Fitch Ratings revised the outlook on the Chicago Board of Education’s A-plus rating to positive from stable as the district enters the market Thursday with a $480 million fixed-rate deal with plans to exit the auction-rate market.
The credit action affects $4.5 billion of outstanding general obligation debt. Moody’s Investors Service rates the district A1 while Standard & Poor’s rates it AA-minus. Chicago Public Schools plan to use up to $30 million of cash on hand to cover any termination payments on swaps tied to the auction-rate debt being refunded with the fixed-rate issue. That figure is preliminary as the final termination costs are not yet known.
The district has about $1 billion of auction-rate debt hit with higher interest rates since that market collapsed in February due to the credit crunch. About $500 million of variable-rate bonds were privately placed with Dexia Bank to retire about half of the district’s ARS. The terms of the private placement allow the district to shift indexes that the interest rates it pays are based on and also to change the remarketing modes, according to schools Treasurer David Bryant. The $480 million of fixed-rate bonds being issued this week will retire the remaining auction-rate debt.
Another deal is planned for May for about $310 million of variable-rate demand bonds to refund floating-rate bonds insured by CIFG Assurance NA that have seen higher rates during recent remarketing periods since the insurer lost its triple-A from all three rating agencies.
“The positive outlook is based on an improved financial position and augmented reserve levels; demonstrated support from senior governments for both operations and the board’s capital plan; and enhanced educational programs which have contributed to student achievement,” Fitch analysts wrote.
The district has benefited in recent years from growth in the personal property replacement tax, continued tax base expansion with modest property tax increases, and reduced spending. Its unreserved general fund balance for fiscal 2007 stood at $404.8 million, or 9.8% of spending, compared to $307.7 million a year earlier.
Increasing wage and pension payments in the fiscal 2009 budget, however, could result in a “modest shortfall,” Fitch wrote. The board recently renewed most of its labor contracts for five years that call for raises ranging from 3 to 4%, another factor Fitch said benefits the credit.