|[November 14, 2012]
Fitch Affirms Chicago Board of Ed (IL) ULTGOs at 'A'; Outlook Negative
NEW YORK --(Business Wire)--
Fitch Ratings rates the Chicago Board of Education, IL's (the board's)
approximately $106 million unlimited tax general obligation refunding
bonds (dedicated revenues), series 2012B at 'A'.
The bonds are expected to be sold through negotiation the first week in
December. Proceeds will provide budget relief in fiscal 2013 and fiscal
Fitch affirms its 'A' rating on the board's approximately $6.1 billion
in outstanding unlimited tax general obligation (ULTGO) bonds at 'A'.
The Rating Outlook is Negative.
The bonds are general obligations, payable from unlimited ad valorem
taxes levied against all taxable property in the City of Chicago. The
bonds are additionally secured by state aid revenue.
KEY RATING DRIVERS
REDUCED FINANCIAL FLEXIBILITY: The labor agreement following the recent
Chicago Teachers' Union (CTU) strike results in increased costs to the
Chicago Public Schools (CPS) of about $103 million annually, or 2% of
fiscal 2013 general fund spending. The increases come at a time of
highly stressed operations, when Fitch believes spending reductions are
imperative to maintaining fiscal stability.
BUDGETARY GAP LOOMS LARGE: Prior to the settlement CPS had already
planned to nearly deplete reserves in fiscal 2013. The schools now face
a budget gap of about $1 billion in fiscal 2014. The gap arises largely
from the combination of the new labor contract, use of reserves to
balance the current fiscal year's budget, and a dramatic jump in pension
costs in fiscal 2014.
OUTLOOK REMAINS NEGATIVE: Fitch believes dramatic changes are necessary
over the next several months to support operating and fixed cost
spending in fiscal 2014. Options within the board's control appear
unlikely to be sufficient. The coming challenges appear considerably
greater than they have been historically.
PENSION WEAKNESS: Weak pension funded ratios were exacerbated by payment
deferrals for the teachers' plan in fiscal years 2011-2013. The city's
plan in which non-teachers participate is even more poorly funded.
Proposed pension reform, if approved by the state, could reduce the
pressure notably. However, approval is uncertain and outside the
UNFAVORABLE DEBT POSITION: The district's debt levels are above average
with very slow amortization. The current debt restructuring will further
slow overall amortization.
CAPITAL PLAN REDUCED: Expectations for future capital spending are down
significantly from prior plans. However, Fitch believes
maintenance-related needs may exceed planned spending.
ECONOMY RECOVERING SLOWLY: Chicago ('AA-', Stable Outlook) benefits from
a large and diverse economic core whose employment base and housing
market are nonetheless under substantial stress.
WHAT COULD TRIGGER A RATING ACTION
PERSISTENT FISCAL 2014 GAP: A further rating downgrade might result if
CPS is unable to address the large upcoming budget gap without
implementing measures that reduce future financial flexibility, such as
further deferral of fixed cost payments or use of more than a moderate
level of one-time solutions to close the gap.
MOUNTING FIXED COSTS: Fitch believes management's ability to address
mounting fixed costs, including full funding of annual pension
contributions and increased debt service, will be tested. Inability to
contain growth in these costs would additionally pressure the rating.
CPS served 404,151 students in school year 2011/2012 in a district with
675 schools that is coterminous with the city. Enrollment trends are
slowly declining and management reports its demographer projects
continued declines of about 1% annually.
STRIKE SETTLEMENT INCREASES COSTS, REDUCES FLEXIBILITY
The settlement of the recent CTU strike results in cost increases of
about $103 million annually over the four-year term through fiscal 2016.
The fourth year of the contract will be implemented at CPS's option,
with CTU approval. The contract includes COLAs, step and lane increases,
and the addition of 512 positions to accommodate a longer school day.
CTU represents about 74% of board employees.
Prior to the tentative agreement Fitch cited the need for CPS to address
a large budgetary imbalance of at least $770 million in fiscal 2014
(14.9% of fiscal 2013 budgeted spending). The district now estimates
that imbalance to be about $1 billion. Fitch believes the settlement
narrows the options for achieving balance as salary and wage increases
are already built in. Fitch also believes long-term savings included in
the agreement primarily avoid, rather than redue, future costs. These
include eliminating a pension enhancement program, reducing sick day
accumulation, and changing the step increase structure. However, the
changes should have a positive impact on pension ARC payments.
RESERVES HISTORICALLY MODERATE BUT VOLATILE
Fiscal 2011 ended with a large operating surplus after transfers of $316
million and a sound unrestricted general fund balance (the sum of
committed, assigned, and unassigned under GASB 54) of $521 million or
10.6% of spending. Both the surplus and the balance were much improved
from fiscal 2010, which ended with a general fund operating deficit of
$102 million and an unreserved balance of 4.1% of spending.
