The Chicago Board of Education approved a budget and $1 billion of borrowing as it struggles to remain solvent.

CHICAGO — The junk-rated Chicago Board of Education unanimously signed off on a $6.4 billion budget panned by rating agencies for rolling over debt and gambling on uncertain state support.

The board also signed off on $1 billion of debt issuance, some of which will go to ease the district's budget strains while driving up its long-term borrowing tab.

Board president Frank Clark, recently tapped by Chicago Mayor Rahm Emanuel to take the post, acknowledged the budget's flaws.

"It is a budget that keeps us going today. It is not a sustainable approach long-term…we need more revenue," he said.

The vote came after chief financial officer Ginger Ostro outlined how the district planned to erase $1.1 billion of red ink and its borrowing plans that will provide fiscal relief through a scoop-and-toss debt restructuring and by paying off interest-rate swaps now in default. Ostro also warned of the district's bleak cash flow position that leaves it dependent on credit lines. The board also approved contract with Ernst & Young to provide cash flow ongoing analysis.

The overall $6.4 billion budget includes a $5.7 billion operating budget, a $178 million capital budget, and $539 for debt service.

The proposed budget relies on $200 million of previously announced cuts assumes the state government will provide $480 million in help through some combination of measures that include the state picking up about $200 million in CPS teacher pension contributions to match what it provides other districts.

The state hasn't agreed to such help and its ability to do so, amid a political impasse that has put the state budget almost two months overdue, is unclear.

The budget relies on $250 million of debt restructuring primarily from so-called scoop and toss refunding in which principal payments coming due are pushed off to future dates. The district will draw $75 million from reserves, which were nearly drained to balance past budgets.

Both tactics fall into the category of non-recurring revenues that add to structural budget woes and have contributed to the downward spiral of CPS' bond ratings. Another $62 million would come from tax-increment financing surplus revenues and $80 million would come from higher property tax revenue.

The board also approved tapping $1.04 billion of a $1.16 billion debt authorization that had received initial approval from the board last month. The district intends to pay for ongoing projects in the borrowing and will cover fees to cancel swaps now in default due to its credit deterioration, as well as the $250 million of principal payments coming due.

The district faces more than $200 million in termination payments to cancel its swap contracts based on recent valuations, but Ostro said the district remains in negotiations with its bank counterparties so a final figure remains unclear.

The district's scheduled debt service payments rise to a high of $604 million in 2025 and remain in the $500 million to $550 million range until 2032 when they drop to $267 million.

As debt service takes up more of its resources, the district is also clamoring for more capital funding claiming $3.5 billion in deferred maintenance needs.

In signing off on the budget, the board rejected the Chicago Civic Federation's plea to scrap the plan and work on a long-range solution.

"This budget is yet another financially risky, short-sighted proposal and fails to provide any reassurance that Chicago Public Schools has a plan for emerging from its perpetual financial crisis," said Laurence Msall, president of the government research group.

After several years of budget gimmicks that included a property tax accounting shift and draining reserves, the district has run out of ways to delay the inevitable, the federation warned.

"The current fiscal uncertainty has left the district in a cash crisis with below investment grade credit ratings and has prompted discussions of municipal bankruptcy, a prospect with such severe long-term consequences that it should be a last resort for any government," the federation said.

Chicago Public Schools have junk level ratings of BB, with a negative outlook, from Standard & Poor's; BB-plus, on negative watch, from Fitch Ratings; and Ba3 with a negative outlook from Moody's Investors Service.

Kroll Bond Rating Agency rates the district BBB-plus on negative watch.

Market participants said spreads in recent trades on Chicago school board debt have ranged from 290 to 320 basis points. The board's bonds carry a GO pledge but most are further secured by an alternate revenue pledge of state aid. Much of the board's debt is also insured.

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