KBRA Releases Report Affirming BBB+/BBB Ratings, Revising Outlook to Negative on Chicago Public Schools Unlimited Tax General Obligation Bonds (Dedicated Revenues)

On October 18, 2024, KBRA revised the Outlook on outstanding Unlimited Tax General Obligation Bonds (Dedicated Revenues) of the Board of Education of the City of Chicago, IL (CPS) 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 Chicago Public Schools incurring a budgetary deficit in the current fiscal year (2025) 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 teachers’ pension costs and the State’s assumption of normal pension costs; ii) the lack of identification, to date, of viable alternative revenue sources to fund MEABF pension costs; 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.

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