Junk-rated Chicago Public Schools lands another upgrade

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Chicago Public Schools’ credit trajectory remains on the upswing with Moody's Investors Service the latest to hand the junk-rated district an upgrade.

Moody’s this week raised the Chicago Board of Education's rating one notch to B1 from B2 — that’s four notches away from an investment grade rating — and signaled further positive action is possible by assigning a positive outlook.

The rating applies to just $3 billion of the district’s debt. The district, like the city, does not ask Moody’s to rate new deals.

The upgrade recognizes “the district's improved liquidity, which reflects a significant infusion of new state and local revenue that will stave off material cash flow pressures for at least the next two to three years,” Moody’s wrote.

Over the last two years, the district’s balance sheet has benefited from the levying of a property tax to help with teacher pension contributions and higher state operational aid and new state aid for teachers’ pensions.

The new funding helped wipe out a $1 billion deficit and put the district on the path to rebuilding reserves that are now at $365 million. The ratings remain at junk due to ongoing operating pressures and a reliance on nearly $1 billion in short-term cash flow borrowing, although that's been cut by a few hundred million over the last two years.

“Although revenue and cash have improved, the district's credit profile remains constrained by several factors. The district will face growing costs associated with long-term liabilities and the recent five-year contract with the Chicago Teachers Union that will likely keep reserves thin compared to revenues,” Moody’s wrote.

The high direct and overlapping debt and pension burden of local governments that share the same tax base also weigh on the rating.

Moody’s report offered guideposts for further positive momentum over the next 12 to 24 month outlook period.

“The positive outlook reflects the possibility of continued revenue growth and expenditure adjustments that will enable the district to absorb increasing costs associated with pension contributions, debt service, and the recently-ratified union contracts. It also incorporates the expectation that the district will not materially increase its reliance on short-term borrowing or other sources of non-recurring revenue,” Moody’s said.

The board last week signed off on the new, five-year contract struck after a 11-school day strike and a revised fiscal 2020 budget that factored in the full cost of the first year.

While the budget had already factored some anticipated costs, $48 million of spending was added to cover new contracts for teachers and non-teacher personnel in addition to $60 million to cover a transfer of funds to the city to reimburse it for pension payments for non-teacher employees. Those expenses raised the size of the approved budget to $7.84 billion.

A city-declared tax increment financing surplus that will provide the district with $66 million above what it included in the budget. In addition $68 million in savings from six strike days that won’t be made up will help cover the new 2020 costs. CPS is relying on property tax growth and rising state aid to cover the $1.5 billion contract price tag over the five-year life of the pact.

The district is rated BB by Fitch Ratings, with a stable outlook, and BB-minus by S&P Global Ratings with a positive outlook. Kroll Bond Rating Agency is the sole agency to rate CPS GOs at investment grade with BBB and BBB-minus ratings and a positive outlook.

S&P upgraded the district from B-plus in August, a day after Fitch upgraded it from BB.

CPS operates 659 schools that serve 361,000 students, making it the third-largest public district in the nation.

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