CHICAGO – Chicago Public Schools will scale back $1.55 billion in planned fiscal 2018 short-term borrowing by $250 million after an infusion of city and state funds eased near-term cash flow pressures and helped trim a $550 million budget gap.
The junk-rated district last year relied on $1.55 billion of tax anticipation notes that carried punishing coupons between 4.6% and 5.2%. Faced with delayed state grant funding and the need to make most of its $700 million teachers’ pension contribution last June, the district also issued $389 million of grant anticipation that paid an initial rate in the 6% range.
The district received lower 3.6% rates on the first tranches of a fiscal 2018 TAN borrowing that matures next spring and saw increased interest from banks, finance officials said. The district intends to close on an additional tranche Friday that would bring its outstanding TAN debt to $550 million.
While improved, the rates are still costly compared to top-rated borrowers that pay about 1% on a one-year maturity.
The board was updated on district finances at its October meeting Wednesday during which members approved a revised $5.7 billion budget for the fiscal year that began July 1 to reflect fresh city and state funding help and up to $1.1 billion of general obligation and capital improvement tax-backed borrowing.
The district remains reliant on short-term borrowing and pressured by rising pension and debt costs, but “the fact is, the deficit has been eradicated” for fiscal 2018, said board President Frank Clark.
The state is providing $300 million more in operating aid and teachers’ pension payment help and legislation allowed the district to bypass property tax caps and raise an additional $150 million. Chicago is providing another $80 million to help the district tackle a $550 million deficit. The district is trimming some costs and will use refunding savings to close the gap.
The board will tap up to $930 million of the $1.1 billion authorization in a sale tentatively slated for the week of Nov. 13. Several traders said the state funding would ease CPS spread penalties but the market remains worried over the district’s long-term prospects and its headline risks remain heightened. Deals late in the year also face riskier market conditions.
The deal would include $290 million of new money to fund capital projects and $630 million of refunding for savings – not for restructuring purposes as it has done in the past to push off debt service for immediate budget relief.
Most of the new money will be sold under the district’s junk-rated unlimited tax general obligation credit and about $65 million would be sold under its newer A-rated capital improvement tax credit. The district paid a top rate of 6.25% on its inaugural CIT issue last year and its unrated July GO sale paid yields in the low to mid-7% range.
On the refunding, officials believe they can shave $175 million off long term interest costs including $12 million in the current fiscal year and $9.6 million annually through fiscal 2035. About $440 million will take out expensive floating-rate bonds that carry a 9% rate and another $190 million will refund fixed-rate bonds for savings.
The district’s secondary market trading spreads have tightened since passage of a $36 billion fiscal 2018 state budget package in July and an education funding package in August. CPS bonds are thinly traded in the secondary market but trades earlier this month put the board’s 25 year maturities at about a 225 basis point spread to the Municipal Market Data’s top benchmark. MMD’s AAA benchmark on a 25-year bond was at 2.76% at the market close Wednesday.
The tax levy approved sought totals nearly $2.9 billion, up about 8%.
Moody's Investors Service recently affirmed the district’s B3 rating and shifted the outlook to stable from negative saying concerns over strained liquidity, debt costs, and overall distressed condition remain but new funding eases near-term strains.