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21 Dec 2015
New York, December 21, 2015 -- Summary Rating Rationale
Moody's Investors Service has downgraded to B1 from Ba3 the rating on the Chicago Board of Education, IL's $5.5 billion of Moody's-rated general obligation (GO) debt. The district has $6.0 billion of GO debt outstanding. The Chicago Board of Education is the primary debt issuer for the Chicago Public Schools (CPS) (the district). The rating is under review for further downgrade.
The downgrade to B1 reflects the precarious liquidity position of the district. CPS has increasingly relied on market access and cash flow borrowing to maintain ongoing operations. The downgrade also reflects the district's structurally imbalanced fiscal 2016 budget, which assumes $480 million in additional state funding that has yet to be appropriated by the State of Illinois (Baa1 negative). The lack of a state budget nearly six months into the fiscal year has delayed certain other revenues.
The B1 rating also incorporates the district's steadily escalating pension contributions and recent use of reserves to fund recurring contributions. The rating further reflects the district's elevated debt levels. Favorably, CPS benefits from a large tax base and diverse economy.
The B1 rating is under review for possible downgrade because CPS faces key credit challenges in the next 30 to 90 days. The district is scheduled to receive a state block grant of $150 million in January 2016, which could be delayed. CPS must access the capital markets to issue long-term debt in late January. Part of the proceeds will support operating liquidity by way of principal restructuring. On February 15, the district is scheduled to deposit debt service payments due between June 2016 and March 2017 with the trustees. Finally, the state may finalize its budget and determine the amount of aid to appropriate to CPS in the current fiscal year. CPS's current fiscal year's budget includes $480 million in state aid that has yet to be appropriated. Alternatively, the absence of a final state budget could put further pressure on the district as it approaches the latter part of its own fiscal year without clarity on state funding.
Factors that Could Lead to an Upgrade
Revenue growth and/or reductions in other operating expenditures that enable the district to accommodate increased pension costs into annual operating budgets without reliance on non-recurring revenue sources
District or state actions that halt the growth of the district's unfunded pension liabilities
Improvement in the City of Chicago's (Ba1 negative) credit profile that strengthens CPS's credit quality given the two entities' governance ties and coterminous tax base
Factors that Could Lead to a Downgrade
A continuation of structurally imbalanced operations
Continued depletion of the district's liquidity position, requiring an increasing level of short-or-long term borrowing for cash flow needs
Continued growth in the debt and/or unfunded pension liabilities of the district and/or overlapping governments
Declines in the City of Chicago's credit profile that weakens CPS's credit quality given the two entities' governance ties and coterminous tax base
Debt service on CPS's GO bonds is ultimately secured by the district's pledge to levy a property tax that is unlimited as to rate or amount. Debt service on CPS's GO bonds is paid from the district's receipt of general state aid (GSA), personal property replacement taxes (PPRT), intergovernmental agreement revenue, and tax increment financing (TIF) revenue.
Use of Proceeds
CPS's boundaries are coterminous with those of the City of Chicago. The district is governed by a seven-member Board of Education appointed by the Mayor of the City of Chicago. In fiscal 2015, CPS operated 664 schools, including district-run traditional and options schools, charter schools, and contract schools. Student enrollment was 396,683 in fiscal 2015, which followed an average annual decline of 1.5% since fiscal 2011.
The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regional PFG Chicago
Moody's Investors Service, Inc.
100 N Riverside Plaza
Regional PFG Chicago
Moody's downgrades Chicago Board of Education, IL's GO to B1; rating under review for further downgrade
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