On Monday, the Chicago Public Schools presented a proposal whereby the district would be selling $1.16 billion worth of bonds. The district has been suffering from a big deficit in its budget, sliding credit ratings as well as lack of plan regarding the increasing costs of pension payments.
Chicago Public Schools, which is the third-largest public school system in the U.S. will vote on the proposal in the middle of the week. If the plan is approved, proceeds from the sale of bonds will be used to pay the banks so that swaps, which has been used to put off interest-rate risk could be terminated. Likewise, they would use some of the money to refund bonds that are already outstanding as well as improve the facilities in the public schools in the state.
Drop in financial ratings
The district has seen a drop in their financial ratings. Its ratings were dropped by two notches by Standard & Poor’s in early July. Moody’s on the other hand gave it a “junk” rating. The Fitch Ratings it got in March and the downgrade given by Moody’s Investors Service set off termination payments of the district for around $228 million to counterparties of a bank swap.
The complete budget is yet to be revealed by school officials although there was an announcement made last week that the spending plan would depend on the pension savings of $500 million that is yet to be ordered by the Illinois Legislature. The savings would be incorporated with their share in state funding that amounts to $106 million.
The Chicago Public School district will have a $1.1 billion deficit in their fiscal budget for next year due to the expected pension payment of about $675 million. Funds had been juggled so that the $634 million pension payments for 2015 could be met. The school system used borrowed money in June, which included $200 million from spending cuts and tax anticipation notes.
Huge deficit and debt
Aside from its deficit of $1.1 billion for its 2016 budget, the school district also needs to provide funds for the teachers’ pension that is worth $700 million. The district also has a debt load of $6 billion and will also have to find solutions for the teachers’ contract that had expired recently. The board had already issued a memo for spending cuts of $200 million together with a warning that borrowing and more cuts could ensue if the $500 million pension relief from the state is not forthcoming.
If the plan is approved by the board during their mid-week meeting, it could be the biggest borrowing of the decade for the district.
The Chicago Public School district’s borrowing had been more difficult because their creditworthiness had crumbled. It could be a temporary measure but the borrowing move will still be costly for the public school system.