Chicago Schools Paid 10 Times the Top Rate for Three-Month Loan

  • Board of Education sold $65 million of tax-anticipation notes
  • CPS pays more for 3-month notes than 30-year benchmark rate

The finances of the Chicago schools are in such dire straits that it cost the Chicago Board of Education more to borrow for three months than some governments have to pay for a 30-year loan.

The heightened cost signals more stress ahead as the district prepares to sell as much as $1.2 billion of debt in January. The three major rating companies have deemed the school system’s credit junk. Last week, Moody’s Investors Service slashed the school board’s rating again to four levels below investment grade, and said the district is under review for another downgrade, citing its “precarious liquidity position.”

“As the District continues to work with state leaders to achieve equitable education funding, CPS issued $65 million of short-term bonds yesterday to pay for general operating expenditures,” Michael Passman, a schools spokesman, said in an e-mailed statement on Wednesday.

The nation’s third-largest school system sold $65 million of tax-anticipation notes that mature at the end of March. The federally tax-exempt securities were priced to yield 3.25 percent, according to data compiled by Bloomberg. That’s more than 10 times the yield for benchmark securities that mature in three months. The yield also exceeded the rate for AAA rated bonds that mature in three decades.

“That’s a punishing rate,” said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services. “There’s a lot of fear built into that one. It reflects the anxiety associated with what’s going on in the city and the school district in particular.”

JP Morgan Securities LLC served as underwriter on the negotiated, short-term deal. The proceeds of next month’s expected bond sale will go toward capital projects, refinance existing debt to free up money for operating expenses, convert variable rate bonds to fixed rate, and exit outstanding swap agreements.

The money is needed. The district will run out of credit and cash resources by January, Ernst & Young LLP said in a Dec. 11 letter. CPS has said it needs $480 million from the state of Illinois to close its budget shortfall, and is facing drastic cuts unless the state comes through with the funds. Illinois hasn’t been able to pass a budget for the year that started July 1, much less find a solution for the financial woes of the state’s largest school district.

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