Moody’s Warns on Chicago Schools’ Budget

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The Moody's Investors Service Inc. logo is displayed outside of the company's headquarters in New York, U.S., on Tuesday, Feb. 21, 2012. Moody's Corp. is a credit rating, research, and risk analysis firm. Photographer: Scott Eells/Bloomberg

CHICAGO - After four downgrades over four months, Chicago Public Schools got a fresh warning Monday that its new budget could mean more negative ratings action.

Moody's Investors Service in a comment piece said that the school board's approval last week of a fiscal 2016 budget is credit negative because the spending plan is structurally imbalanced and relies on uncertain, one-time revenue sources to close a shortfall.

The Moody's piece continues the rating-agency drumbeat that began with Moody's May downgrade to a speculative-grade rating. Since then two more agencies have dropped the school district to junk while Kroll Bond Rating Agency kept Chicago schools hanging on the lowest investment grade rating after a two-notch downgrade last week.

The agencies all have a negative view of the district's $6.4 billion spending plan that banks heavily on one-time revenues and assumes a far-from-certain $480 million of state pension help to close a $1.1 billion deficit.

The school board passed the new budget on August. 26.

"Should budgeted state revenue enhancements fail to materialize, the district would face a substantial budget gap, requiring measures such as significant increases to class size," Moody's analyst Mark Lazarus said in the comment.

Noting that the district has cut nearly $1 billion since 2011, Lazarus said the district could be forced to rely on borrowing to cover shortfalls.

"In the event that the district does not receive the additional budgeted state resources and is unable to make commensurate budget adjustments, the district's financial position will likely become more reliant on access to capital markets to issue short-term debt," he wrote.

Other one-time measures in the new budget include $200 million in reduced debt service costs through a restructuring that pushes out principal and interest payments; $79 million in reserves from the general operating fund balance; $55 million in reserves from the district's non-operating funds; and $62 million in a one-time transfer from Chicago's tax increment financing surplus.

Ongoing negotiations between the district and the Chicago Teachers Union are another major uncertainty, Moody's said.

"Revenue shortfalls, including the failure to receive the budgeted $480 million of supplemental state aid for pensions, or higher personnel cost will exacerbate the size and scope of the district's structural imbalance," Lazarus wrote. "Failure to maintain access to short-term borrowing programs in an amount sufficient to maintain operations would be an additional credit pressure. Such variances and their effect on the district's liquidity and cash flow would likely result in a weaker overall credit profile."

The board has $6 billion of general obligation debt.

Standard & Poor's lowered the district to BB with a negative outlook earlier this month. Fitch late last month dropped the district to BB-plus and has it on negative watch. That followed Moody's move in May dropping it to Ba3 with a negative outlook.

Kroll on August. 27 dropped its rating two notches to BBB-minus.

 

 

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