CHICAGO — With its auction-rate debt issues resolved, the Chicago Public Schools is now turning its attention to its insured variable-rate demand portfolio with an eye towards reducing its interest rate risks with the refunding of $130 million of general obligation debt on Tuesday.

The issue, which includes two tranches of $65 million each, will be sold by the Chicago Board of Education with Northern Trust Securities Inc. serving as lead manager on one and BMO Capital Markets GKST Inc. serving in the same role on the other. Harris NA, the Chicago commercial banking arm of BMO, and Northern Trust Co. will each provide a direct-pay letter of credit for the securities.

The upcoming issue will refund debt sold in 2005 that carried insurance from CIFG and a standby purchase agreement from Dexia Credit Local. About $79 million failed in remarketings and is held by Dexia with CPS paying a rate in the 5% range. The remainder continues to be marketed with a small piece held by one investor with CPS paying rates that range from 5% to 9%.

Although the district has seen higher interest rate costs from its floating-rate debt, the total amount has not exceeded budgeted debt service costs.

“We budget for our overall portfolio, not by one deal alone, and so we have not exceeded the amount built into the budget,” said CPS treasurer David Bryant. Swaps tied to the $130 million will remain in place.

The refunding follows CPS’ restructuring last spring of $500 million of auction-rate securities that was privately placed with Dexia. Another $460 million of ARS was restructured last spring using a fixed rate. The district has about $800 million of variable-rate bonds, some of it insured by downgraded monolines. CPS is looking to restructure other pieces of that portfolio that are carrying higher rates.

Ahead of the deal, all three rating agencies affirmed the district’s ratings on $4.3 billion of outstanding debt. Fitch Ratings rates the credit A-plus with a positive outlook, while Moody’s Investors Service rates it A1 and Standard & Poor’s rates it AA-minus.

Analysts said the rating reflects CPS’ completion of about three-fourths of its $5.1 billion long-term capital program, the city’s diverse economic base, and a moderately high debt burden. Fitch assigns a positive outlook based on its improved financial position in recent years, strong reserve levels, city support for property tax increases and capital funding assistance and improved academic results.

CPS closed out fiscal 2008 with an unreserved general fund balance of $432 million, or 9.8% of spending, compared to $307.7 million two years earlier. CPS’ leaders earlier this week announced that a record $475 million deficit must be addressed as they craft a budget for the next fiscal year. Growing costs for wages and pensions are the primary drivers for the deficit.

Board of Education chairman Michael Scott and CPS chief Ron Huberman warned that cuts would be made and discussions held with unions to reduce costs. A property tax increase may also be sought. CPS tapped $100 million from its ending balance last year to help close a deficit in the $5.14 billion fiscal 2009 budget without a property tax increase.

Due to investment losses, pension payments are expected to grow. The district’s pension fund was 80% funded at the start of the fiscal year, but that will likely drop. The district is adhering to a payment schedule designed to bring the pension account to a 90% funded ratio by 2045. The district also carries a $2.1 billion unfunded liability for other post-employment benefits.

The district previously put its new-money borrowing plans for the current year on hold. Bryant expects a new-money issue of at least $250 million in the next fiscal year, with the ultimate size depending on possible state aid from a new capital budget and the level of matching funds CPS must provide under the city’s Modern Schools Program that leverages tax-increment financing funds for school construction.

The district expects to receive about $190 million from the federal stimulus package but those funds would be designated for tutoring, summer and after-school programs. 


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