Chicago Public Schools moved closer to investment grade status with an S&P Global Ratings upgrade last week that came just one week after district leaders again sounded alarms of a gaping budget hole once federal COVID-19 aid runs out.
Governance changes are also coming after Tuesday’s runoff election picks a replacement for Mayor Lori Lightfoot.
The mayor controls the seven school board appointments and typically hand-picks the chief executive officer.
The two runoff candidates differ on visions for CPS that would impact finances and operations. A phased-in shift to an elected school board begins in 2025.
For now, CPS is reaping rewards for its progress in building reserves and reducing its reliance on short-term borrowing with Friday’s S&P upgrade to BB-plus from BB. The outlook is stable.
“The rating upgrade reflects our view of the board’s materially strengthened reserves, supported by consecutive operating surpluses, which are expected to be sustained at levels that we view as strong in the next couple of years,” said S&P analyst Ying Huang. “It also reflects our view of the board’s improved liquidity position and reduced reliance on short-term borrowing for cash flow purpose, if excluding the effect of property tax delays.”
The stable outlook “reflects our view of the board’s consistent operating surpluses and strong reserves in recent years that are expected to be sustained during the outlook period,” Huang said. “A higher rating is unlikely during the outlook period given the upgrade and the board’s still weak liquidity position.”
The district must control spending even if new revenue streams are secured and continue balancing its books even as federal dollars wane if the district is to hold on to its current rating. If the district can sustain its positive trajectory once its COVID dollars run out, it could reach investment-grade territory.
“We would also view successful navigation of the potential Chicago Teachers’ Union contract renewal in 2024 and the transition of board governance structure without material impacts on the district’s operations favorably,” S&P said.
The district’s rating remains at risk if the state should fail to meet its evidence-based level of annual funding increases. The board’s high fixed costs and large unfunded pension liabilities also constrain the rating but don’t necessarily prevent upward movement, S&P said.
The board operates on an $9.5 billion budget and has $9.9 billion in direct debt outstanding including general obligation bonds, $1.4 billion of investment grade rated capital improvement tax bonds secured by a dedicated tax levy, $102 million of lease liability bonds, and $663 million accretion of capital appreciation bonds. It last borrowed in February, tapping its CIT credit for a $529 million issue, and has authorization to sell up to $600 million of GOs.
Fitch Ratings rates the district’s GOs BB-plus and the CIT bonds A. Kroll Bond Rating Agency rates CPS GO bonds either BBB and BBB-plus, based on a legal opinion that pledged revenues are insulated from legal action, and rates the CIT credit BBB-plus. Moody’s Investors Service rates the GOs Ba2.
The district has a $14.7 billion unfunded pension liability, for a 47.6% funding level.
The district received $1.8 billion from the American Relief Plan Act, $206 million from the CARES Act, and $796 million from the December Consolidated Appropriations Act. The funding will last through fiscal 2025.
“These combined funds, along with better-than-budgeted personal property replacement tax revenues (PPRT) and property tax revenues, allowed the district to post healthy operating surpluses in fiscal years 2021 and 2022 despite rising expenditures tied to the pandemic and the five-year Chicago Teachers’ Union contract,” S&P said.
The board expects a fund balance of $1 billion this year and anticipates hitting a reserve balance target of 15% in the coming years.
The board reduced its maximum outstanding tax anticipation note, or TAN, borrowing to $800 million in 2022 from a peak of $1.55 billion in 2017 and $950 million in fiscal 2021. It ended fiscal 2022 without any outstanding TANs and positive net cash for the first time in seven years.
Property tax bills were sent out late last year, and that drove TAN borrowing up to $1.14 billion for the current fiscal year.
“The speculative-grade rating continues to reflect our view of the board’s significant short- and long-term challenges,” S&P said.
Systemic challenges include negative cash flow, notably increased operational spending despite enrollment declines, an ongoing contentious relationship with the Chicago Teachers Union with an upcoming contract expiration in 2024, and a sizeable pension and debt burden.
The mayoral shift will bring a near-term shakeup while the move to an elected school board under 2021 legislation clouds the district’s fiscal future. District leaders said more help is needed from the state to stay on track in fiscal 2026.
S&P currently considers the shift to an elected board as “neutral,” but said the reliance on the “city’s subsidy on non-teacher pension contributions (although not a legal responsibility of the board), which, if fully transitioned to the board, could create additional budgetary stress.”
A report the district published last year says the looming severance of governance ties between CPS and he city adds to strains to the district’s “fragile” fiscal health as federal COVID-19 pandemic relief is being exhausted and structural costs are mounting.
While the district and new mayor will press the state for more aid, they could also ask state lawmakers for new tax levy authority similar to independent suburban districts which allows voters.
Voters will choose Tuesday between the two top vote-getters in the February election. Lightfoot came in third.
Brandon Johnson is a Cook County board commissioner and works as a Chicago Teachers’ Union organizer and is a former teacher. Paul Vallas is a former city revenue and budget director who was chief executive officer of Chicago Public Schools from 1995, when the state handed control of the district back to the city’s mayor, until 2001 and went on to lead school districts in Philadelphia and New Orleans.
The district moves to a hybrid board in 2025 with 10 mayor-appointed members and 10 elected members and a president appointed by the mayor. In 2027, all members will be elected with 20 members coming from single-member districts and a president elected city-wide.
The district has been led by CEO Pedro Martinez since 2021, Miroslava Mejia Krug has been chief financial officer since 2020, and treasurer Walter Stock has been with the district for nine years.