KBRA Assigns BBB Rating to Board of Education of the City of Chicago, Unlimited Tax GO Bonds (Dedicated Revenues), Series 2023A; Affirms Rating for Parity Bonds; Outlook Remains Stable
20 Oct 2023 | New York
KBRA assigns a long-term rating of BBB with a Stable Outlook to the Board of Education of the City of Chicago's Unlimited Tax General Obligation Bonds (Dedicated Revenues), Series 2023A .
Concurrently, KBRA affirms the long-term ratings on the Board of Education of the City of Chicago’s outstanding General Obligation bonds. The Board’s long-term ratings incorporate KBRA’s understanding that the property taxes that secure certain outstanding Board Series should likely be treated as “special revenues”, as defined under the U.S. Bankruptcy Code in a Chapter 9 proceeding. Those Series which have legal opinions provided by the Board to KBRA that have been reviewed by KBRA’s outside counsel are affirmed at BBB+. For those Series without associated special revenue legal opinions, the BBB rating is affirmed. The Outlook for all bonds remains stable.
The assigned long-term rating recognizes CPS’s satisfactory financial position, underscored by a trend of enhanced State aid support, the enactment of dedicated sources for pension funding, and most recently, ample federal stimulus funding supporting balanced operating performance. Attributable to an improved State funding mechanism enacted in 2018, the Board’s unassigned general operating fund balance is vastly improved from the FYE 2017, and prior years’ accumulated deficit position. KBRA’s expectation is that structural budgetary balance will be maintained, as remaining stimulus funding is obligated and expended through FY 2015, and that the Board will continue to make necessary adjustments to adhere to this standard. KBRA will continue to monitor financial operations and performance, as future budgetary imbalance would place downward pressure on the rating. Additionally, the adoption of an elected school board, beginning in 2025, will represent a significant change in Board administrative structure. KBRA will monitor Board practices and policies as the legislation takes effect to determine whether fiscal discipline is maintained.
Key Credit Considerations
The rating was assigned 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 now largely covered by the dedicated pension property tax levy and the state contribution for normal pension costs under the new State funding formula.
Credit Challenges
- The liquidity position of the Board remains narrow, with continued reliance on significant levels of short-term borrowing to support operations at times during the fiscal year.
- While revenue actions and reforms by the State have stabilized Board financial operations and allowed for structural improvement, KBRA views the Board’s financial condition as still challenged, given the near-term full utilization of federal stimulus funds and looming decisions on programs initiated during the pandemic.
Rating Sensitivities
For upgrade:
- Sustained improvement in the Board’s liquidity position.
- Structurally balanced financial operations going forward.
For downgrade:
- Deterioration in liquidity position of the Board.
- Operating deficits that are addressed by one-time revenues.
- The absence of structural budgetary balance, thus eroding the Board's general operating reserve position.
- Absence of adherence to fiscal discipline and adoption of credit negative policies by future elected school boards.
To access rating and relevant documents, click here.