CHICAGO — The Chicago Board of Education adopted a $5.2 billion fiscal 2013 operating budget Wednesday that drains most of its reserves to help erase $665 million of red ink, leaving it little flexibility to cope with a looming pension payment hike and teacher demands for bigger raises.

Ahead of its sale earlier this month of $470 million of new money general obligation bonds, all three rating agencies took a dim view of the district's plan to dip so deeply into reserves, especially given its looming fiscal pressures.

Standard & Poor's downgraded the board's rating to A-plus from AA-minus ahead of the sale and assigned a stable outlook. Fitch Ratings revised its outlook for the board's A-plus rating to negative from stable. Moody's Investors Service downgraded the board's $6 billion of debt to A1 from Aa3 and warned of further action by assigning a negative outlook.

The budget also relies on the maximum property tax increase to raise $62 million allowed under state caps and includes $144 million in non-classroom operating cuts to help close the budget gap. It fully eliminates the deficit by using $432 million in reserves. It will exhaust all of the district's $349 million unrestricted balance, draw $25 million from a restricted fund balance and tap a reserve of $58 million in Illinois state fiscal 2012 funds that are not used.

"This budget process involved some very difficult decisions, but ultimately reflects our commitment to protecting our students and their learning," the district's chief executive officer Jean-Claude Brizard said in a statement. "While much of this budget forces us to address a very grim financial reality, we know that investments we've protected — such as those that support the full school day — will be a payoff for our kids in creating more opportunities for them to experience success in school and life."

The original budget funded 2% raises for teachers, but that money was diverted for the extended school day agreement that calls for the hiring of additional teachers. The union also wants a larger raise and are threatening to strike over a series of issues that include wages and concerns over the district's implementation of the longer day. Schools are scheduled to start the day after Labor Day.

The board — during a lengthy meeting that was marked by teacher protests — also on Wednesday approved spending $25 million on strike contingency plans should one occur. The district's fiscal year began July 1. If the district and teachers reach an agreement that adds additional costs to the budget officials would need to amend the spending plan.

CPS has long maintained a healthy fund balance. It was cited as a credit strength while the district worked to rebuild its eroded credit after the state handed control of CPS back to the city in 1995. It has also provided a stable liquidity cushion that helped the district weather chronic delays in state aid payments.

The district faces a financial reckoning next year when its deficit will balloon to $1 billion due to rising debt service costs and a hike to $534 million from $196 million this year in required pension payments after the expiration of a state-approved pension holiday. School officials are expected to seek support from state lawmakers for pension reforms that would provide some relief from the escalating payment.

The district's sale earlier this month will finance ongoing capital projects included in its massive campaign to rebuild and upgrade schools. The district back-loaded the bonds in terms on the long end with a final maturity in 2042 paying a 3.98% yield and 5% coupon.

The deal marked one of the board's last large sales for some time, as it intends to dramatically scale back its capital spending to about $100 million to $200 million annually through 2017 compared to $500 million to $700 million in recent years.

Fitch said its negative outlook stems from the looming pension hike and labor dispute. "Fitch recognizes the district's history of effectively addressing budgetary gaps but believes the upcoming combination of pressures is exceptionally difficult," analysts said.

A local government watchdog group slammed the budget as irresponsible and had urged board members to reject it. "The district's inattention to the future consequences of its actions could inflict lasting damage on the financial and operational viability of public education in Chicago," said Civic Federation of Chicago president Laurence Msall. The federation has called on the district to undertake a massive restructuring that reflects the size. The district serves more than 600,000 students in 675 schools.

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