With cash flowing again, pressures ease on Illinois school credits

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CHICAGO – Illinois’ restoration of aid payments to schools and some changes in the legislative overhaul of funding formulas will benefit districts' credit profiles and ease pressures on a handful of more fiscally strained districts, says Moody’s Investors Service.

Two August payments to districts totaling $541 million were held up last month due to a stalemate over legislation overhauling school funding formulas. The fiscal 2018 budget required a shift to a new, so-called “evidence-based” model in order for aid to be distributed. Gov. Bruce Rauner and fellow GOP lawmakers reached agreement with the General Assembly’s Democratic majorities leading to Rauner’s signature on the package Aug. 31.

“The resumption of payments is credit positive for Illinois schools districts, especially those with material dependence on state aid and lower cash reserves,” Moody’s wrote in its public finance outlook report Friday. “Furthermore, Public Act 100-0463 sets funding goals that call for significant increases in state funding following several years of stagnant or declining distributions.”

Illinois Comptroller Susana Mendoza distributed Thursday the two overdue payments totaling $541 million that were due on Aug. 10 and 20 and on Friday sent out the first September payment for $264 million. Mendoza praised the compromise agreement she said “finally puts the state on a path to equitable school funding.”

School aid payments have been classified during the budget impasse as part of the $1.85 billion of designated “core priority” monthly payments that also cover debt service, pensions, and payroll. The state’s backlog of unpaid bills continues to hover around $15 billion but should ease with Gov. Bruce Rauner’s announcement that he plans to tap $6 billion in budgeted bonding authority to pay down the backlog. Several billion dollars could also be leveraged in federal Medicaid dollars.

The resumption of funding is most significant for districts that have relatively limited liquidity. As of fiscal 2016, 11 of the 255 districts rated by Moody’s maintained liquidity that was equivalent to 50% or less than state aid.

The 11 included Chicago Public Schools and three other junk-rated districts. CPS received about $300 million from the package through a mix of higher aid and new funding to help cover its pension payments. Eighteen of Moody’s rated districts received 40% or more of their funding from state aid.

The new school funding formula provides an additional $350 million with distribution determined by research-based metrics that set a “district adequacy target” aimed at improving student achievement. Districts, however, will still fall short of those targets with just the additional $350 million available. A hold harmless provision protects any district from a reduction.

The change comes after the state reduced funding between fiscal 2012 and fiscal 2016 by prorating the per pupil foundation target. The 2017 budget had provided a funding boost including a $250 million equity grant that for school districts with high concentrations of poverty.

Under the compromise agreement, local residents can vote to reduce a district's educational tax levy by a maximum of 10%. That poses “a modest credit negative for property wealthy districts,” Moody’s said. If 10% of registered voters sign a petition, a referendum question would go on the ballot. In order for district residents to vote on the tax reduction, funding must be above 110% adequacy.

The package also lifts some mandates and provides up to $75 million in tax credits for private school donations that go to help fund scholarships.

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