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Chicago Public Schools' Debt Rating Takes Another Hit

A second financial ratings agency has downgraded Chicago Public Schools' debt rating to junk status, reinforcing Wall Street's dim view of the district's finances.

By Juan Perez Jr.

A second financial ratings agency has downgraded Chicago Public Schools' debt rating to junk status, reinforcing Wall Street's dim view of the district's finances.

Fitch Ratings on Monday downgraded billions of school board bonds to its "BB+" ranking, which it said reflected the "limited progress" CPS has made to address a vast budget gap as well as the district's meager cash reserves. Fitch said those reserves are likely to be extinguished by next year.

Moody's Investors Service in May downgraded CPS debt by three notches, also to junk status. Both ratings agencies cited the district's large pension liabilities. In addition, the district's cash flow problems boost the need for CPS to resort to short-term borrowing, Fitch said.

District officials have announced $200 million in spending cuts. Fitch said the district also will require "a combination of tax increases, contributions from the state and employee concessions" to balance its budget.

The district this month unveiled school spending plans that bank on a half-billion dollars in help from Springfield, where lawmakers are currently gridlocked over their own political battles. Fitch noted the dependence on state help in its analysis.

"Most options for relief are dependent on actions by the state, which is plagued by political disagreements and its own challenged financial position. Most proposed solutions to the pension problem, Fitch said, "face steep hurdles."

The district has acknowledged that without state help, it will have to resort to "unsustainable borrowing and additional cuts" midway through the coming school year.

The Chicago Board of Education last week unanimously authorized more than $1 billion in new bonds, in part as a hedge against the possibility that state lawmakers won't come through with help. Fitch warned the district's above-average debt level could worsen its problems.

Fitch also made note that the district picks up the tab for the bulk of teachers' required contributions to their pension plans, at a cost of roughly $175 million. CPS "is hoping that employees will agree to pay" the full contribution amount, Fitch stated. The issue has been part of ongoing contract discussions with the Chicago Teachers Union.

The district also faces potential costs related to its interest rate swap contracts, which officials have worked with banks to postpone or negotiate a discounted price.

In the swap agreements, which provide for an exchange of interest payments over several decades, CPS promised its debt rating would not drop below an agreed-upon level. Moody's and Fitch downgraded the school district below that level in March, allowing banks to demand the full value of the contracts.

In a statement, CPS financial chief Ginger Ostro said the district has few options to address its budget deficit, "which makes it even more critical to reach a comprehensive budget solution with our partners in Springfield."

"Our priority will continue to be working toward that broad solution so that we don't have to make even deeper reductions or undertake more unsustainable borrowing," Ostro said.

The latest downgrade came as Forrest Claypool is starting his job as Mayor Rahm Emanuel's newly appointed school district CEO.

(c)2015 the Chicago Tribune

Caroline Cournoyer is GOVERNING's senior web editor.
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