Chicago Public Schools moved closer to an S&P Global Ratings investment grade rating thanks to the looming infusion of $1.8 billion in federal COVID-19-related relief.
S&P raised the rating late last week to BB from BB-minus and assigned a stable outlook. The action leaves the district two notches away from investment grade status and follows a
The aid from the American Rescue Plan signed by President Biden last month coupled with funding in the March 2020 and December 2020 relief packages should allow the district “to report positive operations in fiscal years 2021 and 2022," said CPS lead analyst Blake Yocom. "In our view, the federal funds will bolster the board's already positive financial trajectory.”
In addition to the ARP funding which will flow in two tranches over the next year, the district received $206 million from the March 2020 CARES Act and $796 million from last December’s Consolidated Appropriations Act. “These significant developments should allow for another addition to reserves in fiscal years 2021 and 2022 despite rising expenditures tied to the five-year Chicago Teachers' Union contract,” Yocom wrote.
The state’s $7.5 billion share of direct aid from the new package also provides a ripple effect as it lessens the chances of state aid cuts. Gov. J.B. Pritzker’s proposed fiscal 2022 budget doesn’t cut aid but it does fail to fund a scheduled $350 million increase in evidence-based funding aid for a second consecutive year due to pandemic pressures.
The district — which borrows under the Chicago Board of Education’s name — has about $8.3 billion in rated and unrated debt although that figure doesn’t count the board’s tax anticipation notes.
The rating remains in junk territory as it’s still in budgetary recovery mode. After years of using one-shots to manage deficits, and draining reserves, it was left with a $1 billion structural gap. The picture brightened in recent years after the city restored a pension levy and established a new capital improvement tax levy for the district. The state in 2017 overhauled aid formulas and began covering a portion of the district’s teachers’ pension contributions, like it does for districts outside Chicago.
“We see a variety of systemic challenges: negative cash flow, notably increased operational spending despite enrollment declines, and an ongoing contentious relationship with CTU. Long-term pressures include the board's sizable debt burden, pension liability ($14.1 billion, 43.9% funded), and a capital footprint that is not aligned with its enrollment,” S&P said.
Further upgrades will require maintaining balanced operations, reducing TAN borrowing, managing a “combative union relationship,” and successful navigation of the pandemic including its reopening schedule.
"Due to years of improving finances and additional funds made available by the federal government, CPS is on much stronger financial ground and it is pleased that S&P recognizes the district's improved financial performance," district spokesman James Gherardi said in a statement.
Pritzker last week signed legislation that restores some bargaining rights to the union that were shed under reform legislation that handed control of the district back to the city under then-Mayor Richard M. Daley. Current Mayor Lori Lightfoot has battled with the union over a contract and school reopening plans. Elementary schools now offer either remote or in-school learning and the district hopes to allow in-person learning for high school students later this month for those that choose that option.
The stable outlook signals an upgrade is unlikely in a two-year horizon.
Fitch Ratings rates the district BB and stable. Kroll Bond Rating Agency is the only one to rate the district at the investment grade level of BBB-minus and BBB, with stable outlooks, depending on whether the bonds carry a special opinion on pledged revenues.
The district last sold bonds in January when it saw
Legislation is pending that would move the board to an elected one. Lightfoot supported such a change during her 2019 campaign but is opposed to the form a new board would take under the pending legislation, which may be voted on by state lawmakers this spring. Market participants would like the city to retain some control as it keeps city “skin in the game” in managing finances.
CPS operates on a $6.9 billion budget and has an enrollment of 340,658.
Pritzker last week laid out guidelines for best practices and recommendations among school districts for the use of more than $7 billion in federal funds including $5 billion from the ARP.
Illinois' education system will receive more than $7.8 billion in federal pandemic relief funding in total over three rounds of the Elementary and Secondary School Emergency Relief Fund program, with $7 billion flowing directly to school districts over the next three years.
The 180-page guide offers ideas from experts and stakeholders from across the state to help school districts implement the funding and districts can add their own suggestions.
