahm Emanuel's that Chicago taxpayers pay twice for pensions -- through local CPS property taxes and through state income taxes that help fund pensions in other districts.
"This crisis is now at our classroom doors," said interim school district chief Jesse Ruiz. "We urge Springfield to prioritize education funding and end the broken pension system that forces Chicago taxpayers to pay twice for teacher pensions."
But in its statement, Moody's dismissed the idea of any significant help from Springfield, predicting that "state budget pressures may limit future state aid increases to the district." Gov. Bruce Rauner has said repeatedly that he has no plans to bail out Chicago governments, and he is backing a bill that would allow CPS and other local governments to declare bankruptcy.
The downgrade, which applies to CPS' $6.2 billion in taxpayer-backed debt, is likely to increase borrowing costs at a time when the school district has little access to cash.
CPS still has up to $500 million in short-term credit that can be used for operating funds, according to a presentation to prospective bondholders last month. But the schools' rainy day fund is running extremely low for a district of CPS' size.
School officials expect to have $227 million left in reserves at the end of this year, plus an additional $174 million available from a debt service fund, the presentation said.
Analysis by Merritt Research Services shows CPS ended the 2014 fiscal year with far less cash on hand than almost any large school district.
Several analysts said the district is nearing a scenario that could require emergency financial oversight from the state -- an arrangement CPS operated under from 1980 to 1995.
The downgrade "darkens the picture for the school board to resolve its financial problems on its own," said Richard Ciccarone, president and CEO of Merritt, a municipal bond analysis firm. "There's going to need to be a radical step on the part of city, school board and state."
Without that kind of help, CPS will likely see significant increases in borrowing costs as a result of the downgrade, said Laurence Msall, president of the Civic Federation. The government watchdog group is calling for creation of a panel that would guide local governments in financial crisis and help them make decisions on issues like which services they can afford and what assets could be sold.
Msall noted that the state legislature approved the changes that allowed the district to underfund teachers' pensions for years. The failure to fully fund pensions has helped drive the current financial crisis. The district's projected $700 million pension payment is one of the major contributors to next year's budget deficit.
The district, whose ability to raise taxes is limited by state law, is already scrambling to appease its creditors. Downgrades earlier this year by Moody's and Fitch Ratings gave banks the option of demanding immediate repayment of $228 million in liabilities. That money is tied to contracts that contain provisions promising the district's rating would not drop below certain levels. The district has been negotiating with banks since March to avoid paying back the money.
Moody's downgrade of CPS' debt to Ba3 means the service thinks investors face a "substantial credit risk." The district has fared better with other agencies: It is rated one notch above junk status by Fitch and four notches above junk by Standard & Poor's.
Moody's downgrade of the Park District's rating three notches to Ba1 -- junk status but still two notches better than the schools -- provoked criticism from parks officials.
The parks have a balanced budget, healthy reserves, an uncontested pension restructuring plan and ample revenues available to make its bond payments, spokeswoman Jessica Maxey-Faulkner said.
"The Chicago Park District has done everything that Moody's has asked," she said.
Chicago Tribune's Juan Perez Jr. contributed.
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