Another one bites the dust
Wednesday, May 13, 2015 - Posted by Rich Miller
* Oy…
…Adding…. From Moody’s…
Rating Action: Moody’s downgrades Chicago Board of Education, IL’s GO to Ba3; outlook negative
Global Credit Research - 13 May 2015
Ba3 rating applies to $6.2 billion of GO debt
New York, May 13, 2015 — Moody’s Investors Service has downgraded to Ba3 from Baa3 the rating on the Chicago Board of Education, IL’s $6.2 billion of outstanding general obligation (GO) debt. The Chicago Board of Education is the primary debt issuer for the Chicago Public Schools (CPS) (the district). The outlook remains negative.
SUMMARY RATINGS RATIONALE
The Ba3 rating reflects CPS’s steadily escalating pension contributions and use of reserves to fund those contributions. We believe pension costs will place increasing strain on the district’s precarious financial position absent material revenue growth or expenditure reduction, both of which appear increasingly difficult for the district to achieve. Based on the Illinois Supreme Court’s May 8 overturning of the statute that governs the State of Illinois’ (A3 negative) pensions, we believe that the district now has fewer options for reducing its own pension costs. We view the district’s ability to grow operating revenue as similarly constrained. In our opinion, state budget pressures may limit future state aid increases to the district. The district’s credit profile is also pressured by competing demands placed on the local property tax base from the debt and unfunded pension liabilities of the City of Chicago (Ba1 negative) and other overlapping local governments. Finally, the district’s governance ties to the city inform our credit opinion.
OUTLOOK
The negative outlook reflects our expectation that CPS’s budget pressures will intensify due to rising pension costs. The district’s net annual pension contribution will increase by 6% this year. In fiscal 2015, the district’s mandatory net annual pension contribution totals $635 million (an amount which equals the $697 million contribution less state support of $62 million). In fiscal 2014, the district’s mandatory net annual pension contribution totaled $601 million (an amount which equaled the $613 million contribution less state support of $12 million). Further increases are scheduled in future years. CPS officials are actively working to identify revenue enhancements and expenditure adjustments that will be needed to accommodate the increased payments, but solutions remain uncertain. This budget gap is a credit negative that is becoming more pronounced as fiscal 2016 approaches. The outlook also incorporates the likelihood of continued growth in the unfunded pension liabilities of the City of Chicago. The costs of servicing those liabilities exacerbate the practical limitations of generating revenue from a shared tax base.
WHAT COULD CHANGE THE RATING UP (or revise the outlook to stable)
• Revenue growth and/or reductions in other operating expenditures that enable the district to accommodate increased pension costs into annual operating budgets without reliance on non-recurring revenue sources
• District or state actions that halt the growth of the district’s unfunded pension liabilities
• Improvement in the City of Chicago’s credit profile that strengthens CPS’s credit quality given the two entities’ governance ties and coterminous tax base
WHAT COULD CHANGE THE RATING DOWN
• A continuation of structurally imbalanced operations
• Narrowing of the district’s fund balances and liquidity
• Continued growth in the debt and/or unfunded pension liabilities of the district and/or overlapping governments
• Declines in the City of Chicago’s credit profile that weakens CPS’s credit quality given the two entities’ governance ties and coterminous tax base
* And…
Rating Action: Moody’s downgrades Chicago Park District, IL’s GO to Ba1; outlook negative
Global Credit Research - 13 May 2015
Ba1 rating applies to $616 million of GO debt
New York, May 13, 2015 — Moody’s Investors Service has downgraded to Ba1 from Baa1 the rating on the Chicago Park District (CPD), IL’s $616 million of outstanding general obligation (GO) debt. The Ba1 rating applies to $333 million of general obligation unlimited tax (GOULT) debt and $283 million of general obligation limited tax (GOLT) debt. The outlook remains negative.
SUMMARY RATINGS RATIONALE
The Ba1 rating on CPD’s GOULT debt reflects the district’s governance ties to the City of Chicago (Ba1 negative). Based on the Illinois Supreme Court’s May 8 overturning of the statute that governs the State of Illinois’ (A3 negative) pensions, we believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably. We perceive increased risk that the city’s intensified pressures will adversely affect CPD’s financial operations and position. CPD’s tax base, which is coterminous with that of Chicago, is highly leveraged by the debt and unfunded pension obligations of the city and other overlapping governments. Our opinion weighs the severity of these challenges against the district’s credit attributes, which include an ample liquidity position; considerable ability to reduce expenditures; and manageable direct debt levels.
