CHICAGO – Delays in Illinois school grants are especially harmful to districts struggling with weak liquidity like junk-rated Chicago Public Schools and suburban Lincoln Way schools, says Moody’s Investors Service.

The state’s budget gridlock is inching through a second fiscal year, but Gov. Bruce Rauner and lawmakers did come to agreement to fund grants and operating aid for kindergarten through 12th grade schools. Some of the aid, however, flows only as revenue comes into state coffers.

The state’s current bill backlog stood at $11.6 billion Friday and the state is behind $1 billion in grant payments owed to districts though operating aid has generally been on time.

“A handful of rated districts face increasing cash flow pressures or the potential for a material decline in reserves amid the continued delays,” Moody’s wrote in a report published in its weekly outlook Thursday. “The most vulnerable districts are those that are highly dependent on state grant funding and those with limited operating reserves.

“Any event that results in delayed or reduced general state aid disbursements for Illinois schools could result in a much larger group of materially impacted credits,” Moody’s warned.

Quarterly grant payment delays to districts have risen to nearly nine months. While many districts don’t rely on the grant funds or enjoy a healthy fund balance that provides a cushion, the delays pose a credit negative for districts that both rely on them and are already grappling with strained liquidity.

A Chicago Public School elementary school.
State grant payments add to the strains faced by Chicago Public Schools and several other districts.

“The most vulnerable districts are Chicago Public Schools, Will County Community High School District 210 (Lincoln Way), and Marion, et al Counties High School District 200,” Moody’s said. “These three districts' narrow cash reserves provide limited protection against continued delays.”

CPS is rated at B3 with a negative outlook and Lincoln Way is rated Ba1 with a negative outlook. Marion is rated Baa1. All have net cash balances and fund balances that are in negative to single digit territory as a percentage of revenues.

In fiscal 2016, grants comprised less than 5% of revenues for 54% of rated districts, between 6% and 10% of revenues for 42% of rated districts, and more than 10% of revenues for just 4% of rated districts.

Aid is a significant revenue source for McHenry County Community Unit School District 200 rated Aa2, and Kankakee & Will Counties Community Unit School District 5, but they enjoy healthy operating cash and reserve levels and will not likely experience cash flow stress, Moody’s said. They may experience credit-negative declines in reserves.

Nearly 400 districts across the state announced an initiative on Monday to raise pressure on lawmakers to act, warning of the negative impact of aid delays on their balance sheet and students’ education. They also warned if a fiscal 2018 appropriation is not approved some will be hard-pressed to open in the fall or remain open. Districts also want state lawmakers to follow through on efforts to overhaul school aid funding levels and distribution formulas.

An official from Gov. Bruce Rauner’s administration suggested the governor was willing to sign another stand-alone K-12 education appropriation in testimony during a legislative hearing Thursday.

Moody’s warnings echo alarms sounded in the latest Illinois State Board of Education report on districts’ fiscal 2016 finances. Fiscal 2016 ended last June.

“Districts are now at a point where additional budget reductions are going to be very difficult to realize without impacting the education of students,” the report said. “Because of the delayed payments, district administrators continue to make difficult choices of decreasing expenditures, incurring debt and/or eroding fund balances,” the state report warned.

While the 2017 analysis focuses on fiscal 2016 results, it reported that the number of districts operating in the red in the current fiscal year is projected to rise to 409 from 382 in fiscal 2016.

The cash-strapped Chicago Public Schools – which has warned that schools could close early in June without additional state aid – posted its worst ever financial score. The district is awaiting a Friday court ruling on its lawsuit against state funding formulas it hopes will ease pressures. The district is struggling to close a $215 million hole left by Rauner’s veto of pension funding help.

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