CHICAGO – Illinois is putting the ratings of some already strained school districts at risk due a political dispute that has held up distribution of fiscal 2018 general state aid, S&P warned in a report Thursday.

“Without the resolution of this impasse, significant downward pressure on certain Illinois school district ratings will likely remain, especially for districts with weak reserves, weak liquidity, and greater reliance on state aid,” S&P wrote as the state has now missed to aid payments to its more than 850 districts.

S&P’s special commentary follows similar warnings that have come from Fitch Ratings and Moody’s Investors Service about the potential impact of the delays on districts’ credit profiles and it adds to the rising tide of pressure on Gov. Bruce Rauner and lawmakers to resolve their differences. Legislative leaders were meeting Thursday in an attempt to reach a compromise.

Illinois Gov. Bruce Rauner
A school funding battle between Illinois Gov. Bruce Rauner and state lawmakers leaves school districts stuck in the middle, according to S&P Global Ratings.

“S&P Global Ratings believes that the fiscal outlook for many Illinois school districts -- which are already pressured due to years of state underfunding and late payments -- will likely worsen significantly should the state fail to reach a new funding formula agreement, distribute the missed payments, and submit timely future payments to districts,” S&P added.

The strain is most acute for districts that have thin reserves and the delays could result in cuts and cash flow borrowing “if they have the capacity,” S&P said.

“While these methods may provide a temporary measure of fiscal relief for certain districts, the longer the funding formula stalemate, the greater the possibility for significant fiscal pressure and downgrades on affected ratings in this sector,” said S&P, adding it would review districts on a case-by-case basis.

Should a funding formula agreement be reached that provides greater state aid clarity, is commensurate with most districts' financial needs, and is fully appropriated by the state, long-term stability could return to the sector, analysts said.

Talks among Illinois’ legislative leaders were continuing Thursday after leaders said they made progress in a Tuesday meeting.

House Speaker Michael Madigan, D-Chicago, canceled a planned session for Wednesday to attempt an override of Gov. Bruce Rauner’s amendatory veto of the original school funding overhaul legislation in Senate Bill 1 but it was expected to fail without some GOP support. If lawmakers can’t resolve their differences Madigan will attempt to override next week.

The budget package that took effect last month after some GOP members broke with Rauner to support it requires the adoption of a so-called evidence-based model – such as the one in SB1 -- to distribute general aid.

Rauner used his amendatory veto powers to reshape the bill that he had labeled a bailout for Chicago Public Schools, leaving in limbo the bimonthly distribution of nearly $7 billion of aid that was to begin with an Aug. 10 payment. Rauner altered the bill shifting how tax-increment financing and future enrollment will count toward funding levels and cut CPS’ new aid levels.

The Senate overrode Rauner but Democrats are a few votes short of the three-fifths majority of 71 for an override to succeed and few Republicans have so far showed a willingness to again break ranks again. If the amendatory veto is not overridden by Aug. 29, the legislation dies.

In negotiations, Democrats are pushing to keep new funding levels for CPS intact while Republicans are pushing to include subsidies for families that choose private schools and to lift some mandates on districts. There are also discussions on lifting Chicago’s Public Schools’ annual property tax cap. The cash-strapped and junk rated district has long raised its levy by the maximum amount allowed which is limited to the lessor of inflation or 5%.

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