The Ba1 rating on CPD’s GOLT debt reflects the credit characteristics inherent in the GOULT rating and the sufficient debt service coverage provided by the debt service extension base (DSEB) levy that secures CPD’s GOLT debt. The DSEB is a dedicated debt service levy that is unlimited by rate but is limited by the amount of the DSEB. The district’s 2015 DSEB levy equaled $46.8 million, which provides adequate coverage as it exceeds maximum annual debt service (MADS) on outstanding GOLT debt.
OUTLOOK
The negative outlook reflects the district’s governance ties to the City of Chicago, the GO rating of which carries a negative outlook. The outlook also incorporates the likelihood of continued growth in the city’s unfunded pension liabilities, and the costs of servicing those liabilities. The substantial funding needs of overlapping governments exacerbate the practical limitations of generating revenue from a shared tax base.
WHAT COULD MAKE THE RATING GO UP
• Improvement in the City of Chicago’s credit profile that strengthens CPD’s credit quality given the two entities’ governance ties and coterminous tax base
• Change in governance framework that reduces the influence of the city on the district
WHAT COULD MAKE THE RATING GO DOWN
• Declines in the City of Chicago’s credit profile that weakens CPD’s credit quality given the two entities’ governance ties and coterminous tax base
• Substantial reduction in the district’s reserves or liquidity
• Determination by a court of law that the current statute governing the district’s pension plan is unconstitutional
- Downstate - Wednesday, May 13, 15 @ 3:51 pm:
There are many institutional investors that can no longer hold these types of securities. Many banks will be precluded from keeping these in their portfolio.
- Norseman - Wednesday, May 13, 15 @ 3:56 pm:
Moody must be having fun.
- Formerly Known As... - Wednesday, May 13, 15 @ 3:57 pm:
What was their first clue? CPS passing a 12 month budget that uses 14 months of revenue?
- E. Hemingway - Wednesday, May 13, 15 @ 3:57 pm:
“How did you go bankrupt?”
Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
- Wordslinger - Wednesday, May 13, 15 @ 3:59 pm:
I’m starting to think this “gravitas” thing isn’t such a big deal.
Was nice of them to wait until after the election to drop the hammers.
- Wensicia - Wednesday, May 13, 15 @ 3:59 pm:
Illinois is next…
- Bill White - Wednesday, May 13, 15 @ 4:00 pm:
This made me smile with gallows humor:
WHAT COULD MAKE THE RATING GO UP
• Change in governance framework that reduces the influence of the city on the district
- Wordslinger - Wednesday, May 13, 15 @ 4:01 pm:
wensicia, it would probably be wise for the state to get serious about an FY16 budget.
- archimedes - Wednesday, May 13, 15 @ 4:01 pm:
So, in a nutshell, City goes down they all go down. City goes up, they all go up.
Looks like it is high time to man up and pass the property tax increase.
- Tequila Mockingbird - Wednesday, May 13, 15 @ 4:05 pm:
Wordslinger, You really think the election is the timing? I think it is more likely the court blow to the pension reform law and fed pressure on the rating agencies take a stronger stance on the investments. and I agree, the state and some other units are going to share the spotlight sooner or later.
- Anonin' - Wednesday, May 13, 15 @ 4:05 pm:
Yikes the short sellers must be dancin’ big time. Wonder if the media is planning’ to cover?
- jerry 101 - Wednesday, May 13, 15 @ 4:05 pm:
“Finally, the district’s governance ties to the city inform our credit opinion.”
So, basically, Moody’s doesn’t like Rahm.
- Michelle Flaherty - Wednesday, May 13, 15 @ 4:12 pm:
Turns out Chuy Garcia did win.
- Name/Nickname/Anon - Wednesday, May 13, 15 @ 4:24 pm:
CPD had pension liabilities reduced with reform and the legislation hasn’t been challenged. Did Moody’s even consider that?
- Name Withheld - Wednesday, May 13, 15 @ 4:27 pm:
Ty Fahner’s been making phone calls again.
