Chicago school district's competitive note deal allowed bankers to step up

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Chicago Public Schools further chipped away at its high short-term borrowing rates as its latest cash flow note sale drew widespread interest.

The yields landed at 1.95% and 2% on two tranches in the unrated $250 million sale of tax anticipation notes that come due in October but can be called Aug. 15. Those rates are down from 2.45% and 2.65% in TAN sales late last year. The district paid punishing rates in of 4.8% in prior fiscal years.


The lower rates in Thursday's pricing recognize the junk-rated district's fiscal progress and bankers' eagerness to please Chicago's new mayoral administration.

Reduced interest rates and cash management initiatives are expected to cut short-term interest costs in half in the current fiscal year and save $10 million from what was originally budgeted.

“CPS is on track to cut short-term borrowing costs in half, which promotes the type of financial stability needed to continue accelerating academic progress across the district,” CPS Chief Executive Officer Janice Jackson said in a statement.

An infusion of new state operating and pension funding help in 2017 along with several local tax levy hikes helped trim a $1 billion deficit, easing a budget and liquidity crisis that has kept three of the district’s four bond ratings deep in junk territory.

CPS said it received $1.975 billion in bids on the $250 million the district was offering, which represents a 7.9 times over-subscription.

Headlines this month that state lawmakers had met and even slightly exceeded their school aid funding formula requirements in the newly adopted fiscal 2020 state budget reminded investors of CPS’ progress.

Banker views that Jennie Huang Bennett, who left the school district's chief financial officer post to serve as new Chicago Mayor Lori Lightfoot’s CFO last month, was watching also helped drive interest in bidding as they look to foster relationships with the new city finance chief and her boss, said several Chicago-based bankers.

The district has fared well in its three recent competitively bid note sales. During the height of its budget crisis, many TAN transactions were privately placed.

The Board of Education’s short-term borrowing soared as its operating fund balance tumbled from $1.2 billion in 2015 to a negative $275 million in 2017. The district is rebuilding its various reserve accounts and expects to close out the year with a $285 million ending fund balance.

Short-term borrowing peaked at an authorized level of $1.55 billion in outstanding notes before dropping last year to $1.1 billion. The board this year authorized up to $1.25 billion but the district currently anticipates needing to have no more than $994 million outstanding at any time. The next sale is expected in July for $244 million, according to the offering statement.

The TANs are secured by pledged property tax revenues. Total collections of $2.46 billion are received in two installments and flow directly from the county to an escrow agent that sets aside the required amount to repay the notes before freeing up remaining funds for the district’s use. Short term borrowing is capped at 80% of the tax levy.

The district heads into the summer with a new board seated. At the district’s May meeting, all seven board members appointed by Lightfoot’s predecessor Rahm Emanuel resigned to allow Lightfoot to put her stamp on the district. Former state senator and city clerk Miguel del Valle will serve as the board president.

Lightfoot is keeping Jackson. Jackson had been in the post of chief education officer when Emanuel tapped her early last year to take over the leadership position vacated by Forrest Claypool after an ethics scandal. Jackson is a former CPS student, teacher, and principal.

Future board leadership for the nation’s third largest district appears headed toward a major change as many state lawmakers, the Chicago Teachers’ Union, and Lightfoot support a change to an elected structure. A bill to do so cleared the House but stalled in the Senate due to opposition from Lightfoot, who disliked the size and lack of board membership requirements.

The district faces labor headwinds heading into the summer with negotiations underway on a new teachers’ contract. The union was a strong backer of Lightfoot’s runoff rival Toni Preckwinkle, who is Cook County board president.

The offering statement warns “the board’s ongoing financial outlook will continue to be determined by factors such as labor, pension, and debt service costs as well as the ability of the board to raise revenues and reduce certain expenditures.”

The district’s 2019 pension contribution totaled $809 million, of which $239 million is coming from the state and $430 million from a special pension levy. The teachers’ fund is at a 50.1% funded ratio.

The district is operating on a $6 billion operating budget with a new budget expected to be unveiled and approved over the summer.

The district has received a series of positive credit actions since the state approved new funding, the latest coming S&P Global Ratings, which upgraded it to B-plus from B last July.

“A cloud of uncertainty and questionable decisions arising from a variety of ongoing issues” precludes a higher rating according to S&P, which questioned increased operational spending and the affordability of capital spending in fiscal 2019 and beyond, special education spending pressures, and unresolved sexual harassment scandals and lawsuits.

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School bonds TRANs Primary bond market Public school funding Board of Education of the City of Chicago Illinois
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