CHICAGO - The Chicago Board of Education Wednesday authorized $1.16 billion of borrowing to pay for ongoing capital projects, to cancel swaps, and refund debt for budget relief.
The board approved the authorizing resolution for the borrowing although the Chicago Public Schools administration will return for approval of specific bond issues tapping that authority in the coming months, chief financial officer Ginger Ostro said during a board meeting.
The administration, struggling with a $1.1 billion budget gap, did not provide additional details on the timing, number, or sizing of any issues although Ostro did offer a broad outline of how the district would use proceeds if the full amount is issued.
The district would use between $600 million and $650 million for capital projects already underway; another $250 million to $300 million would go to convert floating-rate paper to a fixed-rate and cover the negative valuation on swaps; and $150 million to $250 million would go to restructure debt for budget relief.
If help the district is pressing for arrives from the state government, the district might alter the borrowing plan.
"We have to make a contingency plan should we not get to that solution in time," Ostro said of the use of borrowing for budget relief.
The district's use of scoop-and-toss refundings, one of the non-recurring revenue practices used to help balance past budgets, contributed to its structural deficit and credit rating deterioration. Cancelling the interest-rate swaps would also ease strains on the district's balance sheet after recent downgrades triggered termination events that allow bank counterparties to demand payment on those contracts that are negatively valued at about $228 million.
A CPS attorney said Wednesday the district is in "negotiations" with banks on the swaps, but provided no additional detail. The city government was able to strike forbearance agreements when swap terminations were triggered by its own rating drops and it has since cancelled most of the swaps that were in default by borrowing to pay the termination fees.
CPS has pushed off release of its budget until next month as it presses for state help on its teacher's pension fund payment, with a nearly $700 million contribution due in the current fiscal year. The budget will assume $500 million from the state picking up a greater share of contributions and by requiring teachers to cover more. The administration has warned without that help a mix of cuts beyond $200 million in recently announced reductions, and borrowing would be needed.
The district, dropped three levels into junk territory at Ba3 by Moody's Investors Service this spring, is struggling to remain solvent, a condition evidenced by its need to tap credit lines to cover a more than $600 million fiscal 2015 payment owed to its teachers' pension fund late last month.
At least $200 million of the borrowed money must be repaid in October with tax revenues. CPS is working to establish another $900 million line authorized by the board to use in the new fiscal year that began July 1.
The resolution approved Wednesday allows the district to pledge as an alternate revenue source a portion of its state aid, personal property tax replacement funds, a portion of a capital improvement property tax, or funds derived from agreements with the city or Chicago Infrastructure Trust.
The resolution caps the amount the district can reimburse itself for "induced expenditures" to $700 million. The bonds would be tax-exempt. No additional information on the financing plans was immediately available.
The district's budget and pension ills have dragged down its ratings. Standard & Poor's rates the district BBB, and placed it on CreditWatch negative. Fitch Ratings assigns the Chicago schools its lowest investment grade rating of BBB-minus, with a negative outlook. Kroll Bond Rating Agency assigns a BBB-plus rating on watch negative.
Chicago schools in recent market appearances paid steep interest rate penalties to draw buyers.
The board also approved Mayor Rahm Emanuel's pick to lead the district, Forrest Claypool, as well as several other high-level officials.
"This new leadership team will build on our gains, address our challenges, and make sure that we continue putting our children and their education first," Emanuel said in a statement. The previous chief executive officer resigned over a contract scandal. Claypool starts July 27.
Standard & Poor's in a recent special report noted the leadership changes and said it was monitoring the district's budgetary efforts as the rating remains on CreditWatch with analysts looking for the district to move toward a structural balance.
Analysts raised concerns over the district's decision to assume $500 million in state help which could "prove overly optimistic," they wrote.
"A delay of further cuts until later in fiscal 2016 and a planned use of additional borrowing for operational costs would reflect a continued deferral of budgetary adjustments needed to improve structural balance," analysts wrote. "Similarly, deferment of pension payments without a credible plan to catch up on those payments in the near term also would reflect a deferral of needed budgetary adjustments."
