Chicago Board of Education Downgraded to A3 by Moody's

Moody's Investors Service said it has downgraded the rating to A3 from A2 on Chicago Board of Education's general obligation debt.

The outlook remains negative.

The A3 rating and negative outlook apply to $6.3 billion of the district's outstanding general obligation debt. The Chicago Board of Education serves as the primary debt issuing arm for Chicago Public Schools.

The downgrade to the A3 rating reflects a leveraged overall debt burden resulting from significant debt and pension obligations of overlapping governmental entities on the district's tax base, particularly the city of Chicago (GO rated A3/negative outlook).

Additionally, the A3 rating reflects the district's substantial and diverse tax base, which is coterminous with the city of Chicago; above-average debt burden; recent improvements in general fund reserves due primarily to the earlier remittance of property tax revenues from Cook County (GO rated Aa3/negative outlook); and expected narrowing of reserves in the current fiscal year associated with the bridging of a $1 billion budget gap.

The negative outlook reflects an estimated $1 billion budget deficit for fiscal 2014, attributable to increased programmatic requirements, declines in state aid available for operations, and the sizable increase in pension contributions following a three-year relief period. While the district has identified several revenue and expenditure avenues for addressing this gap, significant budget adjustments will be necessary.

The outlook also incorporates the likelihood of continued growth in unfunded pension liabilities among overlapping governmental entities, particularly the city, which will lead to increases in overall debt and pension obligation burdens on the district's tax base.

The district's general obligation credit quality may be impaired if fiscal adjustments are insufficient in addressing the district's budget gap in a timely manner and increases in overlapping debt and pension obligations continue without satisfactory pension reform.

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