Chicago schools line up more than $2 billion of borrowing authority

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CHICAGO — The Chicago Board of Education put its stamp of approval on a $6 billion fiscal 2019 operating budget, $1 billion capital program, and more than $2 billion of new money, refunding, and short-term borrowing.

The budget package totals $7.6 billion between operations, capital, and $600 million in debt service.

“We are really proud of the budget that we are presenting today as it invests significantly in the students’ futures as well as reflects our commitment to making sure that Chicago Public Schools is on more stable fiscal footing,” CPS Chief Executive Officer Janice Jackson told board members at the Wednesday board meeting. “We are also very appreciate of the historic reform to the funding formula” at the state level.

The board authorized $500 million in general obligation refunding and up to $1.25 billion of short-term tax anticipation warrants.

With an infusion of new state money approved late last summer that helped wipe out red ink, the district scaled back on costly cash flow borrowing last year, lowering the amount to $1.1 billion from $1.55 billion and said in budget documents it expects a similar level in fiscal 2019 even though up to $1.25 billion was approved.

The district said Thursday it intends to tap just $994 million of the authorization, a level that represents a further reduction from past years.

The board also signed off on up to $313 million of junk-rated general obligation-alternate revenue source bonds and up to $125 million of bonds under its investment grade dedicated capital improvement tax levy to support the new capital plan.

The district's borrowing plans got a boost Thursday from S&P Global Ratings, which upgraded it to B-plus from B.

"The upgrade reflects the board adopting a balanced budget for fiscal 2019 when accounting for management's articulated plan to close a small $59 million initial gap and the state adopting a fiscal 2019 budget that includes the promised higher state aid revenue as a result of Illinois' new evidence-based funding formula, along with estimates for fiscal 2018 indicating an operating surplus and a resulting positive fund balance,” said analyst Blake Yocom.

The rating remains four notches away from investment grade and “a cloud of uncertainty and questionable decisions arising from a variety of ongoing issues” precludes a higher rating, according to S&P.

S&P's reference to a "cloud of uncertainty and questionable decisions" stems from a variety of ongoing issues — notably increased operational spending and the affordability of capital spending in fiscal 2019 and beyond, special education spending pressures, and unresolved sexual harassment scandals and lawsuits. "While the latter two issues are not likely to significantly affect the board's financial position, we still view them as persistent problems for management to address," S&P said.

The CPS capital package is up from $136 million plan adopted last year, giving Mayor Rahm Emanuel a talking point as he seeks re-election early next year.

The package relies on another $189 million from the district’s new money issuance of last year and $43 million of federal funds with the remainder raised from “other” capital funds that is likely translates into additional borrowing, according to analysts.

While the operating budget proved an easy sell this year with pressures eased by new state aid approved last July, the capital budget’s approval came despite protests and pressure from teachers, parents, and community groups to delay the vote. They demanded more detail on where the district will spend the capital funds and cited a new academic study that found widespread disparities in the past.

The lack of project detail and a full financing plan drew a rebuke from the Chicago Civic Federation. The research organization endorsed the operating budget but objected to the size of the capital spending without a fuller financing picture. The federation also questioned the affordability of issuing more debt to finance a capital budget that lacks transparency regarding prioritization for selected projects.

“CPS’ finances have barely reached more stable footing. This is not the right time to issue massive amounts of additional debt with only a portion going to the most critical facility needs,” federation president Laurence Msall said in an analysis of the budget package published Tuesday.

The capital budget would finance maintenance, energy efficiency measures, information technology and security infrastructure upgrades, new and expanded schools to relieve overcrowding and allow the district to accommodate free, full-day pre-kindergarten for all by 2021.

The debt service schedule on the $313 million appears back-loaded with $128 million repaid through 2042 and $460 million of the principal and interest paid down between 2043 and 2046. The district’s debt service schedule on its existing $8.2 billion debt load of GO, CIT bonds, and public building commission bonds totals $600 million this year and will rise to about $700 million next year. Debt service begins to fall in 2031 and drops to about $350 million in 2043 and then $300 million in 2045.

The $8.2 billion of debt is up from $6.7 billion two years earlier.

The district’s GOs carry a BB-minus rating and stable outlook from Fitch, a mix of BBB-minus and BBB ratings with a positive outlook from Kroll Bond Rating Agency and a B2 rating and stable outlook from Moody’s Investors Service, which raised its rating from B3 earlier this month.

The $125 million of new capital improvement tax bonds taps a levy first imposed in fiscal 2016 and used to back a roughly $730 million borrowing in fiscal 2017 and roughly $65 million in fiscal 2017. Fitch Ratings assigns an A rating to the bonds and Kroll a BBB rating.

The federation endorsed the operating plan but retains worries about the district’s reliance on short-term borrowing and concerns that the state can’t be counted on to meet its pledge to continue raising aid.

“Fortunately, the Chicago Public Schools’ finances have begun to stabilize following Springfield’s much-needed overhaul of the decades-old education funding formula — though the work is far from over,” Msall said. “Unfortunately, because Illinois continues to languish in its own financial crisis, state funding will remain a source of uncertainty for CPS and other districts.”

The district’s downward spiral that threatened its solvency halted in fiscal 2018 with $100 million in additional state aid from a funding formula overhaul, $220 million in new aid for pension contributions, and authority to raise about $130 million more than allowed under property tax caps in order to fund pensions. The city also provided $80 million for safety costs. The new funding came on top of a previously approved higher property tax levy for teachers’ pension contributions which will total $809 million payment this year.

The federation warns that the district is far from out of the woods given that its pension system carries $11 billion of unfunded liabilities and is just 50% funded, that the district continues to rely on cash flow borrowing and faces declining enrollment while hiring additional personnel and spending on salaries and benefits rises. Personnel costs will increase by $144.6 million, or 3.8%, to nearly $4 billion. Student enrollment stood at 371,382 last fall and has declined by 29,163 students, or 7.3%, since 2013.

The budget allocates $21 million for the anticipation note borrowing in the new fiscal year, down from past years. The district has paid 70% of the three-month London Interbank Offered Rate plus a spread of 330 basis points on recent TAN tranches.

The district’s GO spreads have been trimmed since passage of the state funding by more than half to about 200 basis points over the Municipal Market Data’s AAA benchmark.

Spreads have further narrowed since the Moody’s upgrade. An insured 2032 bond traded Thursday at a 100 basis point spread to the MMD AAA compared to 125 bp in May, according to MMD municipal strategist Dan Berger. Berger added that he did not see any trades of uninsured paper since the Moody’s upgrade.

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School bonds Budgets Infrastructure Board of Education of the City of Chicago Illinois