In yet another financial degradation for the Chicago Board of Education, Fitch Ratings downgraded them to junk bond status, on Monday, and also warned of a cash flow problem that would affect the payment of daily expenses, and another challenge for newly appointed chief executive Forrest Claypool; but the change also hammers another nail into the coffin of Chicago finances.
The change from BBB- to BB+, comes on the heels of increased borrowing costs for CPS as they “saw its cost to borrow climb in April amid the uncertainty created by a federal investigation and a looming annual budget deficit of more than $1 billion,” this “nearly two months after Moody’s Investors Service stripped the board of its investment grade rating,” said Crain’s Chicago Business.
“The downgrade reflects the limited progress the Chicago Public Schools has made in addressing a structural budget gap approximating 20 percent of spending,” Fitch said in a statement. As a result, “the district is highly dependent on borrowing in the upcoming months to finance ongoing operations.”
Heavy dependence on borrowing has also caused the agency to monitor the financial behavior of the CBOE, and it will run out of cash, they say, at the end of the current fiscal year. Solutions, including a property tax increase, of $170 million, would require state legislative approval, which seems unlikely in the contentious atmosphere between Gov. Bruce Rauner, a Republican, and the Democratic legislative majority.Changing the state formula for funding, as well as having teachers pick up a larger portion of their pension seem remote, especially as current teacher contract negotiations have ended mostly in stalemate. The district currently pays the roughly $175 million pension tab.
Fitch was well aware of the political situation, as reported in the Chicago Tribune, when they stressed that “most options for relief are dependent on actions by the state, which is plagued by political disagreements and its own challenged financial position. Most proposed solutions to the pension problem, Fitch said, ‘face steep hurdles.’”
This recent news comes less than one week after the CBOE voted to borrow $1.16 billion in bond sales, faces the spectre of classroom cuts, and a considerable increase in borrowing costs, thus further miring them in more debt, including the aforementioned 20 percent structural deficit. Attempts at saving money have yielded only modest results and the recent $200 million of cuts included cutting 1,400 positions, but 25 percent, of those, were already vacant.
Crain’s also noted that “in a statement Ginger Ostro, chief financial officer of CPS, said: ‘As Fitch points out, CPS has limited options for addressing our $1.1 billion shortfall, which makes it even more critical to reach a comprehensive budget solution with our partners in Springfield. Our priority will continue to be working toward that broad solution so that we don’t have to make even deeper reductions or undertake more unsustainable borrowing.’”
Fitch did acknowledge an improved local economy, but gave gave scant hope for the future, and noted the “poor working relationship” with the Chicago Teacher’s Union, as part of its bleak outlook.