CHICAGO -- City Colleges of Chicago and the finance team for its first-ever borrowing under its own name hit the road Thursday to promote a $250 million general obligation sale that garnered double-A level ratings but carries the blemish of the city’s name.
Fitch Ratings assigned a AA-minus rating and Standard & Poor’s rated the system, formally known as Cook County Community College District No. 508, AA. Both assign a stable outlook.
The bonds pricing Tuesday are secured by various pledged revenue sources including tuition and fees and state grants. They also are secured by the system’s property tax levy which is abated only when sufficient pledged revenues are in hand.
The system’s tuition and fees account for 44% of operating revenues with property taxes representing 30% and state grants 25%. The district will use a fixed-rate structure and has the ability to go out 40 years but will likely limit the paper to 30 to 31 years, said CCC’s chief financial officer, Melanie Jopek Shaker.
Jefferies is the senior manager with Loop Capital Markets LLC and Ramirez & Co. Inc. as co-senior managers.
The nation’s third largest community college system is stressing its solid credit and balance sheet along with its reliance on its own revenue sources as opposed to the local tax base for debt repayment. That tax base is strained by the pension woes of other local governments.
The deal faces headwinds attached to Chicago’s name. The city’s credit and that of the Chicago Board of Education have deteriorated over a pension funding crisis. The negative Chicago headlines have further fueled the interest rate penalties already imposed on most Illinois governments because of the state’s credit woes.
“The pledged revenues provide coverage of more than five times although we have the ability to cover debt service from any available revenues,” Shaker said.
In addition to the city and school board, Moody’s Investors Service has targeted other city-related agencies, including the park district and governments that rely on the same overlapping tax base, like Cook County and the Metropolitan Water Reclamation District, with recent downgrades.
City Colleges did not ask Moody’s to rate the bonds.
Shaker said officials decided to seek just two ratings to save money and settled on Fitch and Standard & Poor’s.
Proceeds will finance a $555 million capital program unveiled last year by Chicago Mayor Rahm Emanuel, who appoints the board, and CCC Chancellor Cheryl Hyman that calls for improvements throughout the seven-college system that serves 111,000 students.
“With the funds available through our bond sale, we will launch major capital improvements to prepare our students for success in further college and careers,” Hyman said.
The plan includes a new $250 million Malcolm X College that will house the system’s College to Careers programs in allied health, classroom and other academic-related improvements, new life safety and security systems, and deferred maintenance projects. The program relies on about $165 million of capital reserves built up in recent years through operating efficiencies along with tax-increment financing funds and other revenues. Shaker said CCC has no additional borrowing plans.
City Colleges’ fund balance exceeds 20%, including $70 million in available working cash that provides liquidity to smooth out chronic delays in state aid. The system’s operating surplus in fiscal 2012 totaled $35.4 million, and the board approved a $657 million budget for fiscal 2014 that was balanced without a tuition or property tax hike.
Fitch said it expects adequate reserves will be maintained. “Should the amount of reserves actually drawn materially differ from expectations, the overall financial profile may be altered and trigger a rating change,” it wrote.
Standard & Poor’s rating reflects the region’s deep and diverse economy, large tax base and the district’s strong reserves and recent history of positive financial operations.
“Partly offsetting these factors are the district’s adequate, but below-average, income and moderately high overall debt,” Standard & Poor’s wrote.
Fitch said it is concerned about “the cumulative effect of severely underfunded area pension systems on all Chicago area governments” but it “believes the district is more insulated than most due its relatively limited reliance upon property taxes and its very small share of the overall property tax levy.”
The district’s teachers are covered by a steeply underfunded state pension plan but CCC is phasing in pension costs into its expenditure forecasts as various state level pension reform proposals have proposed a gradual shift.