Fitch Lowers Chicago Schools' Outlook as $558M Deal Prices

CHICAGO - Fitch Ratings revised its outlook to stable from positive on the Chicago Board of Education as it entered the market yesterday with $558 million of new money.

The expectation of growing fiscal pressure facing Chicago Public Schools prompted the outlook revision, Fitch said. The district - the largest in Illinois - recently eliminated a $475 million shortfall in its $5.4 billion fiscal 2010 budget through a mix of tax increases, cuts, and federal stimulus funds. But spiking pension requirements and other costs will continue to pose significant challenges over the near term, analysts warned.

The district also plans to issue more than $1 billion of new money over the next two years, raising its already-high debt burden. Yesterday's issue consists of $518 million of taxable Build America Bonds and about $40 million of tax-exempt general obligation bonds.

Banc of America-Merrill Lynch is senior manager. Northern Trust Securities Inc. and Siebert Brandford Shank & Co. are co-senior managers. A.C. Advisory Inc. is financial adviser.

Fitch rates the credit A-plus, Moody's Investor's Service rates it A1 and Standard & Poor's rates it AA-minus.

The bonds are secured by unlimited ad-valorem taxes levied against all taxable property in Chicago, and are also payable from general state aid revenue.

Fitch noted a number of challenges facing the district over the next few years, including rapidly rising pension payment requirements, delays in state aid, and a weak economy.

"Maintenance of adequate fiscal reserves, despite spending pressure and the financial effects of a weakened economy, is a key credit consideration," Fitch analyst Melanie Shaker said in a report on the outlook revision that was released Tuesday.

Pension contributions in the fiscal 2010 budget will rise by $130 million to $300 million, teacher salaries by $125 million, and health care by $30 million. Officials said another $229 million will be needed in fiscal 2011 for pensions, leaving the school district with an estimated $900 million gap.

"Fiscal 2010 will be a difficult year for CPS, as pension payments have increased more than tenfold since 2006 and teacher contracts, though settled through 2012, provide somewhat generous wage increases of 4% annually," Shaker wrote.

The Civic Federation of Chicago, a local watchdog group, has warned that CPS faces major fiscal challenges, particularly related to its pension funding. The group recommended that the Illinois General Assembly and the district work together to enact a moratorium on pension enhancements and limit annual pension increases for new hires.

In addition to yesterday's sale, the district's finance team is discussing potential structures for a qualified school construction bond 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 provides investors federal tax credits instead of interest, leaving the issuer to repay only the bond principal and other issuance costs. Chicago schools received $254 million of the $22 billion of bonding authorization doled out to states and school districts under the federal stimulus.

The district has $4.3 billion in outstanding debt.

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