CHICAGO – Chicago's junk-rated school district is planning its next borrowings, banking on a new tax levy and what its leaders describe as recent fiscal strides to improve its market reception.
Chicago Public Schools is seeking approval for a fiscal 2017 budget and authority for up to $945 million in borrowing with votes on both expected at the Board of Education's meeting next week.
The debt is the subject of a public hearing next week but it's unclear how soon the borrowing authority would be tapped and how much is planned for the current fiscal year. The district has said it would spend $338 million on capital this year but that relies on just $266 million in debt. A supplemental capital budget is expected to be introduced in the fall.
"The District is notifying the public regarding a potential bond authorization to support necessary capital improvements over multiple years in schools across Chicago," CPS spokeswoman Emily Bittner said Tuesday. "The District will not exceed the amount it is notifying, but this does not mean that the district will borrow the entire authorized amount."
The district would need to return to the board for approval of individual issues, their structure, and financing teams.
As CPS works to sell the public on its proposed budget at hearings this week, market participants offered mixed reviews of the spending plan to close a $1 billion deficit with a big boost in state help.
The proposed $5.4 billion budget advances efforts to stabilize a distressed balance sheet as CPS works to avert a fall further into junk territory and retain its market access, albeit at punishing rates, market participants said.
The budget proposal "represents a significant improvement over last year," said Nuveen Investments analyst Molly Shellhorn. "The budget doesn't fully solve the district's structural budget gap, but is an important step toward balanced operations."
The Chicago Civic Federation, which tracks Illinois and Chicago area government finances, agrees that new revenue from the state represents a boon for the district, but the short- and long-term prospects of some of that help are clouded.
"It remains a budget that on paper has a lot of contingencies and uncertainties and even with an extraordinary property tax increase there's still considerable gaps in the known revenues," wrote federation president Laurence Msall.
"This budget does not stabilize CPS finances. It is not a road map for how the district can go forward in the coming years and it remains to be seen whether it will be sufficient to build confidence in the market and allow further access to additional borrowing," Msall added.
CPS is expected to limp back into the market this fiscal year after a scaled-down borrowing for $725 million nearly hit a 9% state-imposed interest rate cap earlier this year. The district published notice Tuesday of an Aug. 24 public hearing on a general obligation, unlimited tax alternate bond authorization of up to $945 million.
"This is a great achievement to get where they are today considering where they were in June," says Paul Mansour, head of municipal research at Conning. "But at the same time they are starting out the current fiscal year with few if any reserves, no lines of credit in place [to replace expiring ones] and questionable access to the public debt markets."
The Civic Federation says structural improvement is all the more urgent given the district's rising teacher, pension, healthcare, and debt service costs.
"There needs to be a reasonable plan, long term that the citizens, teachers, business community -- everyone can understand," it said.
Schools chief Forrest Claypool's administration briefed the federation on the plan late last week, a few days after publicly unveiling the proposal that was billed as a "balanced" budget that lays the groundwork for the district to secure fresh credit lines and market access for capital projects. It has no plans to restructure existing debt, as it has in past issues, to ease debt service costs on operations.
Risky Assumptions
After relying on short-term credit lines to remain afloat through fiscal 2016, the district headed toward fiscal 2017's first day July 1 with a more than $1 billion deficit to erase.
The deficit was closed through a mix of cuts and savings from various efficiencies and labor changes, new tax-increment financing funds, improved Medicaid collections, more property tax revenue, and additional state funding.
New cuts and savings come on top of $250 million in previously announced spending reductions. Claypool characterized most of the measures as recurring items that would not lead to future deficits.
Market participants question that assessment.
Unable to resolve their partisan budgetary differences to pass a full-year spending plan, Gov. Bruce Rauner and lawmakers in late June approved partial stopgap funding for state services and public education.
It allocated to CPS an additional $130 million in state poverty grants and $215 million for pension payments. The package also cleared the way for a $250 million city property tax levy for pensions. The $250 million comes on top of a $45 million hike approved last fall by the council for capital funding.
The $250 million represents a long term-stable revenue source. The $130 million is a firm figure, but only for fiscal 2017, because lawmakers plan to overhaul state aid formulas. The $215 million toward pensions is contingent on state lawmakers putting aside their partisan bickering and passing statewide pension reforms early next year.
Mansour says he thinks the district is "halfway there with the recurring revenue" but "we as bond analysts are a little uncertain about taking the state at its word…I have a bad feeling they will be here next year in a similar situation as a lot of these actions are one-time actions."
The district's last budget relied on $480 million of state help that never came to fruition.
"The proposed budget has too many assumptions. It is a typical budget held by too many Band-Aids. The goal of the Chicago public school system is to make sure they are open for the first day of school," said Bob Malvenda, a portfolio manager at Cumberland Advisors.
Nuveen is hopeful that the state support signals it's serious about reforming aid. "We recognize the spending plan is still vulnerable to factors outside of the district's direct control, like statewide pension reform for the normal cost pension contribution, but we think the board has made as much progress as could reasonably be expected in a short period of time," Shellhorn said.
Nuveen was a participant in the Chicago Board of Education's $725 million bond sale earlier this year, which finally found enough buyers after it was trimmed in size following a week's delay during which Mayor Rahm Emanuel and CPS lobbied investors.
One far-from-certain budget line is CPS' decision to phase out over two years its coverage of 7% of teachers' 9% pension contribution to save $130 million. The district is pressing teachers to give up the subsidy in exchange for raises in a multi-year contract offer. The Chicago Teachers Union has balked at the request and threatened a strike come this fall.
"A lot is going to depend on the teachers' contract," Mansour said. "For buyers like Conning we are looking at the structural budget deficit that CPS faces" and additional revenue and expense actions are needed to achieve balanced operations especially given that the district entered the fiscal year with little safety net in the form of reserves.
Conning did not participate in the district's sale earlier this year but holds previously issued Chicago Board of Education general obligation bonds.
Future Borrowing
The district's return to the market could be smoothed by Claypool's intention to leverage the $45 million capital improvement tax levy to back new issues.
"I think it will be well received if it's a dedicated tax possibly remote from bankruptcy," Mansour said. Budget documents disclosed that the tax likely would grow by $143 million by 2032.
The bond notice published Tuesday reports that the $945 million authorization would be tapped in one or more issues "for the purpose of financing the rehabilitation, renovation, construction and acquisition of school and administrative buildings and equipment, site improvements, and other real and personal property in and for the school district together with other capital improvements" as well as "contract obligations" and "the purchase of school grounds for the construction of or additions to schools buildings."
It's unclear if the debt would involve a new structure tied to the $45 million property tax levy.
CPS also continues to work on short-term credit lines. It issued $1.1 billion in tax anticipation notes during fiscal 2016. The notes have paid rates of 3.25%, expensive for debt of a short duration.
The district has paid a steep penalty to issue long term debt, including 8.5% on its most recent public offering earlier this year and 7.25% on a recently closed $150 million private placement.
The district is rated B-plus by Fitch and S&P, B2 by Moody's Investors Service and carries one investment grade rating of BBB-minus from Kroll Bond Rating Agency. All assign a negative outlook. The district has $6.7 billion of debt outstanding and nearly $10 billion of unfunded liabilities.
