Standard & Poor's dropped Chicago Public Schools to B-plus.

CHICAGO – The Chicago Public Schools took a fresh credit blow Friday in the form of a two-notch downgrade of an already junk-level rating from Standard & Poor's as the district grapples with a cash crisis that threatens its solvency.

The rating agency lowered its rating on the district's $6 billion of general obligation bonds to B-plus from BB and left it on CreditWatch with negative implications "while it continues to monitor the board's efforts to maintain sufficient liquidity to meet its financial obligations."

The rating review comes ahead of the Chicago Board of Education's sale the week of Jan. 25 of $875 million. JPMorgan is running the books.

The district's S&P rating is now four levels into speculative grade territory, at the same level as Moody's Investors Service. Moody's lowered its rating to B1 from Ba3 in December. It is no longer asked to rate CPS' new issue borrowing.

"The rating action reflects our view of the board's low liquidity and significant reliance on market access to continue supporting operating and debt-service expenses," said analyst Jennifer Boyd. "We also believe the board's lack of progress in addressing its structural imbalance further weakens its credit quality.

"In our view, adverse business, financial, or economic conditions will likely impair the board's capacity or willingness to meet its financial commitments," she added.

The district's fiscal chief, Ron DeNard, sought to underscore the district's need for greater state funding in responding to the downgrade.

"As S&P notes, long-term success is contingent on fair funding from the state of Illinois, which provides Chicago students with just 73 cents for every dollar they provide other students in the state," he said.

The district's is depending on the successful sale of a portion of the pending bond deal to pay its debts and keep school doors open in the current fiscal year.

The district's liquidity position is precarious. Current cash-flow projections show the board ending fiscal 2016 with just $33 million in cash after depleting $870 million of proceeds from tax-anticipation notes and its line of credit to make its June pension payment, and without an additional fiscal year 2017 line of credit.

The district's continued reliance on $480 million of state pension help in its current budget that took effect July 1 also poses a threat.

Help from the state has failed to materialize with state leaders stuck in an impasse over the state's fiscal 2016 budget. Gov. Bruce Rauner said earlier this week that the schools shouldn't expect a bailout and Chicago's chief financial officer said the city has no current plan to provide a loan or aid for the district. The district has warned of dire layoffs if the state help is not forthcoming.

The district's reliance on non-recurring maneuvers like pushing off debt repayment, dipping deeply into reserves, accounting shifts on property tax collections, and a partial pension payment holiday, have driven its structural deficit up to $1 billion as it faces rising teacher pension payments.

The district is banking on other risky fiscal assumptions in its next budget. It hopes to achieve $170 million in savings through the elimination of the 7% employee pension contribution. Teachers would have to pick up the costs and they've resisted that proposal. The dispute over a new contract could lead to a strike. The district also wants a $170 million property tax levy for pensions, which requires state authorization.

The district is hampered by limited revenue raising flexibility because it comes under state property tax caps.

A Standard & Poor's single B-level rating is "more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation," according to the rating agency. "Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation."

Fitch Ratings rates CPS bonds at junk while Kroll Bond Rating Agency rates it at the lowest investment grade level of BBB-minus with a negative outlook.

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