Mayor Daley's Schools Pay Price for Illinois Fiscal Problems: Muni Credit

Friday, October 15, 2010

Chicago’s Board of Education, stung by delayed aid from Governor Pat Quinn and a credit-rating downgrade, is paying almost twice as much as comparably rated schools for taxable Qualified School Construction Bonds.

Fitch Ratings lowered its credit score on the board one level last week to A+, fifth-highest, citing delays in state aid payments and future rises in pension and debt-service costs. Standard & Poor’s assigned AA-, fourth-highest, and revised its outlook to negative. Moody’s Investors Service rates the debt Aa2, third-highest.

Yesterday’s $257 million issue of so-called QSCBs, the third-largest sale of the federally subsidized debt, offered 19- year bonds priced to yield 6.32 percent, or 2.5 percentage points above 30-year U.S. Treasuries. That’s about 82 percent more than the 1.37 percentage-point spread the Los Angeles Unified School District paid on its $190 million of the debt in May. Chicago Public Schools, the nation’s third-largest district, is paying the price for the fiscal problems the state and city are having, said Anthony Greco, a trader at Boston- based Breckinridge Capital Advisors, which manages $13.5 billion.

“Illinois as a state is in the news, and it’s not positive news,” Greco said. “Chicago has its own set of problems that mimic the state and it’s making people nervous.”

The Board of Education also sold $125 million in Build America Bonds, which carry a 35 percent subsidy. QSCBs are eligible for a 100 percent subsidy on interest costs.
Build Americas

The board’s 30-year Build Americas were priced to yield 6.52 percent, or 270 basis points abovebenchmark Treasuries. The board’s 30-year securities in a September 2009 sale were priced 165 basis points above Treasuries. That spread widened to as much as 232 basis points this week, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

In August, Fitch and Moody’s each downgraded Chicago’s general-obligation bond rating. Fitch lowered the rating to third-highest AA from AA+, and Moody’s dropped it to Aa3, fourth-highest, from Aa2. Fitch cited unfunded pension liabilities and said it “expects economic recovery in the city may lag that of the nation.”

Illinois is the nation’s second-lowest rated state, with general-obligation debt graded at A1 by Moody’s and A+ by S&P.;

Daley’s Proposal

Chicago Mayor Richard Daley this week proposed closing a projected $654.7 million deficit by dipping into cash reserves and having businesses perform some municipal services while leaving taxes as they are. Revenue from sales, income and real estate taxes has plunged $1 billion from 2007 levels, Daley’s budget said. Chicago Public Schools get about 75 percent of funding from state and local revenue.

The state didn’t deliver $236 million of aid payments by the end of fiscal 2010. As of Oct. 7, $210 million remained unpaid, which the state says it will remit by Dec. 31, according to S&P.; The board has secured a $500 million line of credit, S&P; said.

The credit company’s revision “reflects our expectation that the board will be hard-pressed to maintain balanced operations and adequate reserves in the face of the state’s ongoing fiscal problems and the board’s limited ability to increase revenues,” analyst John Kenward wrote.

Yesterday’s sale was the school system’s entire 2010 allocation of QSCBs. About $8.2 billion of the debt has been offered nationwide since the program started in April 2009.
Sandra Deangelus, debt manager for Chicago’s schools, didn’t respond to calls seeking comment.