Moody's Sinks Chicago School and Park Districts to Junk
CHICAGO -- Moody's Investors Service stripped the Chicago Board of Education and the Chicago Park District of their investment grade ratings, lowering both by three notches Wednesday.
The school and park district downgrades came a day after Moody's downgraded Chicago's general obligation bonds down to the junk level of Baa1 on Tuesday.
As with the city government, Moody's cited the Illinois Supreme Court's ruling last Friday voiding state pension reforms in a ruling that Moody's believes heightens pressures on Chicago and overlapping taxing bodies to solve their pension woes.
Moody's pushed the Board of Education's $6.2 billion of bonds down to Ba3 from the lowest investment grade level of Baa3 and left a negative outlook on the rating. The board serves as the issuer for the Chicago Public Schools.
"The Ba3 rating reflects CPS's steadily escalating pension contributions and use of reserves to fund those contributions. We believe pension costs will place increasing strain on the district's precarious financial position absent material revenue growth or expenditure reduction, both of which appear increasingly difficult for the district to achieve," Moody's wrote.
"Based on the Illinois Supreme Court's May 8 overturning of the statute that governs the state of Illinois' pensions, we believe that the district now has fewer options for reducing its own pension costs. We view the district's ability to grow operating revenue as similarly constrained. In our opinion, state budget pressures may limit future state aid increases to the district."
The school system is rated lower than the city because its revenue raising powers are limited by property tax caps, while the city enjoys home rule status and greater flexibility to raise taxes. The school system is grappling with a $1.1 billion deficit in its fiscal 2016 fiscal year, which begins July 1, due in large part to rising pension contributions that will consume $700 million of its $6 billion budget. The system has $9.5 billion of unfunded liabilities.
The credit is further "pressured by competing demands placed on the local property tax base from the debt and unfunded pension liabilities of the City of Chicago and other overlapping local governments," Moody's wrote. "Finally, the district's governance ties to the city inform our credit opinion."
A prior downgrade in March triggered swap termination events for the district.
Moody's lowered the park district's rating three levels to Ba1 from Baa1, affecting $616 million of GO debt.
The Ba1 rating reflects the park district's governance ties to the city of Chicago, Moody's wrote.
"Based on the Illinois Supreme Court's May 8 overturning of the statute that governs the State of Illinois' pensions, we believe that the city's options for curbing growth in its own unfunded pension liabilities have narrowed considerably. We perceive increased risk that the city's intensified pressures will adversely affect CPD's financial operations and position."
Because of a default event triggered by Wednesday's downgrade, the interest rate on some of the school district's debt, tied to a line of credit, increases, to 9% for tax-exempt paper and 13.5% for taxable debt.
The district doesn't face any threat of acceleration under its credit terms, according to its most recent offering statement.
Previous downgrades earlier this year by Fitch Ratings and Moody's below the BBB level triggered swap termination events that could, under terms of the swap contracts, force payments of nearly $230 million to swap counterparties. The district has 10 interest rate swaps on a notional amount of $1.1 billion.
CPS has previously said it is negotiating with the banks -- Loop Financial Products LLC, Merrill Lynch Capital Services LLC, Royal Bank of Canada LLC, Bank of America NA, Goldman Sachs Bank, Goldman Sachs Capital Markets LP - to stave off payments.
If forced to cover the negative valuations, the district could tap a debt service stabilization fund that holds $174 million, its unrestricted cash balance of $71 million, or draw on a $500 million bank line of credit. Standard & Poor's has specifically warned the district that its current rating is conditioned on the maintenance of adequate unrestricted reserves
CPS currently has $1.1 billion of debt in variable rate mode. A majority of which was publicly sold, but the district also has two privately placed floating rate obligations. The two private placement do not contain a rating thresholds that, if triggered, would provide the purchaser with the option to declare all outstanding obligations immediately due and payable, Moody's said.