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Moody’s downgrades bond rating for Chicago Public Schools

Updated: August 13, 2012 1:51PM

Moody’s Investors Service has downgraded the bond rating of the Chicago Board of Education after it proposed draining its “rainy day” fund to fill a budget deficit — meaning it will cost potentially millions more for the board to issue bonds in the future.

Moody’s spokesman David Jacobson said the downgrade came Tuesday night, and said his firm also gave a negative outlook to the board’s bonds.

That “means there’s a risk of a potential additional downgrade over the next 12 to 24 months,” Jacobson said Wednesday.

Moody’s lowered the Chicago Public Schools rating on $5.9 billion of outstanding general obligation debt to A1 from Aa3, and revised the school district’s outlook to negative from stable.

Facing a $665 million deficit, Chicago school officials on Friday released a budget for the coming year that relies on the school system’s most drastic raid on its reserve funds in 17 years — draining nearly $400 million.

The $5.16 billion budget — which includes 2 percent raises for stakeholders from teachers to the central office — draws down CPS reserves to zero, and raises property taxes for schools to the maximum $62 million allowed by law.

CPS policy currently calls for a rainy-day fund of $250 million to provide a cushion in case revenues fall short.

The CPS budget had been criticized by the Civic Federation, which called the proposed draining of reserve funds a prelude to “catastrophe.”

In issuing the bond rating downgrade, Moody’s cited “a financial profile marked by mounting pressures and the expectation of a substantial reduction in reserves and liquidity in fiscal 2013; increased pension contribution obligations; and an above-average debt burden,” facing the school board.

In announcing its budget proposal, the school system’s chief administrative officer, Tim Cawley, had acknowledged draining the reserves put the system’s bond rating at risk and could increase borrowing costs by $1 million to $2 million, but said CPS weighed those costs against some $200 million in cuts.

Schools spokeswoman Becky Carroll on Wednesday said Moody’s decision “underscores the grave fiscal situation” CPS faces, and put the blame on past administrations.

“Despite cutting more than a half-billion dollars over the last year alone, it’s not enough to undo years of revenue losses and misplaced priorities that landed the district in the financial quandary it’s in today,” Carroll said.

“We will continue to make tough decisions to put CPS on the best financial footing possible, without sacrificing investments in our children’s education.”

Laurence Msall, president of the Civic Federation, said last week that the CPS budget avoids tackling a “structural deficit” that will only deepen by the end of next school year, when a pension relief package approved by lawmakers expires, and CPS will then be facing a $1 billion deficit.

That seems to be supported by Moody’s, which said its revision from stable to negative of the outlook for CPS “primarily reflects fiscal challenges and pressures resulting from delayed intergovernmental revenues from the State of Illinois; uncertainty surrounding the outcome of current labor negotiations with the Chicago Teachers Union; increased pension contributions following three years of legislative pension relief; and an estimated $1 billion budget gap for fiscal 2014.”

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