A2 rating and negative outlook apply to $6 billion of post-sale GO debt
New York, November 15, 2012 --
Moody's Rating
Issue: Unlimited Tax General Obligation Refunding Bonds (Dedicated
Revenue), Series 2012B; Rating: A2; Sale Amount:
$106,160,000; Expected Sale Date: 11/29/12;
Rating Description: General Obligation
Opinion
Moody's Investors Service has assigned an A2 rating to the Chicago Board
of Education's (IL) $106.16 million Unlimited Tax General
Obligation Refunding Bonds (Dedicated Revenues), Series 2012B.
Concurrently, Moody's has affirmed the district's negative outlook.
The A2 rating and negative outlook apply to $6.4 billion
of the district's outstanding general obligation (GO) debt. Of
this amount, $6.1 billion was issued by the Chicago
Board of Education and $300 million was issued by the Chicago Public
Building Commission. The Chicago Board of Education serves as the
primary debt issuing arm for Chicago Public Schools.
SUMMARY RATINGS RATIONALE
The bonds are ultimately secured by the District's general obligation
pledge, but the district is expected to use General State Aid revenue
to pay debt service. Proceeds of the current offering will be used
to restructure select maturities due in 2014 and 2015 and provide budgetary
relief to operating funds. The restructuring is expected to provide
$100 million in budgetary savings over fiscals 2013 and 2014.
Assignment of the A2 rating reflects the district's substantial and diverse
tax base, which is coterminous with the City of Chicago (GO rated
Aa3/negative outlook); a weakened financial profile marked by the
budgeted depletion of reserves to fund ongoing operations in fiscal 2013;
an impending spike in pension payments following three years of legislatively-authorized
pension relief; and continued delays in intergovernmental revenues
from the State of Illinois (GO rated A2/stable outlook). In fiscal
2013, the district must also contend with a moderate increase in
unbudgeted salary costs associated with the recently negotiated labor
contract with the Chicago Teacher's Union (CTU). The A2 rating
also reflects an above-average debt burden.
The negative outlook reflects the school district's budgeted depletion
of reserves to fund ongoing operations in fiscal 2013; the moderate
additional unbudgeted salary costs of labor contract negotiations;
an estimated $1 billion budget deficit for fiscal 2014, and
the sizable increase in pension contributions following a three-year
relief period. Significant budget adjustments will be necessary,
but the demonstrated power of collective bargaining suggests that future
budget controls may be difficult for the district to implement.
If progress is not made toward improving the financial condition and liquidity
of district operating funds, or if challenges arise in making the
required pension contributions, the district's general obligation
credit quality will be impaired.
Strengths
- Large and diverse tax base benefits from its long-standing
role as a major economic center with important financial, transportation,
institutional, and tourism components
- Management has continued to implement revenue enhancements and
expenditure adjustments, including property tax increases and personnel
reductions
Challenges
- Strong presence of collective bargaining may make it difficult
for the district to implement budget reductions
- Significant narrowing of reserve levels and liquidity in fiscal
2013, which relies on a drawdown of $431 million in reserves
- An estimated $1 billion budget shortfall for fiscal 2014
- Trend of declining of pension funding levels with dramatic increases
in required contribution levels in coming years
- Opportunities for further expenditure reductions may be difficult
to identify
OUTLOOK
The negative outlook reflects the school district's budgeted depletion
of reserves to fund ongoing operations in fiscal 2013; the moderate
additional unbudgeted salary costs of labor contract negotiations;
an estimated $1 billion budget deficit for fiscal 2014, and
the sizable increase in pension contributions following a three-year
relief period. Significant budget adjustments will be necessary,
but the demonstrated power of collective bargaining suggests that future
budget controls may be difficult for the district to implement.
If progress is not made toward improving the financial condition and liquidity
of district operating funds, or if challenges arise in making the
required pension contributions, the district's general obligation
credit quality will be impaired.
What could change the rating or outlook -- UP
- Achievement of structurally balanced operations over the medium
term
- Significant improvements to liquidity and reserve levels
- Reduced long-term liability exposure related to pension
and other retiree benefits
What could change the rating or outlook -- DOWN
- Further erosion to operating reserves and liquidity
- Continued state aid payment delays and reductions
- Escalating pension funding costs that become unmanageable
The principal methodology used in this rating was General Obligation Bonds
Issued by U.S. Local Governments published in October 2009.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
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Mark G. Lazarus
Analyst
Public Finance Group
Moody's Investors Service, Inc.
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Suite 2220
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Genevieve Nolan
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Moody's assigns A2 rating and negative outlook to The Chicago Board of Education's (IL) $106.16 million Unlimited Tax General Obligation Refunding Bonds (Dedicated Revenues), Series 2012B
