Chicago’s deep financial problems worsened Friday as a Wall Street bond-rating agency dramatically downgraded the credit of the city’s school system — triggering penalties that could come to more than $200 million.
Fitch Ratings dropped the Chicago Board of Education’s credit score by three notches. The plunge came two weeks after another agency, Moody’s Investors Service, also reduced its rating on the school district’s debt.
Chicago Public Schools is required to maintain a certain credit rating under the terms of complex debt “swap” deals with financial institutions. Failure to do so could activate termination clauses in the deals and CPS could have to make payments to the financial institutions.
Friday’s report from Fitch means CPS has dropped below the threshold for terminating the deals. According to Fitch, CPS could be forced to pay $263 million in penalties as a result.
In filings with federal regulators, though, Chicago school officials said the liability is less than that — $228 million.
CPS spokesman Bill McCaffrey said the district is in talks with the financial institutions to renegotiate the terms of the deals.
Like the school board, the city of Chicago also entered into risky swap deals with termination clauses based on its credit rating, and the city’s fiscal woes had left it facing potentially huge termination payments.
That hasn’t happened yet because Mayor Rahm Emanuel’s administration recently renegotiated all but one of City Hall’s swap deals to lower the termination thresholds and avoid having to pay now.
For CPS, the Fitch and Moody’s downgrades leave its bond rating — which affects the interest rates the city must pay to borrow money — just one level above junk status.
“This was not unforeseeable, but it certainly is unwelcome news,” said Laurence Msall, president of the Civic Federation.
CPS officials “have been operating without a transparent, long-term plan” to deal with the district’s fiscal problems and should have cut costs more aggressively, Msall said.
Even after closing a record number of schools, cutting administrative costs and raising property taxes, CPS has projected a budget deficit of more than $1 billion for the coming school year.
The school system also lacks adequate financial reserves to make the termination payments, according to Fitch. In their report Friday, Fitch analysts predicted the CPS reserves “will likely be depleted” within a little more than two years after being heavily relied upon in recent years.
“Options within the board’s sole control are limited, and Fitch believes meaningful solutions would have a notable impact on educational programs,” the report warned.
The analysts cited the district’s high pension liability and “poor labor history,” referring to the 2012 teachers’ strike.
The rocky relations between the mayor — who appoints the school board — and the Chicago Teachers Union haven’t improved since the strike. And the teachers’ current contract can end June 15. CTU is heavily backing challenger Jesus “Chuy” Garcia in an effort to unseat Emanuel in the April 7 runoff election.
Garcia said the Fitch downgrade “is the latest example of the consequences of Mayor Emanuel’s fiscal mismanagement.”
Barbara Byrd-Bennett, Emanuel’s chief executive for CPS, said: “It is not a secret that Chicago Public Schools has long faced serious fiscal challenges that are primarily driven by a broken pension system — something the recent downgrades cite as the most critical issue that simply must be addressed to maintain CPS’ fiscal stability. Without reforms, CPS will be forced to decide between funding the pensions of retirees and funding the education of its students.”
Changes to the pension system “are largely dependent on approval by the state,” Fitch noted.
And any reforms wouldn’t help the district deal with the ongoing imbalance between revenue and spending, which has CPS facing yearly deficits of about 20 percent.
