CHICAGO — The Chicago Board of Education this week will refund $110 million of general obligation bonds for budget relief that will help fund a new teachers' contract that ended the district's first strike in more than two decades.
The bonds will pay off maturities coming due on outstanding bonds with half of the relief taken in the current fiscal year and the remainder in the next. The district's increased fiscal 2013 budget costs stem from salary increases in the new four-year contract, including a 3%, $59 million cost of living increase and $33 million for increases based on experience.
Chicago Public Schools will tap proceeds from the bond restructuring, capitalized interest from its new-money bond sale last summer, the sale of surplus properties, and various savings from other measures to cover the first-year expense of the contract.
Citi is the senior manager on the bonds selling as soon as Thursday, district officials said. William Blair & Co. is the co-senior manager, A.C. Advisory Inc. and Columbia Capital Management LLC are financial advisors, and Mayer Brown LLP is bond counsel.
All three rating agencies recently affirmed the board's ratings that were hit with a series of downgrades earlier this year. Fitch Ratings assigns the board's $6 billion of GO debt an A rating and negative outlook. Moody's Investors Service rates it A2 with a negative outlook and Standard & Poor's rates it A-plus with a stable outlook.
In other news, the district has added a public finance banker to its fiscal team. The board recently approved the addition of Jenny Huang, an executive director in the public finance group at Morgan Stanley for the last 12 years, as treasurer to round out its fiscal team. The district in September hired veteran corporate executive Peter W. Rogers to serve as chief financial officer.
Turnover also hit the top of the district, as Chicago Mayor Rahm Emanuel in the fall replaced his hand-picked schools chief Jean-Claude Brizard after just 17 months on the job with Barbara Byrd-Bennett who had been serving as interim chief education officer.
An initial round of downgrades came after the district decided to nearly drain its reserves by using more than $400 million to help close a $665 million gap in the $5.2 billion fiscal 2013 budget. Analysts were also concerned over the looming spike in pension payments in 2014 of $338 million to $534 million due to the expiration of a three-year pension holiday.
The seven-day strike in September and pressures posed by the new four-year, $300 million teachers' contract, prompted additional negative action.
The district — which can't rely on the cash-strapped state for extra aid and faces property tax caps — has warned of a $1 billion deficit in its next budget.
"Fitch believes significant actions will be necessary in fiscal 2014 to avoid a deficit position. Fitch's concern that near-term non-recurring solutions will come at the expense of longer-term flexibility is heightened given the increased size of the gap and reduced ability to achieve productivity gains from labor," analysts wrote.
The district is zeroing in on school closings to help cut costs. Gov. Pat Quinn late last month signed legislation that extended to the end of March the Dec. 1 deadline CPS faced to file an educational facilities master plan with planned school closings.
The district has appointed a task force to recommend changes aimed at what board officials have called "right-sizing" the district which serves 403,000 students and operates 681 schools with excess capacity for 500,000.
The district then intends to impose a five-year moratorium on subsequent closings. "Once we execute a final, comprehensive plan to address the utilization issues facing our district, the mayor has requested that we implement this moratorium as we believe this will bring stability to our school communities, and I will personally commit to ensuring that this is a commitment CPS keeps," Byrd-Bennett said recently.
CPS, like the city of Chicago, is hoping state lawmakers adopt pension reforms that could ease its pension payment schedule but lawmakers are expected, at least initially, to take up only state level reforms early next month.
The board this year moved to cut its planned borrowing levels, approving $750 million of borrowing over the next three years which is down from $2.3 billion authorized for the prior three years. "Since the board pays for debt service from state aid, management believes the lower authorized debt amount should reduce pressure on future budgets," Standard & Poor's wrote.