Moody's downgrades CPS bonds

July 11, 2012

Scott Kanowsky

Moody's Investor Service announced Tuesday it has downgraded Chicago Board of Education's general obligation debt from Aa3 to A1, raising pressure on an organization already facing a number of fiscal quandaries. The Chicago Board of Education owns and operates the Chicago Public Schools.

The decision comes after CPS announced last week its intention to completely empty its reserve funds — a sum reaching nearly $432 million — to partially plug a deficit of $665 million. Other efficiencies and cuts equaling $144 million will be added to fill the rest of the gap in CPS' $5.16 billion budget for fiscal year 2013.

CPS is also involved in ongoing contractual discussions with the Chicago Teachers' Union, which is asking for salary increases.  

In its report, Moody's also switched CPS' financial outlook from stable to negative, warning that "If progress is not made toward improving the financial condition and liquidity of district operating funds...the district's general obligation credit quality may be impaired."  Moody's also expressed concern over pension funding levels and "uncertainty" over labor negotiations with the teachers union.

The downgrade will make it more expensive for CPS to buy municipal bonds. A spokesman for Moody's said another possible downgrade could also come in the future.

“[The] decision underscores the grave fiscal situation facing the Chicago Public Schools," wrote district spokeswoman Becky Carroll in a statement.

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

The downgrade does not come wholly as a surprise.

Chief Administrative Officer Tim Cawley acknowledged in an interview with WBEZ that draining reserve funds could lead to a downgraded bond rating. Cawley, however, said the fiscal pain felt from a downgrade would not equal "the pain felt from closing this gap with cuts instead of reserves."

Laurence Msall, president of the Chicago-based budget watchdog Civic Federation, had previously blasted CPS for creating a "fiscal time bomb."  In an interview Wednesday, Msall said he was not surprised by Moody's actions.

“It is financially irresponsible to go into the coming year with a budget that has no reserves and doesn’t have a plan for how you will replenish the reserves, how you will meet your upcoming pension costs, and your upcoming debt service costs,” he said.  Msall added that CPS is facing intense "financial and political" realities.

The Chicago Board of Education must still approve the FY2013 budget, but that vote will not happen until the end of July.