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29 Jan 2016
New York, January 29, 2016 -- Summary Rating Rationale
Moody's Investors Service has downgraded to B2 from B1 the rating on the Chicago Board of Education, IL's $5.5 billion of Moody's-rated general obligation (GO) debt. The district has $6.1 billion of GO debt outstanding. The Chicago Board of Education is the primary debt issuer for the Chicago Public Schools (CPS or the district). The outlook is negative. This rating action concludes a review for possible downgrade that Moody's initiated on December 21, 2015.
The downgrade to B2 reflects the district's increasingly precarious liquidity position and acute need for market access to support ongoing operations. The district plans to use proceeds of an upcoming borrowing to support near-term debt service payments, among other purposes. Current liquidity provides minimal cushion for unforeseen budgetary variances. Absent near-term budgetary relief in the form of increased revenues or decreased expenditures, the district could deplete available cash by the end of the fiscal year on June 30, 2016. If liquidity is exhausted, the district may be forced to seek additional external liquidity support at a steep cost.
The downgrade also reflects the district's structurally imbalanced fiscal 2016 budget, which assumes $480 million in additional funding that has yet to be appropriated, and may not be appropriated, by the State of Illinois (Baa1 negative). The B2 rating also incorporates the district's steadily escalating pension contributions and elevated debt levels. Favorably, CPS benefits from a large tax base and diverse economy.
The negative outlook reflects the expectation that the district's liquidity position will remain severely pressured and reliant on continued market access to maintain operations. CPS faces several critical challenges in the current fiscal year. On February 15, the district is scheduled to deposit with trustees funding for debt service payments due between June 2016 and March 2017. Additionally, the state has not yet indicated whether it will provide $480 million in state aid that was built into the district's current operating budget. Beyond the current fiscal year, budget pressures will continue, as escalating pension payments and uncertain state aid are contributing to a projected $931 million operating budget gap for fiscal 2017.
Factors that Could Lead to an Upgrade
Significant improvement in the district's liquidity profile
Revenue growth and/or expenditure reductions that enable the district to achieve structurally-balanced operations without reliance on non-recurring revenue sources
Factors that Could Lead to a Downgrade
Failure to deposit with trustees, by February 15, 2016, funds sufficient to cover debt service payments due between June 2016 through March 2017
Impaired or cost-prohibitive market access
Inability to significantly improve liquidity
A continuation of structurally imbalanced operations
Continued growth in the debt and/or unfunded pension liabilities of the district
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 2016, 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.
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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 B2; outlook negative
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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