- Juvenal - Wednesday, May 13, 15 @ 4:43 pm:
Jerry 101:
No, Moody’s loves Rahm.
But the lack of an independent board whose primary concern is their fiduciary duty to the district is a reasonable concern for an investor, especially when the city and schools are essentially competing for the same
Tax dollars as Moody points out.
- A guy - Wednesday, May 13, 15 @ 4:46 pm:
Timing has plenty to do with all of this. The Election? Maybe. The ISC decision: beyond any shadow of a doubt.
- Steve - Wednesday, May 13, 15 @ 4:51 pm:
What if raising taxes doesn’t yield more revenues but leads to layoffs to pay the tax bill? It appears Chicago can’t afford to run a public school system the way they’ve been running it.
- From the 'Dale to HP - Wednesday, May 13, 15 @ 5:04 pm:
If Rauner and the General Assembly do not think this is also their problem, they’re in a for a huge shock in the coming months if they don’t find revenue and fast.
- mokenavince - Wednesday, May 13, 15 @ 5:05 pm:
We will get a tax increase. We should start shedding 50% of our governments at once.
Privatize state jobs, as many jobs as possible.
We have to live within our budget. We have to fix roads, schools, and educate our kids. One more thing our state pays outrageous workers comp. as do our businesses . It won’t be easy but we can do it. Madigan got us in this mess. We need someone besides him to get us out.
- Cable Line Beer Gardener - Wednesday, May 13, 15 @ 5:05 pm:
This news on the same day the Trib reported this.
http://www.chicagotribune.com/news/local/breaking/ct-cps-theft-charges-met-0514-20150513-story.html#navtype=outfit
Employees charged with theft of $870,000.
- Ghost of Harold - Wednesday, May 13, 15 @ 5:46 pm:
Residents of Chicago have an Adjusted Gross Income of about $90bn, not to mention those who work but do not live in Chicago. A 1% city income tax would solve everything. If they put on that income tax, very few people would move, and there’d be a line of other people to the buy the homes of those who did decide to move. Bite the bullet!
- Audge - Wednesday, May 13, 15 @ 5:47 pm:
Moody’s … Isn’t this the same group of happy folk who used to give “A” ratings to mortgage default swaps and similar economic weapons of mass destruction???
- GraduatedCollegeStudent - Wednesday, May 13, 15 @ 6:13 pm:
===We will get a tax increase. We should start shedding 50% of our governments at once.
Privatize state jobs, as many jobs as possible.
We have to live within our budget. We have to fix roads, schools, and educate our kids. One more thing our state pays outrageous workers comp. as do our businesses . It won’t be easy but we can do it. Madigan got us in this mess. We need someone besides him to get us out. ===
Haven’t we been privatizing state functions for decades?
- Rod - Wednesday, May 13, 15 @ 6:22 pm:
Ghost of Harold - is a municipal income tax legal under the Illinois municipal code? I do not see anything in 65 ILCS 5/8-3-1 that would allow for such a tax and I know for a fact the General Assembly would not approve such a taxing power for city and village governments, nor would Governor Rauner.
- Judgment Day - Wednesday, May 13, 15 @ 7:23 pm:
“Moody’s … Isn’t this the same group of happy folk who used to give “A” ratings to mortgage default swaps and similar economic weapons of mass destruction???”
———-
Yup. You got it. Actually, it wasn’t “A” - it was usually “AAA” or at worst, “AAB”. Semantics in credit ratings…..
And under the new posting policies, I am constrained to just describe those kindly folks who did all of that as being “financial engineering” types.
But then the feds gave them a pass, but now the credit ratings firms are absolutely far beyond terrified that they will repeat the 2007-2009 MBS debacle, and this time around, it’s very unlikely they would get a free “Get Out of Jail” card.
I’m just waiting for the third card now - Cook County Government.
- Wensicia - Wednesday, May 13, 15 @ 7:38 pm:
Emanuel on WTTW just now:
Moody’s is wrong because we have a pension agreement that will survive the Court, why didn’t they go after the state as that’s whom the Court decided was wrong with their pension law, and last but not least, a casino will solve our revenue problems!
Sheesh.
