Moody's puts Chicago schools on notice amid governance and policy turmoil

Moody's Ratings on Tuesday put the Chicago Board of Education on notice that it will watch the school district's next steps after Chicago Mayor Brandon Johnson appointed a new school board. All seven previous board members resigned earlier this month.

Moody's said it will be monitoring whether and how those board changes factor into decisions about the district's finances.

"The change in management alone does not represent a material credit event," Moody's said in a release. "However, the new board could take actions that shift the trajectory of the district's financial operations."

Bloomberg News

It's only been nine months since Moody's upgraded Chicago Public Schools to Ba1, leaving it one notch below investment grade and assigning a positive outlook.

Challenges Moody's cites include the effects on the CPS budget of the loss of federal pandemic relief aid and unbudgeted cost increases from a new contract with the Chicago Teachers Union, for which negotiations are ongoing; the city's request for a payment from CPS for pension costs; and a decision over whether to embark on $300 million of cash-flow borrowing in the current fiscal year, which the mayor reportedly pushed embattled CPS CEO Pedro Martinez to approve.

Martinez was appointed by the previous mayor, Lori Lightfoot, though the board members who resigned were all appointed by Johnson.

Martinez took questions from City Council members Wednesday at a special meeting of the Committee on Education and Child Development, during which he and his team predicted that the board would see downgrades from all the rating agencies if the board proceeded with the $300 million of additional short-term borrowing.

Moody's addressed that directly Tuesday.

"An increase in cash flow borrowing would indicate the emergence of a credit negative budgetary imbalance between revenues and expenditures," Moody's said. "CPS will be confronted with a much larger budget gap in fiscal 2026."

Moody's declined to respond to questions about its Tuesday release.

Martinez told city council members he favors using the surplus from the city's tax increment financing districts to solve the district's budget problems in the short term. He asked the City Council to release $484 million of TIF funds to the district, an idea that some council members questioned.

"If those TIFs didn't exist, all of those funds would be with CPS," Martinez said. Johnson is reportedly pressing for additional borrowing amid a fight over who should pay pension contributions for non-teachers employees of the school districts. The idea is that the borrowed money can fund this year's payment.

Martinez told the council members "we don't have any obligation by law" to make the pension payment to the city.

Martinez said the city and its schools need to make common cause to argue for more school funding from the state government.

"We know already, for next year, our projected deficit is half a billion dollars," he said. "I see a path where [we could use] the TIFs that have grown so much, for short-term support. The mayor's team has been committed to working with us on a longer-term plan."

Finance Committee Chair Pat Dowell seemed amenable to Martinez's TIF request. 

"We are in the intensive care unit on life support, and we need to work together," she said, praising the mayor's $1.25 billion economic development and affordable housing bond measure earlier this year, which relied on funds from expiring TIF districts. "I think I understand your calling for what I would call a short-term bridge grant to get us through next year… I support that, versus a long-term payday loan." 

Dowell asked Miroslava Mejia Krug, the district's chief financial officer, about the cost of a short-term financing.

"It would be very hard for us to do tax-exempt bonds for operating expenses, so we'd have to go for other ways to get money into our coffers, and it would pretty much have to be taxable bonds," Krug said.

Martinez said the money for operating expenses would have to come from a refinancing.

"The original bond has to be for capital, by law," he said, noting that they don't favor borrowing for operating expenses.

"CPS has been advocating for additional TIF revenues for pension payment and labor agreements since the mayor took office," Martinez said in a statement Wednesday. "We are excited to see more support for a higher release of TIF funding. The fact that our government and labor partners are coalescing around this revenue source means we can address these looming costs without cuts, without taking on expensive short-term debt and without waiting for additional funding to materialize from the state."

The school board — which has historically been appointed by the mayor — is about to begin a transition with the public election next month of 10 members who will serve along 11 mayoral appointees. After the 2026 election, the entire board will be elected.

Fitch Ratings in September affirmed the board of education's issuer default rating and unlimited tax general obligation bond rating at BB-plus and its dedicated capital improvement tax bonds at A. The outlook is stable.

Kroll Bond Rating Agency rates CPS GO bonds either BBB or BBB-plus, depending on whether the bonds have a special revenue bond legal opinion attached; the outlook is stable. S&P Global Ratings has rated the board's 2023A unlimited tax GO bonds BB-plus since an upgrade in April 2023.