Chicago Public Schools fares better on short-term rates

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CHICAGO – Chicago Public Schools slashed its short-term borrowing rates by more than two percentage points in its first tax anticipation note issue of the fiscal year.

The district received eight bids totaling $1.15 billion on its $200 million, unrated TAN issue that sold competitively Thursday. It marked the district’s first competitive sale of notes in at least 25 years. The paper was purchased by JPMorgan at a 2.45% interest rate.

Though the rate remains high for a security maturing at the end of March, it marks a sharp improvement from the rates paid previous sales as the district grappled with a budget and liquidity crisis. The district paid a rate of about 4.8 % on TANs sold in the last fiscal year — rates that were set based on a benchmark plus a spread and typically directly purchased.

“Today's successful competitively bid note sale is further confirmation of the faith investors have in the district's finances and will allow CPS to cut short-term borrowing costs in half and promote the continued financial stability our schools need to accelerate academic progress,” CPS chief executive officer Janice Jackson said in a statement.

CPS, which issues through its Board of Education, said it expects to cut its short-term borrowing costs by about $10 million this year.

The district expects to limit its maximum amount of TANs outstanding at any one time to $994 million. That’s a reduction from $1.1 billion last year and $1.55 billion the previous year.

Receiving multiple bids also marked a positive. At the height of the district’s fiscal crisis, when it grappled with a $1 billion deficit and uncertainty over whether the state would provide additional aid and pension relief, rating agencies raised concerns over the district’s need to maintain market access for cash flow borrowing

The district has counted on short-term borrowing to manage through its budgetary and liquidity crisis as its operating fund balance tumbled from $1.2 billion in 2015 to a negative $275 million in 2017. The district is rebuilding and opened the year with a $231 million general operating fund balance.

Liquidity strains eased last year when the state approved an overhaul of school aid providing more funding and new pension support but the reliance on TANs continues, albeit at lower levels.

The notes are limited obligations of the district secured solely by pledged tax collections. The district’s levy for the year is $2.46 billion, doled out in two installments.

Based on cash flow projections, the district expects fresh TAN issues through February all of which would be repaid with the first installment levy. CPS will issue additional TANs in April through July repaid with second installment taxes.

The type of sale used for future TAN sales “will depend on market conditions and cash flow,” the district said.

The district has received a series of positive credit actions since the state approved new funding, but three of the four rating agencies still hold the district at junk levels with Kroll Bond Rating Agency assigning a low investment grade rating.

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School bonds Primary bond market Board of Education of the City of Chicago Illinois