CHICAGO — Moody's Investors Service hit the Chicago Public Schools' $6.4 billion of debt with its second downgrade in recent months and underscored its dim view of the credit by leaving it with a negative outlook as the district struggles with mounting fiscal challenges.
Moody's lowered the rating to A2 from A1. It had downgraded the rating to A1 and also assigned a negative outlook in July as the board prepared to adopt a $5.2 billion fiscal 2013 budget dependent on nearly draining the district's reserves to help close a $665 million gap.
The downgrade "reflects a weakened financial profile marked by the budgeted depletion of reserves to fund ongoing operations in fiscal 2013; an impending spike in pension payments following three years of legislatively-authorized pension relief" and ongoing delays in state aid, Moody's wrote.
CPS officials issued a statement acknowledging its troubled balance sheet. "This news underscores the serious fiscal challenges facing the Chicago Public Schools, many of which involve addressing the long-standing financial issues of the district as well as the pension crisis facing our system," read the statement, which also noted the district's half-billion in non-classroom cuts. "We know this is not enough to undo years of revenue losses and misplaced priorities that have left the district with the fiscal crisis it faces today and we continue to make tough decisions to put CPS on the best financial footing possible, without sacrificing investments in our children's education."
The downgrade comes as the district recovers from its first teachers strike in 25 years. Teachers took to the picket lines for seven days earlier in September. The four year contract reached between Chicago Public Schools and the Chicago Teachers Union carries a price tag of $300 million. The rank-and-file will vote on the deal in early October.
Moody's cited the added burden of identifying funds in its current budget to pay for the contract as a contributing factor to the downgrade and CPS' labor relations as a credit factor. "In particular, the duration of the recent CTU strike demonstrates that labor issues may continue to be a ratings factor," Moody's said.
Standard & Poor's over the summer downgraded the board's rating to A-plus from AA-minus ahead of a new-money bond sale and Fitch Ratings revised its outlook for the board's A-plus rating to negative from stable.
Moody's pointed to CPS's fiscal reckoning next year in its outlook. The district faces growing costs and a $330 million pension payment hike with little left in reserves, poor chances of additional state aid given the state's own fiscal woes, and state caps that limit property tax increases.
"The negative outlook reflects our view that the district will be hard-pressed to make the budget adjustments necessary to close an estimated $1 billion budget gap for fiscal 2014," Moody's wrote.
The rating's strengths include the district's substantial and diverse tax base, management's efforts to raise revenues and cut spending and personnel. In addition to tapping $430 million in reserves, the district closed the 2013 gap through cuts and by raising its property tax levy to the maximum allowed.
District officials have not said how they will cover the $75 million cost of the contract in the current fiscal year but have suggested that a restructuring that could result in some school closures based on current enrollment levels is needed.