CHICAGO — One day after being slapped with a downgrade and a warning of possible further negative action, Chicago Public Schools officials are standing by their decision to dip deeply into reserves as the budget fix needed to avoid educational sacrifices.

Moody’s Investors Service late Tuesday lowered the Chicago Board of Education’s $5.9 billion of debt to A1 from Aa3 and suggested further action could be taken by assigning a negative outlook.

The drop came just a few days after CPS chief executive Jean-Claude Brizard presented a $5.2 billion fiscal 2013 budget that relies on a property tax hike, operating cuts and all of the district’s unreserved fund balance to erase a $665 million gap.

The budget relies on a total of $432 million in reserves. It will exhaust all of its $349 million unrestricted balance, draw $25 million from a restricted fund balance and tap a reserve of $58 million in Illinois state fiscal 2012 funds that are not used.

CPS has long maintained a healthy balance and it has been cited as a credit strength while the district worked to rebuild its eroded credit after the state handed control of CPS back to the city in 1995. It has also provided a stable liquidity cushion that helped the district weather chronic delays in state aid payments.

The district also warned last week of a financial reckoning next year when its deficit will balloon to $1 billion due to growing personnel and debt service costs and a spike in required pension payments.

The downgrade comes as CPS plans to enter the market later this summer with $500 million of new-money GOs. Fitch Ratings currently gives the board’s debt an A-plus and a stable outlook. Standard & Poor’s rates it AA-minus and stable.

Factors behind the Moody’s downgrade include “a financial profile marked by mounting budgetary pressures and the expectation of a substantial reduction in reserves and liquidity in fiscal 2013; increased pension contribution obligations; and an above-average debt burden.”

Moody’s is taking a dim view of the credit, given mounting fiscal pressures and poor financial standing without reserves to cope. Those challenges include state aid payment delays, uncertainty over labor negotiations with teachers who have threatened to strike and a projected $500 million hike in teacher pension payments next year when a pension holiday expires.

“If progress is not made toward improving the financial condition and liquidity of district operating funds, or if challenges arise in making the required pension contributions, the district’s general obligation credit quality may be impaired,” analysts wrote.

The district so far has taken the position that the added borrowing costs associated with a lower rating — estimated by the administration at $1 million to $2 million on the upcoming sale — are the price of avoiding devastating classroom cuts.

The downgrade “underscores the grave fiscal situation facing the Chicago Public Schools,” said spokeswoman Becky Carroll. “Despite cutting more than a half-billion dollars over the last year alone, it’s not enough to undo years of revenue losses and misplaced priorities that landed the district in the financial quandary it’s in today. We will continue to make tough decisions to put CPS on the best financial footing possible, without sacrificing investments in our children’s education.”

Moody’s said the credit benefits from a large and diverse tax base, and management’s efforts to implement revenue enhancements and cut costs.

Chicago Mayor Rahm Emanuel this week defended CPS’ actions, saying the district is attempting to balance improving educational services and funding an expanded school day with managing its finances. He is pushing the state to act on pension reforms that could ease the looming hike in teacher pension payments.

The plan that will be voted on by the board late this month includes a $4.7 billion operating budget, a scaled-down $110 million capital budget and funds for debt service. In addition to the new money, CPS is planning on refunding $100 million.

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