CHICAGO — Hit with both positive and negative credit action over the last week, the Chicago Board of Education will enter the market with $400 million of new-money debt next week as it debuts an offering statement that offers expanded pension disclosure and makes clear there’s a new boss in town.
The board expects to enter the market Wednesday with Jefferies & Co. as senior manager and Rice Financial Products as co-senior. Public Financial Management Inc. and Peralta Garcia Solutions are advising the district on the sale.
The bonds carry a final maturity of 30 years with much of principal repayment scheduled in later years. “That’s where we have capacity” in the district’s debt portfolio, said interim chief financial officer Melanie Shaker.
The board pushed off the sale that will fund capital projects, initially planned during fiscal 2011, and cut its size to help lower debt service costs to ease pressure on the fiscal 2012 budget as officials grappled with a $712 million deficit. But the finance team wanted to act this month ahead of planned issuance by Chicago and Illinois as finance officials at the city and its sister agencies seek to better stagger the issuance of local paper.
The board over the summer approved the $5.9 billion budget proposed by Chicago Public Schools’ new chief executive, Jean-Claude Brizard. It closed the budget gap through cost cuts, canceling a collective bargaining raise for teachers, tapping the maximum allowed property tax increase, and drawing $241 million from reserves. It expects to close out fiscal 2012 with a $289 million ending balance.
Moody’s Investors Service on Monday downgraded the board’s $5.7 billion of debt one notch to Aa3, citing mounting fiscal pressures on the district’s balance sheet from rising costs, state aid delays, and a high debt burden as it has undertaken a mammoth rebuilding of existing schools and construction of new ones.
The agency assigned a stable outlook in recognition of “disciplined budgetary actions” taken by the new and strengthened management team.
“We’re disappointed, but the rating agencies now have a stable outlook, which we think is an acknowledgement that we’ve righted the ship,” Shaker said.
Fitch Ratings on Monday affirmed the board’s A-plus rating and stable outlook and Standard & Poor’s last week affirmed its AA-minus rating while revising its outlook to stable from negative.
Liquidity pressure on the district has eased enough so that it won’t have to tap an available line of credit, even though the state remains about three to four months behind on its school aid payments, an amount that totals between $160 million and $170 million.
Though pension costs and state delays remain a challenge, the team is stressing the district’s fiscal strides with investors as it seeks to limit the impact of the so-called Illinois penalty paid by in-state issuers because of fiscal woes, especially ones with exposure to state payments.
With the upcoming transaction, CPS overhauled its offering statement amid greater investor and regulatory pressures to expand pension disclosure and to better reflect the district’s new leadership, including Brizard and a new board.
Working with its bond counsel and staff lawyers, the district expanded its pension information to about 10 pages from one, attached the most recent actuarial statements, and included more financial tables on expenditures.
Pension-related spending “is a challenge we are facing and so we wanted to make sure we were transparent about those rising costs,” Shaker said. The district is facing an increase in fiscal 2014 of its pension contribution to $650 million from a current level of $200 million. The Legislature cut the payment size for fiscal 2011 through 2013. The district had $5.4 billion in unfunded teacher pension liabilities at the close of fiscal 2010 for a funded ratio of 67%. That ratio is expected to fall below 50% by fiscal 2013, according to the offering statement.
Shaker said the borrowing should cover the district’s capital needs for at least a year although it will be reoffering some variable-rate issues with new liquidity support in the coming months.
The district’s offering document also eliminated some older information about academic initiatives under former Mayor Richard Daley in favor of information on initiatives being pushed by current Mayor Rahm Emanuel and Brizard, such as an extended school day.
