Chicago Public Schools’ new five-year, $1.6 billion teachers’ contract could pose a long-term strain on the district’s health that would become acute if state aid prospects falter, two rating agencies said.
And that could make the road back to investment grade ratings all the harder.
The near-term pressures are less of a concern as the new costs are minimal. The district had already built some some costs into the contract and is relying on one-time, non-recurring fixes to accommodate the remainder of the fiscal 2020 costs. Rating agencies also see positives in the length of the contract and the lack of a moratorium on school building closures or teacher cuts to manage spending.
The district is rated BB with a stable outlook by Fitch Ratings, BBB-minus or BBB depending on the series by Kroll Bond Rating Agency, which assigns a positive outlook, BB-minus with a positive outlook by S&P Global Ratings, and B2 with a stable outlook by Moody’s Investors Service.
“In our view, the settlement has increased expenditures beyond anticipated revenue growth and without corrective measures, could potentially slow or reverse the board's recent financial progress,” said S&P’s CPS analysts Blake Yocom and Carol Spain. “The structural gap created by the contract is not insurmountable, in our opinion, but will make producing structurally balanced budgets even more difficult over the next five years.”
The district made fiscal progress over the last two years because of new or higher local tax levies and an infusion of state aid and pension funds that help wiped out a persistent $1 billion deficit, but further strides are needed to work its way back to investment-grade levels.
“We expect that the Board of Education's recently secured increasing revenue streams will now go to higher operational spending, rather than to improve its liquidity position and fund balance, which will likely delay upward rating movement,” S&P wrote. “Given the revenue dependence on Illinois, upward rating potential is also predicated on timely receipt of state aid and continued evidence that the state is committed to meeting its new funding requirements.”
Fitch Ratings also expressed concerns over the long-term challenges of the tentative deal reached by Mayor Lori Lightfoot’s administration, CPS leaders, and the Chicago Teachers Union that ended an 11-day walkout. Teachers will vote on whether to ratify it by Nov. 15.
Annual contracted cost increases start at $115 million and reach $504 million or 9.1% of fiscal 2018 spending by the end of the contract for a cumulative estimated increase of $1.6 billion, Fitch said. The district had previously put a $1.5 billion price tag on the deal.
“The additional costs represent a potential pressure on credit quality in the out years should projected state aid increases not materialize,” Fitch wrote in its report from analysts Michael Rinaldi and Arlene Bohner.
CPS will fund future years from a combination of increased revenues estimated at $200 million to $250 million annually that include $60 million to $70 million of increased state funding and the reallocation of existing spending in the range of $30 million to$40 million.
“CPS's ability to accommodate the contract costs while maintaining its current level of financial flexibility would be challenged if the state school funding environment were to weaken,” Fitch said.
While the district must meet certain mandatory support staffing requirements, the district maintains the ability to enact reduction-in-force savings or to close schools to address future budget gaps. Fitch said that factor “is important to our view of CPS' credit quality given its already limited expenditure flexibility and its reliance on uncertain state funding increases in future years to pay for the increased contract costs.”
The assessment is positive in the near-term. “The new contract commitments appear manageable within the scope of the fiscal 2020 CPS operating budget,” Fitch wrote.
Kroll called the fiscal 2020 costs “manageable” but it also believes the long-term costs can be absorbed. “Out-year structural deficits are significantly reduced and gap closing measures much less onerous. In KBRA’s opinion, CPS maintains numerous options to address future budget deficits. KBRA will update the market as additional information becomes available,” analysts wrote.
Kroll considers the five-year term of the deal to be “highly positive” due to the certainty that allows for better planning. The union had been pushing for a three-year deal.
Moody’s has not yet commented on the contract’s details.
The district will vote later this month on a revised $7.84 billion budget for the fiscal year that runs through June 30 tapping $68 million in savings from six canceled school days and $66 million in additional city revenue from the city’s proposed $300 million tax-increment financing surplus to cover $48 million in the new teachers’ contract and a non-teachers contract along with other expenses.
The majority of costs over the life of the deal come from salary increases and additional support staffing with the latter reaching nearly $103 million by fiscal 2024. A $50 million expense to cover normal cost contributions to the Chicago Teachers' Pension Fund will be paid by the state.
CPS is the third largest public school district in the nation. It operates 659 schools and reported Friday an enrollment of 355,156, down from 361,314 355,156 the previous year. While it marks another drop, it’s lower than recent year declines.
