Regional News

Chicago Schools Looks to Build America Bonds, QSCBs

CHICAGO - Facing a $475 million budget deficit, Chicago Public Schools hope to trim interest rate costs by using the federal government's taxable Build America Bonds program for its $300 million sale next month and tapping in the coming months its $254 million qualified school construction bond authorization.

The new-money sale by the Chicago Board of Education is scheduled to price in mid-September. CPS treasurer David Bryant said the district has selected Banc of America-Merrill Lynch as senior manager. Northern Trust Securities Inc. and Siebert Brandford Shank & Co. are co-senior managers. A.C. Advisory Inc. is financial adviser.

"We are still working on structural issues like call features and whether to use all BABs or include some tax-exempt bonds to optimize our savings," Bryant said.

Illinois' largest district has annually issued between $200 million and $500 million of new money over the last decade towards its massive $5 billion construction program, with the exception of 2002 when it sold just $50 million, and last year when the district took a break to save money as officials grappled with rising operational costs and limited state aid.

The district's finance team is also discussing potential structures for a QSCB issue it hopes to complete in the coming months. By issuing the taxable tax-credit bonds instead of traditional tax-exempt debt, CPS can steer elsewhere the funds that would have gone to interest payments.

The QSCB program, established like the BAB program in the federal stimulus package, provides investors federal tax credits instead of interest, leaving the issuer to repay only the bond principal and other issuance costs. CPS received $254 million of the $22 billion of bonding authorization doled out to states and school districts. Only a handful of transactions have so far been completed.

The district was the first in the country to tap the federal government's then-new qualified zone academy bond tax-credit debt program in 1998.

The QSCB allocation allowed the district to reduce the size of the upcoming transaction. "We expect significant savings using both programs. It's particularly important given the pressures on the operating budget," Bryant said.

The district earlier this week released a $5.4 billion fiscal 2010 budget and the board will vote on the plan later this month ahead of the opening of schools after Labor Day. The district faced a $475 million deficit in crafting the budget, as the state's fiscal 2010 budget did not include its request for an additional $200 million and the costs of salaries and pensions are rising.

Under pressure from Chicago Mayor Richard Daley, the district is asking for only a 1.5% increase in its property tax rate to raise $43 million. It could have sought up to a 4.1% increase under state tax caps. The district will also eliminate a total of 1,000 positions, including 536 previously announced cuts.

In addition to other spending cuts, the district will require non-union employees to take six unpaid furlough holiday days and will dip into its fund balance of $432 million for $61 million. About $190 million in federal stimulus funds for education will also help.

CPS chief executive officer Ron Huberman warned that the use of one-time fixes won't address longer-term problems like rising pension and health care costs. "The cost-cutting steps taken to date have helped reduce the deficit, but will not be enough to resolve the district's longer-term financial stress," Huberman said in a statement. Pension contributions in the fiscal 2010 budget rise by $130 million to $300 million, teacher salaries by $125 million and health care by $30 million.

District officials warned that another $229 million will be needed in fiscal 2011 for pensions, leaving the district with an estimated $900 million deficit to address. The district's pension fund was 80% funded at the start of fiscal 2009, but that will drop due to investment losses. The district is adhering to a payment schedule to bring the account to a 90% funded ratio by 2045.

Officials have suggested that they might seek to defer a portion of next year's pension payment and might eventually seek changes in employee benefits. The district could also ask unions to renegotiate some terms of existing contracts. Huberman warned that without any changes, classroom funding will suffer in fiscal 2011.

Earlier this year, all three rating agencies affirmed the district's ratings on $4.3 billion of outstanding debt. Fitch Ratings rates the credit A-plus with a positive outlook, Moody's Investors Service rates it A1, and Standard & Poor's rates it AA-minus.

Analysts said the ratings reflect CPS' completion of about three-fourths of its $5 billion capital program, the city's diverse economic base, and a moderately high debt burden. Fitch assigns a positive outlook based on the system's improved financial position in recent years, strong reserve levels, city support for property tax increases and capital funding assistance, and improved academic results. CPS' unreserved general fund balance of $432 million represents 9.8% of spending.



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