CHICAGO — While school officials continue negotiations in an effort to avoid a looming teachers’ strike, the Kane, Cook, and DuPage Counties School District U-46 in Elgin, Ill., received favorable news from Moody’s Investors Service yesterday when it upgraded the credit to A2 from A3 in recognition of its fiscal turnaround over the last four years.

The upgrade affects about $346 million of outstanding general obligation debt issued by the state’s second largest public school district behind Chicago Public Schools. Moody’s assigned a stable outlook to the rating.

The district experienced a negative $3.42 million cash balance in fiscal 2007, although when its general fund and working cash funds were combined the figure reached a positive $42.74 million. The general fund deficit marks a sharp contrast to just four years ago when it stood a negative $40 million.

“Management’s success in eliminating” the deficit “in only four years and without an operating rate increase is a significant accomplishment that forms the foundation of this assessment,” Moody’s analyst Shawn O’Leary wrote.

While a modest surplus is expected in fiscal 2008, several factors could hurt that prediction. Negotiations are ongoing on a new teacher contract, a delay in Cook County property tax distributions is expected to hurt the district’s earnings, and a state budget dispute has prevented the setting of current year general state aid allotments.

The district is located about 45 miles northwest of downtown Chicago in the city of Elgin and its 50 schools serve 40,000 kindergarten through 12th grade students in portions of 11 generally affluent communities that span a 90-square-mile area. The district benefited from a full property tax valuation of $15.9 billion in fiscal 2007 and resident income levels compare favorably with state and national norms.

The rating is hampered by the likely need for future borrowing and the district’s above average level of debt, although principal is retired at a good clip — with 66% paid off within 10 years — for a fast-growing district. “Though no near term facility borrowing is expected, the steady pace of enrollment growth is likely to necessitate future borrowing,” O’Leary wrote.

Moody’s anticipates that the district will continue to benefit from long-term growth in its tax base, though at a slower pace possibly than the 9.1% average annual growth since 2001, due to ongoing development that is expected even amid a housing slump and efforts to revitalize downtown Elgin.

As part of its efforts to eliminate its deficit in 2003, the district put off the opening of several new, bond-finance schools. It also cut 600 teacher positions and other support positions, leaving some classrooms overcrowded, and the remaining 2,400 teachers to increase their administrative duties, according to published reports.

The union is citing those factors in its efforts to win more favorable terms in a three-year contract and negotiations have so far been deadlocked. A federal mediator is expected tomorrow to begin overseeing negotiations. The union recently filed a strike notice. While the district has enjoyed labor peace over the last decade, it experienced seven teachers’ strikes between 1978 and 1991.

The district carries a AAA-insured rating from Standard & Poor’s and no underlying rating from either Fitch Ratings or Standard & Poor’s.

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