CHICAGO — The Chicago Board of Education plans to enter the market as soon as next week with a $254 million unlimited-tax general obligation issue that will tap its full qualified school construction bond allocation for 2009.
Goldman, Sachs & Co. and JPMorgan are co-senior managers. M.R. Beal & Co. and Ramirez & Co. are co-managers. Katten Muchin Rosenman LLP is bond counsel and A.C. Advisory Inc. is financial adviser on the transaction.
Proceeds will go towards funding the district’s massive $5 billion capital program. The deal marks the second-largest QSCB offering to date, following the Los Angeles Unified School District’s $318 million issue last month.
The board is pledging general Illinois state aid revenues to repayment of the debt. Those revenues provide at least 1.1 times debt service coverage. The structure includes annual mandatory sinking fund payments. Such a move is considered a credit and investor strength, since the securities carry a bullet maturity of up to 15 years with no amortization.
In February, $22 billion of QSCBs were authorized as part of the federal stimulus to allow states and localities to finance the construction, rehabilitation, or repair of public schools, as well as to purchase equipment for those schools or acquire land for school construction.
In April, the Treasury Department allocated the first $11 billion tranche to the states and the 100 largest school districts in the country. The districts received $5.5 billion and the states received $6.6 billion to distribute locally. Chicago Public Schools received a $254 million direct allocation.
The QSCB program provides investors with a 100% federal tax credit instead of interest and was intended to require the issuer to repay only the bond principal and other issuance costs. Though investor interest in the product has been growing, CPS still expects to offer a supplemental coupon that investors have demanded.
Like some other school districts, CPS might have preferred to hold off on issuing the debt until it attains greater market acceptance and issues such as the stripping of the tax credit are resolved, but it decided to act this year over concerns that a delay into next year would complicate the future timing of the transaction.
If the district failed to act this year, it would have been forced to transfer its allocation to the state or face the allocation’s expiration. States can carry forward the QSCB volume cap, but the direct allocations to the large districts expire if not used or transferred to the state.
“It could have become more cumbersome if we had to transfer the allocation to the state, so we always intended to take advantage of the allocation this year,” said CPS debt manager Sandra DeAngelus.
The district’s $4.3 billion of outstanding debt is rated A-plus by Fitch Ratings, which over the summer revised the outlook to stable from positive. Moody’s Investors Service rates the district A1 with a stable outlook. Standard & Poor’s rates it AA-minus with a stable outlook.
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. It lowered the size of its September sale of $300 million of new-money debt that tapped the Build America Bonds program.
“Even with the supplemental coupon we still expect significant savings by using the program,” DeAngelus said.
Any interest rate savings the district can squeeze out are especially significant since it faced a $475 million deficit while crafting its $5.4 billion fiscal 2010 budget, which was adopted over the summer.
The CPA finance team eliminated the deficit by dipping into reserves, boosting property taxes, cutting jobs, requiring nonunion employees to take unpaid furlough days, and using $190 million of federal stimulus funds.
The district included a 1.5% increase in its property tax rate to raise $43 million and tapped $61 million from its ending balance of $432 million. It also eliminated 1,000 positions, including 536 previously announced cuts, and requires non-union employees to take six unpaid furlough holiday days to save $100 million.
CPS chief executive officer Ron Huberman warned at the time that a crisis could appear, since 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,” he said.
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. Another $229 million will be needed in fiscal 2011 for pensions, leaving CPS with an estimated $900 million gap. It is required under Illinois law to fully fund the pensions.
Rating agency analysts said the district’s rating is based on the completion of nearly three-fourths of its $5 billion capital program, Chicago’s diverse economic base, and a moderately high debt burden. In its review released this week, Fitch noted the difficulties facing the district in fiscal 2010 due to the sharp increase in pension costs and the expense of 4% annual teacher raises through 2012.
The district has moved over the last year to reduce its variable-rate debt exposure to 20% from more than 40% in 2008 following the failed remarketing of some issues amid insurer and liquidity downgrades. The district expects to restructure about $200 million of variable-rate bonds that carry liquidity from Depfa Bank Plc. The bonds are currently trading, but at premium rates, though interest costs remain within budget, DeAngelus said.
The district recently suffered the loss of its board president, Michael Scott, 60, who took his own life last week. Scott’s public service spanned three decades and four mayors. He was praised in editorials and memorials for his civic leadership and activism, loyalty to his West Side neighborhood, redevelopment efforts there and elsewhere, and his diplomatic skills.
Scott first won appointment to the Board of Education in 1980 by then-Mayor Jane Byrne. He served for one year. Scott later worked for the city under the late Mayor Harold Washington. Current Mayor Richard Daley named him the cable commissioner in 1989.
Daley tapped Scott to lead the Chicago Park District board from 1996 to 2001 and then as president of the Board of Education in 2001. He resigned in 2006, but Daley asked him to return earlier this year. Scott also served on the boards of the Illinois Regional Transportation Authority and the Metropolitan Pier and Exposition Authority, as well as on Chicago’s 2016 Summer Olympics bid committee.
Scott had come under scrutiny in an investigation of the selection process for the city’s top high schools and for the use of his board credit card to cover some costs of his trip to Copenhagan over the summer as part of the Olympics bid. He had begun to repay those credit card funds, but board officials earlier this week announced the hiring of a law firm to a review school board expenditures.
