CHICAGO – The credit picture for the already junk-rated Chicago Public Schools has become even bleaker.
Standard & Poor’s put the Chicago Board of Education’s BB rating on CreditWatch with negative implications late Friday.
“The CreditWatch action is based on our view of the board’s lack of progress in meeting the assumptions in its fiscal 2016 budget for Chicago Public Schools,” said Standard & Poor’s analyst Jennifer Boyd.
The budget assumes $480 million of pension help from the state government. With state leaders feuding over the almost five-month overdue Illinois budget, little headway has been made in getting lawmakers on board with fiscal support for the school district.
The district will feel the impact of its declining credit quality when it brings a $1 billion deal.
Sources said the issue, initially planned to sell as soon as this month, won’t come until the New Year, after the December release of the district’s fiscal 2015 comprehensive annual financial report, which has been delayed in many previous years.
JPMorgan, which has provided the district with several credit lines, is the lead manager on the deal.
In addition to $500 million for ongoing capital projects, the district will use the deal to push off $250 million of principal payments for budget relief, and cover fees to cancel swaps now in default due to its credit deterioration.
The district faces more than $200 million in termination payments to cancel its swap contracts based on recent valuations, but the district has been in negotiations with its bank counterparties.
The district closed last month on a $500 million private placement with JPMorgan that’s divided into two separate tranches of tax anticipation notes for $250 million each, which will serve as a credit line.
The debt is secured by tax collections.
Both tranches mature in 2016 and come with costly rates for short-term debt.
One pays 70% of one-month LIBOR plus 2.75%, and the other pays 3.25%, according to the financial documents. The agreements require the district to notify JPMorgan within five days if it should hire a third party consultant to work on “restructuring or insolvency plans.”
While Gov. Bruce Rauner has floated Chapter 9 bankruptcy as a potential option for the struggling district, Chicago Mayor Rahm Emanuel and schools chief Forrest Claypool have dismissed the notion.
Such a bankruptcy filing is not currently an option under state law.
During a speech last week before the Chicago City Club, Claypool renewed his push for state help, saying such help simply bring Chicago level with other districts throughout the state.
“Chicago’s children are 20% of the state’s enrollment, and their families and neighbors provide 20% of the income tax money that funds public education in our state,” but the district only receives 15%, Claypool said. With the higher level of aid, the district would collect $458 million more in the current fiscal year, “eliminating the budget gap that is threatening to derail our school year.”
The district’s $6.4 billion budget relies on $200 million of previously announced cuts, $480 million of state help to make the district’s $688 million teachers’ pension fund payment, $250 million of debt restructuring, $75 million from reserves, $62 million from tax-increment financing surplus revenues, and $80 million in higher property tax revenue to close a billion dollar deficit.
One pending bill that would provide pension aid has mixed support among Democratic leaders and its prospects are uncertain given the state budget impasse between the legislature’s majority Democrats and the GOP’s Rauner.
Claypool and Emanuel have been beating the drum on CPS inequities, from the greater share of teacher pension contributions covered by the state for other districts to the need for more direct aid.
Claypool again last week warned that without action the district faces dire layoffs and cuts that would be felt directly in the classroom and threaten academic goals. He had previously warned of cuts by the end of this month but has since pushed the deadline off to early February.
After years of one-shot practices and accounting gimmicks like debt restructuring, partial pension payment holidays, and shifts in the timing of tax collections, the newly installed Claypool acknowledged the district can no longer make such short-sighted maneuvers.
“Frankly, they borrowed money we didn’t have, year after year, because it was better than the alternative -- laying off teachers, increasing class sizes and taking resources from the classrooms,” he said. “With the district at junk-bond status, we’ve run out of one-time tricks. We’re nearing a breaking point. And without a solution, our schools will look very different next semester and next year.”
Moody’s Investors Service, Fitch Ratings, and Standard & Poor’s all have pushed the board’s $6 billion of general obligation debt down to junk. Fitch assigns a BB-plus rating and has the rating on negative watch which, as with S&P’s watch, implies more near-term risks. The board did not ask Moody’s, which assigns a Ba3 rating and negative outlook to the district, for ratings on its sales earlier this year.
The district retains one investment grade level rating, from Kroll Bond Rating Agency, which dropped the credit two notches to BBB-minus over the summer.
The top yield of 5.63% on the 25-year maturity in the district’s April sale landed 285 basis points over the Municipal Market Data’s triple-A benchmark and that penalty is expected to worsen on the next sale as the market has a bleak view of the district’s solvency, several market participants said.