Moody's Investors Service has placed the B3 general obligation (GO) rating of the Chicago Board of Education, IL (CPS) under review for possible downgrade. The action applies to $5.4 billion of rated GO alternate revenue source bonds, and $159 million of GO lease revenue bonds. This action was prompted by the State of Illinois' (Baa3 rating under review for downgrade) ongoing failure to provide timely operating aid to the district. Delayed categorical grant payments, which were due to CPS in fiscal 2017, total $466.5 million. The state's timeframe for remitting those payments to the district remains uncertain.

While the district may receive increased funding through the budget package currently being considered by the Illinois General Assembly, such increases may be insufficient to alleviate CPS's distressed financial position.

Chicago skyline
Chicago skyline Rudolf Balasko

Given extremely narrow reserves and limited financial flexibility, the district's ability to maintain sufficient cash flow is dependent on an infusion of revenue either from the state or the City of Chicago (Ba1 negative). The rating review will consider any appropriation action the state takes that may or may not address the district's short term liquidity needs and long term budgetary hurdles. If there is no material increase in state support, Moody's will assess what kind of support, if any, may be provided by the city. The district has close management and governance ties to the city, which has significant legal flexibility to draw revenue from an extremely large and diverse tax base.

The B3 rating on the district's GO alternate revenue debt, which comprises the vast majority of the district's outstanding GO debt, incorporates the district's covered abatement alternate revenue debt structure, in which a levy is automatically extended for debt service if the district does not deposit the alternate revenue (mainly state aid) with the trustee in advance of debt service. Moody's believes this structure reduces the likelihood of default outside of bankruptcy.

The B3 rating on the lease revenue debt incorporates the district's non-contingent pledge to make lease payments sized at annual debt service. Lease payments are ultimately supported by an unlimited tax levy. The rating is the same as the GO rating given the absence of appropriation or abatement risk and the unlimited tax pledge that secures lease payments.

The events leading up to the district's June pension payment reflects the magnitude of its liquidity challenges. On June 26, CPS closed on a second series of grant anticipation notes (GANs) bringing the total borrowed to $387 million, which are initially secured by the delayed categorical grants from the State of Illinois. The GANs boosted the district's liquidity, allowing it to make a $467 million pension payment on June 30.

However, the payment was less than the amount required by law. The shortfall will be cured in August 2017 when $250 million in proceeds from a new pension levy are deposited with the Teachers' Pension Fund. Should the state not remit the delayed categorical grants to the district by October 31, 2017, the GANs will convert to Tax Anticipation Notes (TANs), to be repaid with proceeds of the district's operating property tax levy.

Should the GANs convert to TANs, CPS' borrowing capacity for the upcoming school year's operations would be reduced, placing pressure on the district's GO rating.

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