While the build-up of reserves provided a sound cushion for the
financial pressures to come, it was garnered primarily through
non-recurring sources. These included the release of city tax increment
funds ($127 million), a debt restructuring ($110 million), pension
relief ($400 million per year through fiscal 2013), and federal stimulus
funds through the EduJobs program ($50 million per year through fiscal
The fiscal 2012 CAFR is not yet available, but Fitch anticipates it will
show a modest drawdown in general fund balance and a still-solid ending
unrestricted general fund balance of about 8% of spending. Results
reflect continued pension relief, EduJobs funding, and the suspension of
a contractual 4% salary increase based on projected financial strain.
Favorably, state aid payment delays had lessened by the end of fiscal
2012 to one month from three. At present the delays are back up to five
months but budgeted to recede to three months by fiscal year-end.
FISCAL 2013 BUDGET DEPLETES RESERVES, SETS UP GAP FOR 2014
The amended fiscal 2013 budget, reflecting the labor settlement,
includes use of all but $63 million in unrestricted reserves to support
spending. The additional spending related to the CTU contract will be
accommodated mainly with non-recurring actions, including the upcoming
debt restructuring that defers debt service spending of $50 million in
each of fiscal years 2013 and 2014.
Fitch views the fiscal 2013 budget situation with particular concern
given a required $338 million increase in pension spending in fiscal
2014 to $534 million (10.3% of budgeted fiscal 2013 spending).
Fitch believes significant actions will be necessary in fiscal 2014 to
avoid a deficit position. Fitch's concern that near-term non-recurring
solutions will come at the expense of longer-term flexibility is
heightened given the increased size of the gap and reduced ability to
achieve productivity gains from labor. Recent examples of such solutions
include the deferred pension payments and debt restructuring that
deferred principal payments.
Recent financial management turnover is an additional challenge for the
district. Both the CEO and CFO were just replaced, and senior management
vacancies include the controller and treasurer positions.
PENSION LIABILITIES CONSISTENT WITH WEAK REGIONAL NORMS
Pension funded ratios have dropped significantly in the last several
years due to a combination of lower-than-expected investment returns and
payment deferrals for the CTU plan granted by the state for fiscal years
2011-2013. As of June 30, 2011 the plan was 59.9% funded, or 51.4% using
a 7% return rate, compared to 79.7% and 68.4%, respectively, in fiscal
2008. District non-teachers participate in even more poorly funded city
The increased pension payment beginning in fiscal 2014 is needed to
bring payments up to the level required to increase the CTU plan's
funded ratio to 90% by fiscal 2059. Fitch does not believe this is an
aggressive goal with respect to addressing the unfunded liability and
expects the district will be challenged to meet it.
Pension reform being discussed at the state level could have a
meaningful impact on the board's liability but so far there are no solid
indications of when, if, or how it would be implemented. Other
post-employment benefits (OPEB) are similarly underfunded but annual
payments are capped at $65 million, leaving an increasing burden for
employees and retirees. Fitch is concerned about not only these plans
but other city, Cook County, and State of Illinois plans which are all
DEBT CONSTRAINTS MAY HINDER ABILITY TO ADDRESS CAPITAL NEEDS
The district's overall debt levels are above average at 6.7% of market
value, with very slow amortization of 31% in 10 years, the result of
long-dated debt and restructurings. The upcoming restructuring will
further decrease amortization slightly. However, Fitch views positively
a reduction in variable rate debt to 23% from 49% in the last five
years. Management has worked to stagger liquidity facility expiration
dates to reduce rollover risk, and reports favorable bids for recent
Planned capital spending has been reduced to $100-200 million annually
through fiscal 2017, compared to $500-700 million spent in each fiscal
year between fiscal 2009 and fiscal 2012. Fitch views positively
management's attempts to reduce its debt burden but is concerned that
slated amounts will be insufficient to keep up with essential capital
maintenance needs on the district's vast and aging facilities.
ECONOMY SHOWING SOME IMPROVEMENT:
Chicago serves as the economic and cultural hub for the Midwest region
and maintains good prospects for long-term stability if not growth. The
city gained over 30,000 jobs in 2011 primarily in professional and
business services despite reductions in both manufacturing and public
service. Chicago's population totaled 2.7 million in 2011, down 7% from
the 2000 census, but still accounts for 21% of the state's entire
Socioeconomic indicators are mixed with elevated unemployment and
individual poverty rates, slightly below average per capita income
levels, but strong educational attainment levels. As of July 2012, the
city's unemployment rate at 10.5% was still well above the state and
national averages. A 2.7% boost to employment drove a notable
improvement in the rate from the 12.3% recorded in July 2011.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, Zillow.com,
National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14,
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
[ InfoTech Spotlight's Homepage ]