CHICAGO – With the distribution of Illinois school aid still in limbo over a political dispute, Moody’s Investors Service said Thursday that a prolonged delay would hurt districts' credit ratings.

The state’s failure to make its first distribution of fiscal year 2018 on Aug. 10 poses a “credit negative for Illinois school districts” as it will test their financial well-being, Moody’s said in a special commentary. “The delayed aid will weigh most heavily on districts with material dependence on state aid and lower cash reserves.”

School funding is the latest battlefront between Gov. Bruce Rauner and the General Assembly’s Democratic majority. The budget package that took effect last month after some GOP members broke with Rauner requires the adoption of a so-called evidence-based model to distribute aid.

Democrats passed Senate Bill 1 which shifted to such a model in May, but Rauner labeled it a bailout for Chicago Public Schools and recently used his amendatory veto powers to alter the bill shifting how tax-increment financing and future enrollment will count toward funding levels and cutting CPS’ new aid levels.

Moody’s said five to 20 of the 256 school districts it rates “will have deteriorated credit within months because they may use cash reserves or borrow to cushion effects from the state aid delay. The delay will harm more districts if the impasse extends for several months.”

About 100 districts are less at risk of material harm as state general aid accounts for less than 10% of their annual revenue and so they are better positioned with the help of local property revenue to “weather” a delay of even a year or more with minimal impact on their credit profile, Moody’s said.

The state's recent distribution of $400 million in overdue block grants owed to districts from fiscal 2017 will help mitigate the delay for some districts “but the effects will grow if the impasse continues,” Moody’s said.

Fitch Ratings previously issued a similar warning.

Legislative leaders are set to meet Friday in an attempt to reach a compromise proposal on school funding changes. The meeting comes after the Senate overrode the amendatory veto on Sunday.

The House convened Wednesday for an education hearing and to vote on a bill that mirrored the changes made by Rauner. It was shot down in a 0-60 vote with many GOP members voting present.

House Speaker Michael Madigan, D-Chicago, said he intends to attempt an override next Wednesday. Some GOP support is required because Democrats are a few seats short of the three-fifths super majority needed to clear the veto and not all Democrats voted in favor of the original bill. If the amendatory veto is not overridden by Aug. 29, the legislation dies.

Michael Madigan, speaker of the Illinois House of Representatives in Springfield, Illinois on Feb. 18, 2015.
Illinois House Speaker Michael Madigan, D-Chicago, will attempt to override Gov. Bruce Rauner's amendatory veto of a school funding bill next week.

“Senate Bill 1 is the product of close to 10 to 15 years of work by education advocates. It’s well thought out, it does the job, it’s supported by every education advocacy group in the state,” Madigan said Wednesday.

Moody’s said it would be looking at cash reserves relative to state aid dependence to evaluate a district’s risk levels. About 17 of its rated districts receive more than 40% of revenue from state operating aid, while an additional 32 relied on aid for 30%-40% of revenue. Many carry very high cash balances with districts across the rating scale tending to hold higher cash reserves compared with school districts in other states. The state has more than 850 districts.

Among rated districts in Illinois, 10 maintain a cash equivalent of less than 50% of their respective annual state operating aid distribution. “These districts are at greatest risk of fiscal strain,” Moody’s said.

While the report does not address Chicago Public Schools specifically, the district has drained much of its reserves in recent years in order to stay afloat and since has turned to cash flow borrowing. The district’s proposed fiscal 2018 budget relies on $300 million in additional aid authorized in the original SB1.

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