As Chicago Staunches Fiscal Bleed, Schools Are Awash in Red Inkby
Squeezed by pensions, district faces possible labor battle
More than 10% of budget will go toward debt costs this year
Chicago, the nation’s biggest junk-rated city, has raised taxes and moved to shore up its debt-ridden pension system, but for its schools, the triage still has a ways to go.
The Chicago Board of Education is facing a potential strike by its teachers, which could further strain its coffers. The third-largest U.S. school district’s budget counts on state aid and union concessions that may not come. And this week, Moody’s Investors Service cut its rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, as preliminary data showed an enrollment drop of almost 14,000 students -- a loss that may cut into its funding.
The chronic financial strains may lead investors to demand higher interest rates from the debt-dependent district. With $6.8 billion of general-obligation debt, it’s already paying yields of as much as 9 percent, according to Moody’s. More than 10 percent of this year’s $5.4 billion budget is eaten up by principal and interest costs. In August, the board authorized issuing as much as $945 million of bonds and drawing on a $1.6 billion credit line to pay bills.
"To say that they’re challenged is an understatement,” said Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances. "The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.”
The school board’s situation has worsened as its fund balance and reserves shrink, according to Moody’s.
“Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget,” said Rachel Cortez, vice president at Moody’s in Chicago. “They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.”
The district’s deficit may worsen. The spending plan for the year that started July 1 anticipates that it will wrest concessions from the union, including phasing out the district’s practice of covering most of teachers’ pension contributions. The teachers’ union has rejected that, calling it a pay cut. The district is also counting on $215 million in aid that’s contingent on the state passing a pension overhaul -- something that the virtually gridlocked legislature has been unable to do.
The budget relies on "unrealistic expectations,” according to Moody’s.
While lawmakers approved a $250 million property-tax levy for teachers’ pensions, those funds won’t be available until after the end of the fiscal year. The school board must pay more than $700 million to the teachers pension fund by the end of June. The district’s unfunded retirement liabilities are more than $10 billion after years of skipping payments.
The financial pressure has led investors to demand yields on Chicago’s school bonds that are well above benchmark rates, though the gap has narrowed since the state passed a budget in June that provided the property-tax money and about $135 million of other aid. Bonds due in 2042 traded Wednesday for an average of 89 cents on the dollar to yield 5.8 percent, more than double the 2.2 percent on top-rated debt, according to data compiled by Bloomberg.
Ron DeNard, the district’s senior vice president of finance, said Monday that the district is working to bolster its finances and "finalize the path forward to fiscal soundness.”
They have a “tall to-do list” and a lot of their action items are somewhat out of their control -- whether it’s state aid, capital-market access or labor agreements, said Paul Mansour, head of municipal research at Conning, which oversees $11 billion of state and local debt, including some Chicago school securities.
“There’s no margin for error,” Mansour said. “There’s still no long-term structural solution in place, and time is getting short.”