Moody’s upgrades Chicago Public Schools; investment grade a notch away

Bonds

The Chicago Board of Education on Wednesday saw its issuer rating and debt ratings from Moody’s Investors Service upgraded a notch, to Ba1 from Ba2 — still speculative grade, but one level below investment-grade status. The rating outlook remains positive after the upgrade.

Moody’s cited improvements in Chicago Public Schools’ operating fund net cash balance, which went from under 5% of revenues in 2018 to 13% in 2023; improved cash flows, as seen in its reduced cash flow borrowing; and fixed cost ratio, which went down to roughly 20% of revenue, supported by revenue growth from increases in state aid and property tax receipts.

The district’s finances have benefited from the evidence-based funding framework passed by the Illinois legislature in 2017. The framework included a “hold harmless” provision that ensured districts would not receive less money than they did the year before because of enrollment declines. The state also passed a pension property tax to fund pension costs that is projected to bring in $557 million in 2024.

Moody’s Investors Service on Wednesday upgraded the Chicago Board of Education to one notch below investment grade.

Bloomberg News

While fall 2023 enrollment increased in Chicago Public Schools after years of declines, and Moody’s considers the district’s economic indicators “solid,” the rating agency pointed to some areas of concern. 

The district has a high leverage ratio — nearly 500% of revenues — and limited available liquidity. Its general fund net cash balance is under 5% right now. It’s heading into a “more challenging operating environment” because federal aid from the Elementary and Secondary School Emergency Relief Fund is expected to taper off, Moody’s said. 

Moreover, its operating fund net cash balance is the lowest of any large American school district. That puts it at the bottom of a list of the 12 largest rated school districts by enrollment in the U.S.

“The district’s leverage ratio will remain high relative to peers because adjusted net pension liabilities (ANPL) comprises the greatest share and liabilities will not be reduced for many years,” said Moody’s Vice President and Senior Analyst David Levett. “The primary contributor to the district large ANPL is that historically the district made weak pension contributions including taking pension holidays.”

Levett said the driving force behind the Moody’s upgrade was the improvement in operating fund net cash. He also noted that the district’s 2024 budget is balanced.

Still, he said, CPS “will begin to face difficult budget choices in coming years as ESSER [Elementary and Secondary School Emergency Relief] funding is depleted.” That’s the primary reason for a budget shortfall in 2025 of $391 million.

“While it is not unusual for school districts to project large gaps in out years that are later closed during the budget process, the projected gap is an indicator that the district is entering a more challenging operating environment,” he said. “It also makes it unlikely the district will continue to add to reserves at the pace it has been.”

Absent new revenue or expenditure adjustments, Levett said, the district could see declines in its reserves. A downgrade is possible if net operating fund cash balance drops under 5% of revenues; if cash flow borrowing increases again and more tax anticipation notes are outstanding at the close of the fiscal year; or if leverage rises above 580% of revenue.

Conversely, the Board of Education could see Moody’s upgrade its debt to investment grade if it manages to keep its net cash balance between 10% and 15% of revenues, or if there’s a further decline in the leverage ratio to below 450% and the fixed cost ratio remains below 20% of revenues.

District officials did not respond to requests for comment about the upgrade.

Fitch Ratings assigned a BB-plus issuer rating to the board and to its unlimited tax general obligation bonds, most recently ahead of a $600 million general obligation bond sale in October. It assigns an A rating to the district’s capital improvement tax bonds, which offer several layers of protections that insulate pledged revenues from the school district’s operations

Kroll Bond Rating Agency assigns BBB-plus and BBB ratings to the district’s unlimited tax general obligation bonds, with the higher rating on bonds supported by a special revenue bond legal opinion.

S&P Global Ratings assigns a BB-plus rating to CPS general obligation bonds after an upgrade in March.

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