The Chicago Board of Education is enjoying positive rating momentum as it prepares to sell $369 million of unlimited tax general obligation refunding bonds next week.
Two rating agencies upgraded the school district ahead of the deal, though both remain at speculative grade.
Fitch Ratings upgraded the credit to BB from BB-minus Tuesday, and S&P Global Ratings upgraded it to BB-minus from B-plus Wednesday. Both agenciescited the school district’s ability to achieve structural balance and the restoring of reserves earlier than previously expected thanks to a boost in state aid.
Fitch revised its outlook to stable from positive at the new rating. S&P assigned a positive outlook to its new BB-minus rating.
In July 2018, Moody's Investors Service
The district's only investment-grade rating is from Kroll Bond Rating Agency, which on Tuesday affirmed its BBB and BBB-minus ratings on Chicago Public Schools' outstanding debt and assigned its BBB rating to the new deal.
“With significantly more state aid for both operations and pension needs, the district achieved structural balance in fiscal 2018 and restored general fund balance to a positive 4.7% in fiscal 2018 from 6.7% of spending in fiscal 2017,” Fitch said. “The district is projecting further additions to general fund balance in fiscal 2019. These developments have led to an improved liquidity position and materially reduced the need for cash flow borrowing, although liquidity remains narrow.”
Fitch said financial pressures will remain, but the additional funding and revised funding framework have lessened the risks stemming from the amount, timing and potential volatility of state aid to the district.
Along with funds on hand, proceeds of the series 2019 ULTGO bonds will be used to refund the district's privately placed general obligation bonds, series 2008 A and B for net present value savings. The bonds are expected to sell via negotiation the week of Sept. 3.
JPMorgan and Mesirow Financial are the lead managers on the deal. PFM and Public Alternative Advisors, LLC are advising the district.
The refunding will be completed “for traditional savings” and not for restructuring purposes, said board spokeswoman Emily Bolton. “While savings are contingent upon market conditions, the district hopes to see $10 million to $15 million in cost savings in fiscal 2020.” It’s not clear whether all the savings are being taken up front or there’s a net present value savings over the life of the bonds.
The transaction comes amid contentious contract talks between the district and the Chicago Teachers Union.
On Tuesday Chicago Mayor Lori Lightfoot and Chicago Public Schools CEO Janice Jackson said the district is formally accepting the recommendations of an independent, third party fact finder for a new contract with CTU.
Under the proposal presented by the fact finder and recommended by the district, the average teacher would see a 16% salary increase over five years. The union has proposed a total 15% increase over a shorter contract term of three years.
The fact finder’s recommendation also calls for a 1% increase in health care contributions. The raises recommended by the fact finder would cost approximately $351 million, according to the mayor’s office.
"A higher rating is currently precluded due to pending contract negotiations with the Chicago Teachers' Union," S&P wrote in its report on the upgrade. "Upon a successful settlement, a higher rating is possible.
"A successful settlement, in our view, would neither create a budget gap nor disrupt the board's recent financial progress,” S&P wrote. “In our view, any agreement that materially increases expenditures beyond anticipated revenue growth, is a credit negative.”
The district
CPS reports
