Forrest Claypool will be installed as chief executive officer of Chicago Public Schools Wednesday.

CHICAGO - Swap termination fees are among the items to be financed under a $1.16 billion general obligation bond authorization that is up for a Chicago Board of Education vote.

Chicago Public Schools will seek board approval Wednesday to sell the debt, which will also fund capital projects and debt refunding, according to agenda for the school board's monthly meeting, published Monday.

Also at the meeting, the district will install Mayor Rahm Emanuel's picks to lead the district, Forrest Claypool as chief executive officer and Frank Clark as board chairman.

The district, dropped three levels into junk territory by Moody's Investors Service this spring, is struggling to remain solvent, a condition evidenced by its need to tap credit lines to cover a more than $600 million fiscal 2015 payment owed to its teachers' pension fund late last month.

At least $200 million of the borrowed money must be repaid in October with tax revenues. CPS is working to establish another $900 million line authorized by the board to use in the new fiscal year that began July 1.

The resolution before the board Wednesday gives the district permission to use bond proceeds to "construct, acquire, and equip school and administrative buildings" as well as cover "the cost of funding swap termination payments and fees or funding obligations or purchasing related investments of the board and the cost of refunding obligations."

The resolution allows the district to pledge as an alternate revenue source a portion of its state aid, personal property tax replacement funds, a portion of a capital improvement property tax, or funds derived from agreements with the city or Chicago Infrastructure Trust.

The resolution caps the amount the district can reimburse itself for "induced expenditures" to $700 million. The bonds would be tax-exempt. No additional information on the financing plans was immediately available.

The district suffered several multi-notch credit blows in March that triggered interest-rate swap termination events negatively valued at $228 million. The district has not recently disclosed the status of negotiations and has never said that forbearance agreements were reached to stave off demands for payment.

It's unclear how much will go to capital projects. The district cut the size of its annual capital budget to $160 million for fiscal 2016 from more than $400 million in fiscal 2015. The district previously said about $113 million would come from borrowing and $47 million from the city, federal programs, and other sources.

The district is grappling with a $1.1 billion deficit in a fiscal 2016 budget that is expected to be released in August. It must fund a $700 million teachers' pension fund contribution in the new fiscal year and manage its more than $6 billion debt load. The district also faces a battle over a teachers' contract that recently expired and recently announced $200 million in spending cuts with a warning that in the absence of $500 million in state pension relief more dire cuts and borrowing will be needed.

Emanuel and Claypool both dismissed talk of bankruptcy as an option for the district when Emanuel announced Claypool's appointment late last week. Bankruptcy is not a possibility under current Illinois law, but Republican Gov. Bruce Rauner backs the establishment of a general Chapter 9 provision in state law and outlined details in a sweeping local government and state pension overhaul recently unveiled. The idea has not gained traction among Democrats who control the General Assembly, but it still has a market impact.

"If Illinois passes this legislation, CPS would be a likely candidate given the severity of their fiscal situation," John Miller, co-head of fixed income at Nuveen Asset Management, said in the firm's second quarter market commentary. He added that given the political landscape "we view the probability of bankruptcy for either Chicago or CPS as very low for at least the next several years. However, the idea lingers as a negotiating tool and creates market jitters for these credits."

The district's budget and pension ills have dragged down its ratings. Standard & Poor's rates the district BBB on CreditWatch negative. Moody's Investors Service rates it Ba3 with a negative outlook. Fitch Ratings assigns the Chicago schools its lowest investment grade rating of BBB-minus, with a negative outlook. Kroll Bond Rating Agency assigns a BBB-plus rating on watch negative.

CPS and Emanuel want the state to pick up a greater share of teacher pension payments to bring it in line with support provided to other districts in the state, which participate in the state teachers' pension fund. That would provide about $200 million in annual relief for CPS. A plan laid out by Emanuel would also raise property taxes by about $225 million and require teachers to pick their share of contributions covered by the district for a savings of about $200 million.

Chicago schools in recent market appearances paid steep interest rate penalties to draw buyers.

The top yield of 5.63% on the board's 25-year maturity in an April sale landed 285 basis points over the Municipal Market Data's triple-A benchmark.

The district has since faced a barrage of negative headlines and Chicago's recent tax-exempt issues have drawn penalties nearing 300 basis penalties. CPS is expected to face significantly steeper yield spreads.

Many market participants say the statutory lien on state aid offered by CPS' double-barreled bonds has helped lure buyers.

Those protections are limited in benefit. Fitch Ratings in a special commentary last week concluded that "while the presence of the statutory lien will enhance a creditor's post-default recovery prospects, it doesn't avoid the interruption of payment upon a bankruptcy filing by a municipality."

"The simple reason is that in a bankruptcy scenario, the pledged tax revenue could be subject to interruption and default would be likely," said Thomas McCormick, a managing director.

Emanuel named the new leadership team last week. Claypool, who lacks any education experience but has a record fiscally turning around other city-related governmental agencies, replaces Barbara Byrd-Bennett who resigned earlier this year over a contract scandal stemming from her previous job. Clark replaces Vitale, a former Chicago Board of Trade president, who has had a long relationship with CPS first as a pro bono advisor and later as board chairman.

Standard & Poor's in a special bulletin released last Friday noted the leadership changes and said it was monitoring the district's budgetary efforts as the rating remains on CreditWatch with analysts looking for the district to move toward a structural balance.

Analysts raised concerns over the district's decision to bank on $500 million in state help which could "prove overly optimistic," they wrote.

"A delay of further cuts until later in fiscal 2016 and a planned use of additional borrowing for operational costs would reflect a continued deferral of budgetary adjustments needed to improve structural balance," analysts wrote. "Similarly, deferment of pension payments without a credible plan to catch up on those payments in the near term also would reflect a deferral of needed budgetary adjustments."

 

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