Chicago School Board Budget Is Credit Negative, Moody's Says

  • Budget is dependent on state aid that isn't approved yet
  • Reserves and extending interest payments also used to fill gap

The Chicago school system’s budget is "credit negative” because it relies on state aid to close its $1.1 billion shortfall, making the spending plan structurally imbalanced, Moody’s Investors Service said.

The $5.7 billion budget unanimously approved last week by the Chicago Board of Education includes $480 million of aid from the state that has yet to be approved. Illinois is entangled in its own financial crisis as the Democrat-led legislature and Republican governor have yet to agree on a spending plan for the year that started July 1. It’s "risky” to assume that Illinois will provide the funds, according to Moody’s. The budget also uses reserves and extends interest payments on outstanding debt.

“The board’s action is credit negative because the budget is structurally imbalanced and relies heavily on several uncertain and non-recurring resources,” Moody’s said in an e-mailed report on Monday. The district, the nation’s third-largest school system, will have a "substantial" budget gap without state help, Moody’s said. The debt is rated Ba3, three steps below investment grade.

The price of bonds sold by Chicago’s school system has fallen as the district grapples with its budget deficit and rising pension bills. Moody’s cut the board to junk in in May amid its rising retirement obligations. The district owes an additional $676 million to its pension fund this year. Without state help, officials have warned of larger class sizes and more layoffs.

A portion of $25 million outstanding of 5 percent taxable general-obligation bonds sold by the school board traded Monday at an average of 99.8 cents on the dollar to yield 4.9 percent. That’s down from 105 cents in 2007, when the bonds were issued. The debt, the board’s most-frequently traded bond on Monday, matures in December 2020.

Moody’s isn’t the first rating company to react to the board’s financial woes. Last week, Kroll Bond Rating Agency lowered the board to BBB-, one step above junk, marking the company’s first public finance downgrade in its five-year history. Standard & Poor’s cut the district’s rating to BB on Aug. 14, and Fitch Ratings downgraded the schools in July.

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