By Caitlin Devitt
After a long year at Chicago Public Schools (CPS), there won’t be a summer break for the slow-motion financial crisis at the nation's third-largest school district.
A look at CPS’ borrowing sheet illustrates how the junk-rated district has been able to postpone a final reckoning by attracting investors with meaty yields and new revenue streams.
After five straight years of enrollment declines, the district would be better served by focusing more on innovation in the classroom and less on innovation in the capital markets. Municipal borrowing should finance capital improvement, not merely keep the patient alive.
CPS is entirely dependent on borrowing and has increased its reliance every year. In fiscal year 2016, for example, short- and long-term debt climbed by $614 million compared with FY15, according to the FY16 comprehensive annual financial report.
The short-term borrowing helps cover cash shortfalls as the district awaits twice-annual property tax collections. The long-term borrowing helps cover operating deficits.
Last year, investors started to show skepticism amid the district’s dismal math (revenues down, expenses up) and the State of Illinois’ political dysfunction.
In February of 2016, CPS stumbled in the market when it had to briefly delay a general obligation (GO) sale and then trim the size of the deal and pay a top rate of 8.5% to attract buyers.
In November, the district abruptly canceled another GO deal, with a vague reference to “market conditions.”
With its ability to borrow on its own pledge now in doubt, the district created two new credits to attract investors.
CPS hit the market in December with a new property tax pledge called a capital improvement tax, enriched with a dedicated revenue stream and attorneys’ favorable opinions of its special status in a bankruptcy. Investors ate it up.
Last month, the district came up with a new type of short-term credit, which features delayed state grants. JPMorgan is expected to buy the notes as a direct placement, and the interest rate is still being negotiated.
The state grant-backed notes is on top of the district’s $1.55 billion of short-term borrowing authority in FY17. It tapped out the line out by December, with two private deals with JPMorgan and one with PNC. It used the $600 million PNC note to pay off a February debt service payment, then paid back PNC by the end of March, once property taxes rolled in.
The district will likely hit its short-term borrowing cap (it’s limited to 85% of its property tax levy) by FY18 or FY19. What the CPS finance team will come up with then is anyone's guess.
Chicago’s administration knows the city and the state won’t regain its vigor as long as CPS remains in a freefall. A new Chicago tax is likely, and, if the state’s leaders are ever able to reach a budget deal, that is expected to include a revamped school funding formula.
The universe of buyers willing to buy CPS’ bonds has shrunk but plenty remain to help CPS mask its structural problems.
What happens if the state doesn’t reach a deal to fund K-12 schools by August? Even if it does, without new money, what's the district's long-term game?
At a certain point for distressed credits, the investor conversation shifts from yield to recovery. We might not be too far off from that point at CPS.
Caitlin Devitt is a senior reporter for Debtwire covering stressed credits in Texas, Illinois, Louisiana, charter schools and school districts. She can be reached at caitlin.devitt@debtwire.com.
