Bonds

Chicago Public Schools rating and bonds get federal aid bounce

Chicago Public Schools stands to reap about $1.8 billion in new federal COVID-19 pandemic-related aid, an infusion of funding rewarded by one rating agency and municipal bond investors.

Moody’s Investors Service raised the rating one notch Thursday to Ba3 from B1, moving it within three notches of an investment grade rating. News of the anticipated aid and the potential for more positive rating momentum translated into spread narrowing on the secondary market trades.

“Chicago Board of Education has strengthened considerably recently,” said Josh Ippolito, at IHS Markit. The spreads tightened by five to eight basis points at the start of Friday.

“These funds will ensure we can make the investments needed to address unfinished learning and mounting social and emotional needs,” CPS chief Janice Jackson said.

Based on grant funding formulas, Chicago Public Schools is projected to receive about $1.8 billion of the more than $5 billion Illinois school districts expect to receive in the $1.9 trillion American Rescue Plan President Biden signed Thursday.

Prior federal packages approved last year provided more than $900 million for the Chicago Board of Education, including about $700 million in December and $200 million last March.

“These funds will ensure we can make the investments needed to address unfinished learning and mounting social and emotional needs, and we will be working in the months ahead to ensure these resources make a real difference for our students,” Janice Jackson, the district’s chief executive officer, said in a statement this week.

Moody’s rates just $3 billion of the district’s $8 billion of debt; the school along with the city of Chicago, stopped seeking ratings several years ago from Moody’s on new deals after Moody’s dropped the city to junk. Its outlook on Chicago schools is stable.

The district made progress moving up the junk rating scale several years ago after a series of city and state funding boosts that eliminated a $1 billion structural gap and allowed the district to begin rebuilding fund balances drained to manage past deficits.

The city restored a pension levy and established a new capital improvement tax levy for the district and the state in 2017 overhauled aid formulas and began covering a portion of the district’s teachers’ pension contributions like it does for districts outside Chicago.

Gov. J.B. Pritzker decided against funding in fiscal 2021 the scheduled $350 million annual increase under the 2017 funding formula as the state grappled with its own expected revenue losses from the pandemic. His proposed 2022 budget again does not fund the increase but the administration believes federal funds will make up for the loss. CPS would get about $65 million of the $350 million.

With Illinois set to receive about $7.5 billion in aid from the new federal package, Pritzker will face legislative pressure to restore the higher education funding levels after paying down $3 billion in short-term borrowing and a portion of the state’s unpaid bill backlog.

The upgrade incorporates the district’s improved financial performance resulting from substantial prior increases in state and local revenues, Moody’s said. “While state aid is now beginning to stagnate and revenue from a local pension levy could decline, the softening of those revenue sources is offset with a very sizable infusion of federal funds from several rounds of pandemic relief aid.”

The district, however, remains stuck in with junk ratings from three rating agencies.

Kroll Bond Rating Agency is the only one to rate the district at the investment grade level of BBB-minus and BBB, with stable outlooks, depending on whether the bonds carry a special opinion on pledged revenues. Fitch Ratings rates the district BB and stable and S&P Global Ratings rates the BB-minus and stable.

“The district remains challenged by high levels of cash flow borrowing and growing expenditures despite substantial ongoing enrollment loss,” Moody’s said. “Other credit considerations include Chicago’s massive economic base and the district’s close governance connection with the City of Chicago whose mayor appoints the Chicago Board of Education members.”

Moody’s rates Chicago Ba1 and while the mayor appoints the school board, legislation is pending that would move the board to an elected one. Lightfoot supported a change during her 2019 campaign but is opposed to the form a new board would take under the pending legislation that could be voted on by state lawmakers this spring.

The district last sold bonds in January when it saw spreads hit low for recent years of 117 basis points over Municipal Market Data’s AAA benchmark on the 10-year, buoyed by the December federal aid package and a market hungry for higher yielding paper.

CPS operates on a $6.9 billion budget and has an enrollment of 340,658.

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