Moody’s Investors Service on Friday announced it had reduced its rating on Chicago Board of Education debt to one level above junk bond status.
Moody’s downgraded the rating to Baa3 from Baa1 on the board’s general obligation debt. That rating applies to a total of $6.3 billion in outstanding debt held by Chicago Public Schools.
That lowered rating, according to Moody’s, “reflects CPS’s continued reliance” on its reserves to cover ongoing operating expenditures, “particularly pension contributions, which will steadily increase in the coming years.”
Another problem, according to Moody’s, is “the district’s limited ability to raise operating revenue.” And, the ratings agency notes, the lowered CPS rating also takes into account the city’s own credit rating, which also was reduced by Moody’s this week.
In a statement issued Friday, CPS said the downgrade “should come as a shock to no one” considering the ongoing pension crisis.
“CPS is facing downgrades because of broken politics that force Chicago taxpayers to pay twice for teacher pensions – once for CPS educators, and a second time for suburban and downstate teachers. CPS pension costs have tripled since 2013, and the district now faces a crushing $700 million pension payment this year. CPS will be forced to decide between funding the pensions of retirees and funding the education of its students, while we know that even applying the recent state pension reforms in SB1 would provide at least $210 million in pension relief next year alone.”
CPS spokesman Bill McCaffrey said the downgrade in Moody’s rating alone will not be enough to make the district pay any penalties on its derivative financing deals; a second rating agency also would have to lower its rating of CPS debt.
McCaffrey also noted that the district expects to save about $20 million by completing bond transactions approved last week by the Board of Education. CPS already was expecting the Moody’s downgrade, he said, and it included an increased interest rate in its projections.
He also said pension reforms recently passed by the Illinois General Assembly are predicted to save the district $210 in its next budget, while reducing the unfunded liability in the Chicago Teachers Pension Fund by 37 percent.
In its statement, posted Friday, Moody’s said the “negative outlook reflects our expectation that CPS’s budget pressures will intensify due to rising pension costs. In fiscal 2016 alone, the district’s mandatory annual pension contribution will total $688 million, an increase from $197 million in fiscal 2013.”
Moody’s said pension contribution costs will be $601 million in fiscal 2014 and $634 million in fiscal 2015, and noted that “further increases are scheduled for fiscal 2017 and beyond,” and though “CPS officials are actively working to identify revenue enhancements and expenditure adjustments that will be needed to accommodate the increased payments, but solutions remain uncertain. This budget gap is a credit negative that is becoming more pronounced as fiscal 2016 approaches.”
McCaffrey noted that the actual amount paid out is higher than the district’s contribution. In fiscal year 2014, CPS paid out $613 million in pensions — $405 million more than in the previous year. In 2015, that payout will be $697 million.