Chicago Schools Get Another Downgrade

CHICAGO – The Chicago Public Schools took its fourth ratings blow of recent months when Fitch Ratings Tuesday lowered its general obligation rating to A from A-plus as the district struggles to cover the $300 million cost of a new, four-year teachers’ contract.

Fitch warned that the downgrades may not be over by leaving the rating with a negative outlook. 

The ratings assigned to the Chicago Board of Education’s more than $6.1 billion of outstanding debt have fallen in recent months due to near- and long-term fiscal challenges.

The Fitch downgrade is the second from a rating agency since CPS’ resolution of a seven-day teachers strike last month, its first strike in 25 years.

“The labor agreement following the recent Chicago Teachers’ Union strike results in considerable increased costs to the Chicago Public Schools,” Fitch wrote. “The increases come at a time of highly stressed operations, when Fitch believes spending reductions are imperative to maintaining fiscal stability.”

The district closed a $665 million gap to balance its $5.2 billion fiscal 2013 budget over the summer only by nearly draining its reserves. That leaves it little room to cover the $74 million price tag in fiscal 2013 of the four-year teacher’s contract or to manage a $330 million increase looming in its teachers’ pension payment next year.

While the district has cut spending, dramatic changes are needed, Fitch said. The district may be hard-pressed to achieve them given its labor strife and likely political opposition to possible school closures.

“The coming challenges now appear considerably greater than they have been historically,” Fitch said in its rating outlook.

CPS chief executive officer Jean-Claude Brizard’s office issued a statement similar to those released following other recent downgrades, touting spending cuts and acknowledging its challenges without saying specifically how it will tackle them.

“We will make these difficult decisions, but we will not sacrifice the investments that need to be made to support our students and their learning, and will continue to make decisions that put them and their academic achievement first,” the statement said.

At the center of the district’s challenges is the expiration of a state approved three-year pension holiday. CPS’ already weak pension funding ratios worsened due to the deferrals and the payment will rise by $338 million to $534 million next year.

The district’s teachers pension plan was 59.9% funded at the close of fiscal 2011. The increase next year puts the district on the path to reach a 90% funded ratio by 2059. Other post-employment benefits are similarly underfunded but annual payments are capped at $65 million, leaving an increasing burden for employees and retirees.

The pension increase comes as the district already faces rising debt service payments to cover borrowing that financed renovations after years of neglect. The district has also in recent years restructured debt pushing off near-term debt service and is planning on restructuring at least $100 million for fiscal 2014 relief.

The district’s overall debt levels are above average at 6.7% of market value, with very slow amortization of 31% in 10 years, the result of long-dated debt and restructuring, Fitch said.

While the district intends to scale back annual capital spending to $100 million to $200 million over the next few years from $500 million to $700 million in recent years, Fitch said it believes maintenance-related needs may exceed planned spending.

Fitch also cited recent financial management turnover as a challenge. A new chief financial officer was recently announced while CPS continues to search for a new deputy CFO. CPS is the third largest district in the nation and serves 404,000 students in 675 schools. Enrollment trends are declining with projections at 1% annually.

Moody’s Investors Service rates the board’s debt A2 with a negative outlook after two recent downgrades. Standard & Poor’s over the summer downgraded the board’s rating to A-plus from AA-minus.

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