Chicago schools have more borrowing on the table

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CHICAGO – Chicago Public Schools expects to return to the market in its new fiscal year with a general obligation refunding and is eyeing a possible new money issue using its higher-rated capital improvement tax credit should its now-lean proposed capital budget grow.

The refunding “is definite” and the CIT bonds are “on the table” but CPS hasn’t determined the size of a deal should the proposed capital budget grow in size, the district’s chief financial officer Jennie Huang Bennett said in an interview at The Bond Buyer’s Midwest Municipal Market Conference Thursday.

Bennett, a member of a conference panel discussing the impact of the 2017 federal tax reform package, said the district, like most municipal bond issuers, is exploring options to deal with the elimination of advance refundings.

Various options outlined include taxable refundings, the shortening of the traditional 10-year call feature, taxable-convertible bonds, and forward-delivery refundings.

“There’s a cost there” that in some cases is prohibitive and limits the district’s ability to take advantage, Bennett said. The district’s spread between tax-exempt and taxables is 150 basis points so that’s not an option and as a higher-yielding credit it’s difficult to value the forward delivery cost, while on shorter calls there’s a potential drag on savings for budgetary relief so it’s a tough balance, she said.

The new deals stand to benefit from a thirst for high-yield paper – which market participants at the conference said remains strong -- and the market’s improved perception of the district following its receipt of $900 million in new, annual state aid and pension help, city funding, and new tax levies over the last two years. The gains helped drive up demand for its junk-rated general obligation paper in a spring refunding.

The CIT bonds carry higher, investment-grade ratings – an A from Fitch Ratings and BBB from Kroll Bond Rating Agency. Kroll is the only agency to also rate the district’s general obligation bonds in investment grade territory. The others rate CPS on the single-B and double-B tiers.

Investors snapped up the district’s May sale leading the district to move up the pricing date and raise the size to $560 million from $260 million with a boost from coverage provided by Assured Guaranty Municipal Corp. on some pieces.

The bonds were 10 times oversubscribed, Bennett said. “There’s not a lot of sub-investment grade insured paper out there….it was a big part of it.”

Uninsured spreads to the Municipal Market Data’s benchmark ranged from 193 bp to 224 bp while insured tranches ranged from 120 bp to 135 bp. In November, the district's 10-year maturities landed at 4.55%, a 255 bp spread, and its 2034 bond landed at 4.70%, a 225bp spread. Before passage of the state funding and city’s commitment to also provide funding for safety expenses the district saw spreads of more than 450 bp.

The district sold $65 million under the CIT credit last fall, a follow up to its inaugural sale of $729 million in 2016. Spreads narrowed on the CIT bonds, which benefit from a revenue structure designed to insulate the debt from a potential CPS restructuring. Spreads on near comparable long bonds were shaved in half landing at 150 bp last fall compared to 309 bp in 2016.

The district began levying the tax in 2016 when it was set at $45 million, but it can raise the tax based on inflation and leverage the increment.

The district’s proposed $189 million capital program would primarily go to fund roof, window, mechanical, and masonry needs at schools with funding coming from the district’s new money borrowing last fall.

“We are exploring opportunities to secure additional funding to address facility needs throughout the city, and if additional resources are identified we intend to revise our draft capital plan to invest in more of the resources that foster continued academic growth,” the district said in a previous statement.

The district will make a roughly $800 million payment by the end of the month to cover teachers’ pensions – with all but about $100 million coming from the state and special property tax levies -- and has one more draw for about $200 million to make on its short-term credit lines. The district’s costly tax anticipation note borrowing was reduced to $1.1 billion from $1.5 billion the previous year, saving about $60 million in interest.

The district is now working on a fiscal 2019 budget that will be unveiled later this summer and on determining the size of its planned note borrowing, which remains a drag on the district’s ability to boost its GO ratings. Bennett said the district’s received positive news recently in that state grants are on time and that the next property tax bill will also go out on time despite concerns previously raised that county budget cuts could delay the bills.

A looming problem is possible fallout that could damage its investor and public image and potential fiscal damage from possible litigation or state actions that could result from a recent Chicago Tribune series.

It revealed the district’s Law Department had probed 430 reports that school employees had sexually abused, assaulted or harassed students since 2011 and found credible evidence of abuse in more than 200 cases, raising concerns about reporting, transparency, and enforcement.

Bennett said based on the Tribune series there’s “nothing material” that would impact CPS finances and that the district’s primary concern is now on implementing revised policies and supporting various probes. The rating agencies did not contact the district over the issue, Bennett said.

Chicago Board of Education President Frank Clark recently announced that the inspector general will manage future probes now handled by the Law Department, which would be responsible for defending the district in the event of future litigation.

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