- RNUG - Wednesday, May 13, 15 @ 8:32 pm:
== why didn’t they go after the state ==
Because the rating companies had previously assumed SB-1 would be found unconstitutional and assigned their ratings for the State accordingly. Emanuel should have known that … but it’s much better PR to say it should have been the State instead of us. More of the divide and conquer blame game.
- Emily Booth - Wednesday, May 13, 15 @ 8:46 pm:
Fall out from the Daley years.
- Anon - Wednesday, May 13, 15 @ 8:57 pm:
And the pension crisis gets more real.
- Newdealer - Wednesday, May 13, 15 @ 9:08 pm:
Rating agencies should be destroyed. They play no constructive role in the economy for the middle class.
- Big Muddy - Wednesday, May 13, 15 @ 10:12 pm:
==Fall out from the Daley years.==
Decades. Otherwise correct.
And you can say the same for the state under Madigan.
- Under Further Review - Wednesday, May 13, 15 @ 11:20 pm:
The only appointed board of education in the state, accountable to no one, but the mayor, has failed the taxpayers and the students once again. In every other district, school board members must face the voters.
- Southside Markie - Thursday, May 14, 15 @ 12:44 am:
Whether one agrees with Moody’s or not is irrelevant. The reality is that, as Downstate points out, the rating precludes institutional investors from buying these issuers’ debt due to the investors’ internal protocols. This means that increased interest rates will be the least of the issuers’ problems. Placing the debt at any interest rate is going to be a very difficult proposition for underwriters — something they may not want to engage in since they only get paid if the debt is placed. Look for Fitch and S&P to follow. They are not going to want to bear the risk of endorsing this debt now that Moody’s has broken the ice.
- Carhartt Representative - Thursday, May 14, 15 @ 7:58 am:
We have Barbara Byrd Bennett working 7 jobs aside from the one CPS hired her for. School Board President David Vitale who brokered toxic swaps between CPS and his friends and also has major conflicts of interest with AUSL. There’s the over budget Magic Sodexo contract to not clean the schools and all the money turned over to corrupt charter operations like UNO. It’s a shame that corruption got Chicago into much of this mess, but it’ll claw it’s way out on the back of students and their teachers.
- Wordslinger - Thursday, May 14, 15 @ 8:32 am:
SM, the problem isn’t future bond issues, but the possible call on $2.2 billion in existing debt that junk status now allows. It’s going to cost a lot of new juice to wriggle out of that.
The junk bond market is huge — $1.3 trillion — and red hot as investors continue to chase yield. Junk bond munis backed by government revenues would sell in minutes as a replacement for junk bond oil backed by nothing but the hope of $120 a barrel.
Junk status is certainly a Scarlet Letter for Daley and Emanuel and a testament to their hubris and mismanagment, but it wouldn’t keep the city from borrowing. Just more juice.
- Bond Analyst - Thursday, May 14, 15 @ 8:50 am:
You forgot to copy and past this part of the Moody’s report: “ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. “
- Southside Markie - Thursday, May 14, 15 @ 8:51 am:
Wordslinger: Didn’t mean to downplay what it means for existing debt. Couldn’t agree with you more on that. With due respect, don’t agree that future sales will be easy if the issuers want to pay the juice. You make a good point. I wonder, though, how much less speculative these issuers’ debt is compared to oil-backed junk, absent a GO backing and dedicated levies. Especially given the ever-shifting nature of the political landscape. I also wonder how long it will take the issuers to adapt to this because their in-house and outside professionals are not experienced with placing debt with that market.
- Apocalypse Now - Thursday, May 14, 15 @ 8:52 am:
Let’s see, which party has been in charge in Chicago for the last 5 or 6 decades?
- Wordslinger - Thursday, May 14, 15 @ 9:05 am:
AN, why don’t you ask Rauner and Griff? They and their pals have been the big money backing Daley and Emanuel.
The answer would be the Big Money Party since Richard II.
Smart businessmen.
Seriously, are you a kid in a treehouse or something?
- Arsenal - Thursday, May 14, 15 @ 9:27 am:
“Let’s see, which party has been in charge in Chicago for the last 5 or 6 decades?”
If you can draw a coherent ideology or set of policies from Papa Daley, Byrne, Washington, Junior, and Rahm, you’re almost certainly leaving out some big things.