CHICAGO — Fitch Ratings dropped the Chicago Board of Education's general obligation rating one level to A-plus Thursday due to mounting fiscal challenges from state aid delays and the looming expiration of federal aid and pension relief that helped close a fiscal 2011 deficit.

"The downgrade … reflects the Chicago Public Schools' weakened financial flexibility and expected continued challenges in the next several years in attaining stable financial operations given the diminution of non-recurring sources of budget relief," Fitch analysts wrote.

CPS officials did not return calls for comment on the downgrade.

The rating action comes ahead of the district's sale on Wednesday of $418 million of new-money debt that includes $257 million of taxable qualified school construction bonds, $151 million of taxable Build America Bonds, and $10 million of tax-exempt bonds.

The district will sell $170 million of tax-exempt refunding bonds Oct. 20 and an additional $73 million of taxable refunding bonds in a restructuring that will extend debt maturities to provide debt-service relief in fiscal 2011 and 2012, adding to the future burden.

The bonds are payable from pledged general state aid revenue, but the district's GO pledge supported by its property tax levy secures the bonds.

Siebert Brandford Shank & Co. is senior manager on the BAB piece, Loop Capital Markets LLC is senior manager on the QSCBs, and Morgan Stanley is senior manager on the refunding. Fitch assigned a stable outlook to the rating.

The action also affects $4.9 billion of outstanding GO debt.

The Chicago Public Schools faced a $1 billion deficit in its proposed $6.5 billion operating budget earlier in the year. It cut some programs and faculty positions but otherwise relied heavily on revenue streams that won't be available in the coming years.

The budget included more than $400 million in federal stimulus funds that expire next year and $400 million in pension relief. The Illinois General Assembly trimmed the size of the district's pension payments by $400 million in each of the next three fiscal years.

To fully close the budget gap, district officials proposed draining the district's $190 million fund balance that serves as an informal reserve. Board members objected and chief financial officer Diana Ferguson proposed the debt restructuring plan as an alternative.

"The impact of using one-shots is that it makes it harder to balance the budget in future years," said Fitch analyst and managing director Amy Laskey. "The pension deferral and debt restructuring also will add to the district's future costs" as pension and debt-service payments will rise in 2014.

The district's debt levels are above average and are expected to continue to rise due to a long amortization schedule and the need to fund $1.7 billion of proposed projects. New money from the sale next week will go toward the ongoing capital program.

By leaving a fund balance in place, the district will ease some liquidity concerns that stem from ongoing state aid payment delays. The state ended September owing $5.5 billion of bills as it faces its own budget and liquidity crunch. The state owed the district $236 million in aid at the close of fiscal 2010 last June.

The district also faces teacher contract talks and may be hard pressed to make future cuts given large spending reductions and staffing cuts in the fiscal 2010 and 2011 budget, Fitch warned.

The system's pension system was funded at an adequate 74% ratio at the end of fiscal 2009, but it has been underfunding the actuarially annual required contribution and the $400 million annual reduction in payments over the next three years will drive up future contribution levels. The district's retiree health care unfunded liability was $2.4 billion at the close of fiscal 2009.

The rating benefits from Chicago's large and diverse economic base, despite the local economy facing the dual headwinds of high foreclosure rates and unemployment. The district benefits from a stabilized enrollment base of more than 400,000 students who attend 675 schools.

The district carries ratings of AA-minus from Standard & Poor's and Aa2 from Moody's Investors Service. Both agencies revised the district's outlook to negative ahead of the sale, but their reports were not released by press time.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.