Chicago School Board to Weigh $840 Million of New Bonds

chicago-school-357.jpg

CHICAGO – Junk-rated Chicago Public Schools will ask its Board of Education for authority to sell up to $840 million of bonds backed by a new citywide capital improvement tax levy and to refund up to $160 million more.

The two items are on the board's agenda for its monthly meeting Wednesday.

"This up-to amount would be for construction under the supplemental capital plan and funded by revenue from the new capital improvement tax," said CPS spokeswoman Emily Bittner. "Because these bonds have a dedicated revenue source, they will not impact CPS' operating budget. We anticipate releasing the supplemental capital plan after we've gone to market."

The board approved an initial capital program of $338 million for fiscal 2017, but CPS chief executive officer Forrest Claypool has said a supplemental budget was in the works. The $840 million taps a previously approved initial $950 million bonding authorization.

While CPS struggled to complete a bond sale earlier this year, Claypool has expressed confidence that the new tax, combined with improvements in the district's budget, will smooth market access issues. While that remains to be seen, the bond resolution included in the agenda packet provides a deeper but still sketchy look into the district's intentions.

The City Council approved the new levy last year along with a phased-in $543 million annual property tax increase to fund city contributions to its public safety pensions.

The dedicated capital improvement tax bonds would also carry the same ad valorem tax pledge assigned to the district's other general obligation alternate revenue bonds. On its past deals, the district has pledged state aid or some other stream as the alternate revenue source although it can tap any available revenues. It has always abated the ad valorem tax but has stressed with bondholders that its lawyers believe the tax could withstand a restructuring.

On the new bonds, the ad valorem tax levy of $36 million this year jumps to $105 million in 2032, but it is the district's intention to abate that levy. The new capital improvement tax levy, or CIT, rises to $48 million in 2017 where it holds steady until 2031 when it grows to $131 million as permitted.

The CIT revenues must provide 1.25 times annual debt service coverage and the district's estimates must be backed up by a feasibility study. Public Financial Management Inc. is providing the first such analysis for the upcoming issuance.

The bond resolution, like past CPS resolutions, permits floating- or fixed-rate issuance, capital appreciation, current interest, or convertible bond structures and allows for a maturity out to 2055. Proceeds can finance projects, capitalized interest, issuance costs, and potential credit support. CPS can use a public offering or private placement. Interest rates under any credit support agreements should the banks end up holding its bonds are capped at 15%.

The Wednesday meeting is the board's first since CPS and Chicago Teachers' Union negotiators reached agreement on a new four-year contract that averted a strike set to begin earlier this month. The board will eventually vote on a revised budget that reflects the new contract if teachers ratify it later this week.

"We'll be holding public budget hearings to gather public feedback on the revised budget, and those dates will be announced after CTU members have the opportunity to review and ratify the contract," Bittner said. The district has not yet said how much the contract will cost.

Mayor Rahm Emanuel is freeing up about $88 million in tax increment financing funds to support the teachers' contract. The district's $5.4 billion fiscal 2017 budget was based on figures from a January offer that the teachers' union rejected.

The earlier offer counted on savings from phasing out the district's coverage of 7% of teachers' 9% pension contribution.

The final agreement leaves that benefit intact for existing teachers while phasing it out for teachers hired after Jan. 1. New teachers are given a 7% base pay raise. Cost-of-living raises proposed in January were scaled back and occur in only year three and year four. Teachers also agreed to healthcare concessions.

Last month, Moody's Investors Service dropped the district further into junk, to B3 from B2, and maintained a negative outlook.

The rating setback came after the district won an infusion of funding from state lawmakers and put new credit lines in place. But some of its state funding depends on a future legislative agreement on pension reforms and the district's liquidity remains precarious and dependent on short-term borrowing.

The district struggled with market access earlier this year and finally paid a punishing rate of 8.5% to get its bonds sold in the public markets, but was able to capture a lower rate of 7.25% on a $150 million private placement in July with JPMorgan.

The district has about $7 billion of debt and $9.5 billion of unfunded pension liabilities. CPS is rated B-plus by both Fitch Ratings and S&P Global Ratings and carries a low investment grade rating from Kroll Bond Rating Agency. All assign negative outlooks and S&P has the credit on negative watch.

 

 

For reprint and licensing requests for this article, click here.
Illinois
MORE FROM BOND BUYER