KBRA Affirms BBB+/BBB Ratings, Revises Outlooks to Negative on Chicago Public Schools Unlimited Tax General Obligation Bonds (Dedicated Revenues)
18 Oct 2024 | New York
KBRA has revised the Outlook on outstanding Unlimited Tax General Obligation Bonds (Dedicated Revenues) of the Board of Education of the City of Chicago, IL (Chicago Public Schools) to Negative from Stable. We have affirmed the long-term rating of BBB+ on those outstanding Series for which KBRA has received a legal opinion, provided by the Board and approved by KBRA's outside counsel, that the property taxes securing the bonds should likely be treated as "special revenues", as defined under the U.S. Bankruptcy Code in a Chapter 9 legal proceeding. For those Series without associated special revenue legal opinions, the BBB rating is affirmed.
The Negative Outlook reflects our view that the likelihood of CPS incurring a budgetary deficit in the current fiscal year has increased. The District’s FY 2025 Budget identifies projected deficits of at least $500 million in each of the next five fiscal years (2026-2030), with the potential for deficits to increase to as much as $900 million in FY 2026. KBRA views the projected recurrence of CPS’s structural deficit as reflective of i) the need for additional state funding, notwithstanding 2018 enhanced education funding legislation and the legislative authorization (also in 2018) of a dedicated property tax levy to fund pension costs and the State’s assumption of normal pension costs; ii) the lack of identification, to date, of viable alternative revenue sources; iii) the expiration, in the current fiscal year, of federal stimulus funding, a portion of which the District used to support ongoing operations; and iii) CPS’s exceptionally high fixed cost burden, which is attributable to payroll and associated taxes, large pension contribution requirements and debt service obligations.
Key Credit Considerations
The rating was affirmed because of the following key credit considerations:
Credit Positives
- Strong security structure, with the pledge of alternate revenues as primary source of repayment and a dedicated property tax levy as a secondary source. The dedicated property tax levy, if required, is deposited directly with the Bond Trustee.
- Evidenced Based Funding formula has increased state education aid revenues and includes hold harmless provisions which effectively remove funding risk related to enrollment declines.
- The Board’s annual pension costs are supplemented by a dedicated pension property tax levy and the State contribution for normal pension costs.
Credit Challenges
- Liquidity is very narrow. Short-term borrowing is relied upon to support operations at various points throughout the fiscal year.
- Mounting fiscal challenges have severely destabilized District leadership ahead of a planned transition to a hybrid elected/appointed 21-member Board in early 2025.
- The combination of expiring federal stimulus, some of which covered ongoing operations, and anticipated increases in personnel and collective bargaining costs, calls into question the sustainability of the District’s budget going forward.
- Pension costs continue to grow despite a dedicated pension property tax levy and the State’s assumption of normal pension costs.
Rating Sensitivities
For Upgrade
- Sustained improvement in the Board’s liquidity position.
- Structurally balanced financial operations going forward, as projected by an annually published long-term financial plan.
For Downgrade
- Further deterioration in the Board’s liquidity position.
- Operating deficits that are addressed by one-time revenues.
- Worsening structural budgetary imbalance and the erosion of the Board’s recent General Operating Reserve position.
- Non-adherence to fiscal discipline and/or adoption of credit negative policies, including borrowing funds or taking a short-term loan for operations, by an interim board or by future elected school boards.
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