CHICAGO – Junk-rated Chicago Public Schools is using risky assumptions in its efforts to erase a $1 billion deficit, according to S&P Global Ratings.
The rating agency in a report late Friday said the district, which sells its debt through the Chicago Board of Education, will remain on CreditWatch with negative implications until it gets a look at the fiscal 2017 budget set for release next month. S&P had placed the district's B-plus rating, which is four notches into speculative grade territory, on a six-month watch period Jan. 15.
"We are extending the CreditWatch period today in anticipation of the August release of the district's fiscal 2017 budget, including its plans for addressing its cash flow needs in fiscal 2017. If, however, developments transpire before then that impact our assessment of the district's credit, we will take the rating action(s) we deem appropriate," S&P said in the report.
The report noted developments over the watch period that included CPS's on-time payment of nearly $700 million to the teachers' pension fund and state legislative approval of measures the would provide nearly $600 million in new funding.
S&P raised concerns over the stability of one of the new revenue sources and whether it could be relied in future years, and said another measure is risky.
The new funding will come in the form of a roughly $250 million new property tax levy, an additional $130 million in state poverty grants, and about $200 million from the state for teachers' pensions.
"The additional state funding from a high-poverty equity grant is currently one-time revenue, with decisions by the state regarding education funding in future fiscal years still uncertain," the report said. Gov. Bruce Rauner has named a special legislative commission to consider how to overhaul the state's school funding formulas.
"The additional state funding that would go toward the district's pension payment next June is contingent on lawmakers agreeing on a pension reform bill, and also would be considered one-time revenue, in our view," S&P noted.
"This budget assumption presents risks, in our view, given the state's continuing inability to adopt a budget for fiscal years 2016 and 2017. The district's budget assumptions on labor costs also will be notable, given ongoing negotiations with the teachers' union on a contract that expired at the end of fiscal 2015," S&P said.
The district is pressing the Chicago Teachers Union to accept a contract that offers raises but ends the district's coverage of 7% of the teachers' 9% pension contribution as it seeks to close a remaining $300 million deficit. The union has threatened to strike over the issue.
CPS chief executive officer Forrest Claypool last week said the budget unveiled next month will be balanced and he believes will pave the way for the district to replace $900 million in expiring credit line and return to the capital markets to borrow for capital projects.
The district operates on a $5.7 billion budget and its liabilities include $9.6 billion of unfunded pension obligations and nearly $7 billion of bond debt.
