CHICAGO –The Chicago Board of Education voted to shutter 49 schools in a move defended by the school system and board members as necessary to right-size a district straining with a $1 billion budget deficit.

“Today’s reality requires change. Ultimately it is our responsibility to choose,” said board president David Vitale ahead of Wednesday’s vote. The number of closures is the most ever planned for a single year by the district or nationally.

Chicago Public Schools previously had projected that the closure of 53 elementary schools and the elimination of one high school program would save $40 million annually in operating costs and $560 million in capital spending over the next decade. Earlier this month, the district reduced the capital savings by $122 million to $438 million.

Following hearings, CPS chief executive officer Barbara Byrd-Bennett took four elementary schools off the list presented to the board for a vote at its meeting Wednesday. The impact on projected savings was not immediately clear.

The decision, announced earlier this year after an initial round of hearings by a special task force, drew widespread protests from the Chicago Teachers’ Union and community activists. Protestors flocked to the board headquarters Wednesday to contest the vote.

Critics expressed concerns that the district was moving too fast, hadn’t considered the impact on local communities, and that the moves would jeopardize students’ safety as they crossed gang territories. They also challenged the savings as CPS will issue more debt this year to finance capital improvements at the schools slated to take in students.

The fiscally stressed district countered that safety measures would be enhanced and the closures were needed so it could make better use of its strained resources with 100,000 vacant desks at its 681 schools, which serve 403,000 students. “We cannot maintain a system that cannot be sustained,” Byrd-Bennett told board members ahead of the vote.

“ I know this is incredibly difficult, but I firmly believe the most important thing we can do as a city is provide the next generation with a brighter future,” Mayor Rahm Emanuel, who handpicked Byrd-Bennett and is responsible for appointing board members, said in a statement.

The action impacts 29,000 students who the district asserts will benefit from the move with an infusion of spending for improved programs and facilities at the schools that will take them in. Air conditioning will be installed at the so-called “welcoming schools,” most students will receive iPads, accessibility will be improved as well as food service and technology support, and other capital investments will be made.

Under the final plan approved by the board, 49 elementary schools will close although the closure of two will be delayed for one to two years. One high school program located at an elementary school will also close. The administration initially recommended the closure of 53 elementary schools and the high school program.

The board recently refunded $403 million of debt for savings using a floating note structure in three series tied either to a percentage of LIBOR or the SIFMA index rate. The bonds are not subject to tenders and are not supported with a letter of credit. The debt refunded floating rate securities backed by bank LOCs from 2009 and 2010 issues.

A new money sale is on tap for later this year. After scaling back on capital projects, CPS reversed course and said it would bolster its $109 million capital budget by $364 million this year in part to finance $155 million of investments at the “welcoming schools.”

CPS officials said recently the final sizing and timing are still under discussion but about $329 million of projects may be funded with bonds. Another $100 million may be tacked on to the deal to finance projects in the next fiscal year’s budget.

The district’s structural budget woes and past reliance on non-recurring revenues from debt restructurings and reserves drove several rounds of rating downgrades over the last two years. Ahead of the recent refunding, Moody’s Investors Service affirmed the A2 and negative outlook assigned to $6.3 billion of board and building commission debt issued for the schools. Standard & Poor’s affirmed its A-plus rating and stable outlook. Fitch Ratings, which did not rate the deal, assigns an A and negative outlook to the board.

Factors behind the district’s daunting $1 billion operating deficit in fiscal 2014, which begins July 1, include rising costs, a past reliance on one-shots, and a $338 million increase in pension payments due to the expiration of a three-year pension holiday. The board has yet to propose a fiscal 2014 budget. 

Standard & Poor’s said its rating reflects strong financial management, a moderately high debt burden, ongoing revenue pressures, and limited flexibility due to property tax caps and limited state aid increases.

“The stable outlook reflects our expectation that the board will be challenged to return to balanced operations and maintain unrestricted operating reserves at a level that we consider at least adequate in light of the state’s fiscal problems, the board’s limited revenue-raising flexibility, and a substantial increase in pension costs,” said Standard & Poor’s credit analyst John Kenward.

“While the district has identified several revenue and expenditure avenues for addressing this gap, significant budget adjustments will be necessary. The district’s general obligation credit quality may be impaired if fiscal adjustments are insufficient in addressing this gap in a timely manner,” Moody’s said.

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