CHICAGO – Chicago Public Schools’ won an upgrade from Moody’s Investors Service as the district’s liquidity and budgetary ills have eased with more state funding in hand.
Moody’s raised the rating to B2 from B3 and assigned a stable outlook. It applies to the $4.8 billion of CPS general obligation debt issued before the district stopped asking Moody’s to rate its new debt.
Though the rating remains deep in junk territory, the action marks the latest in a series of rating or outlook improvements for the district over the last year from all four rating agencies after the state overhauled its school aid formulas and began providing CPS with teachers’ pension help like other districts have long received.
“The upgrade to B2 reflects the district's improved liquidity position that has benefited from increased state funding received on a more timely basis, and expectations that recent liquidity enhancements will be sustained through fiscal 2019,” Moody’s wrote.
Moody’s followed the Thursday action with a report affirming Chicago’s Ba1 GO rating – one level below investment grade – and revising its outlook to stable from negative “based on the expectation that Chicago will not face significant budgetary obstacles in the next two to three years given recently enacted tax increases to finance rapidly growing pension contribution requirements.”
“The stable outlook also reflects reduced contingent risks related to improved liquidity at Chicago Public Schools following large increases in state support and the district's own tax levy,” Moody’s added.
The rating agency in its latest city rating reviews had named CPS’ fiscal crisis as a negative pressure. Mayor Rahm Emanuel holds sway over board leadership appointments and key district decisions.
Passage of an on-time state fiscal 2019 budget with the new funding formula aid levels also bolsters the CPS credit profile by signaling “a more consistent commitment.”
The state is providing CPS with $450 million more annual funding and the General Assembly and City Council have signed off over the last two years on additional pension-related property tax levies that are raising hundreds of millions more annually.
“The rating will continue to be constrained by the district's still-weak liquidity and high debt and pension burdens” and “tax base leverage is amplified by the debt and pension obligations of overlapping entities including the City of Chicago and Cook County,” Moody’s said.
Debt levels are likely to grow in fiscal 2019 if proposed capital and operating budgets are ultimately approved, though the district hasn't provided full details on the timing of borrowing to support its $1 billion capital proposal.
“The B2 rating can accommodate the issuance of up to $750 million of incremental debt as contemplated in the proposed capital plan, assuming CPS is able to maintain its current liquidity profile,” Moody’s said.
The district has said it’s planning to borrow $313 million of GOs and up to $125 million under its capital improvement tax levy credit. Separately, the district is planning on a $500 million refunding this year.
The stable outlook reflects passage of the state budget and that district “governance will remain closely tied to the city of Chicago,” Moody’s said. Some state lawmakers and local leaders are backing efforts to shift to an elected school board.
Sustained improvement in operating liquidity, growth in revenue or spending cuts, and a reduced reliance on state operating revenue could drive an upgrade. State approval for a Chapter 9 statute, liquidity erosion, or a failure to meet pension obligations or maintain market access on short term borrowing could drive a downgrade.
The district’s GOs carry a BB-minus rating and stable outlook from Fitch Ratings, a mix of BBB-minus and BBB ratings with a positive outlook from Kroll Bond Rating Agency, and a B rating and positive outlook from S&P Global Ratings.
CPS serves 371,000 students in 646 schools and is the nation’s third-largest school district. CPS spreads have come down, but remain costly, trading earlier this week at about 200 basis points over the Municipal Market Data’s AAA benchmark.