Analyst: Credit downgrade to junk spells more trouble for Chicago Public Schools
Standard & Poor’s decision to sink Chicago Public Schools’ credit rating into junk-bond territory shortly after the district’s new $9.5 billion teachers’ contract was hammered out will worsen the district’s financial woes, according to a recent report issued by a Chicago-based conservative think tank.
"This is more bad news for CPS and Chicago taxpayers, as the downgrade will only increase borrowing costs for the district and the burden on city taxpayers," Illinois Policy Institute Policy Analyst John Klingner said in his report, published by the institute.
S&P's downgrading of Chicago Public Schools came just ahead of the school district's plan to sell $426 million in bonds. S&P cited the new contract with the Chicago Teachers Union among its reasons for downgrading the district’s credit from B+ to B, with a negative outlook.
"The rating action reflects our view of the district's continued weak liquidity in its most recent cash-flow forecast and reliance on cash flow borrowing, combined with the increased expenditures in the district's new labor contract that exacerbate the district's structural imbalance challenges," S&P said in a statement.
The Illinois Policy Institute said it is an independent organization that generates public-policy solutions aimed at promoting personal freedom and prosperity in Illinois.
Before joining the Illinois Policy Institute, Klingner was an office assistant in former U.S. Rep. Peter Hoekstra’s (R-MI) Washington office, according to his institute bio. Klingner later worked as a research assistant for the American Legislative Exchange Council and graduated from Hillsdale College in 2012 with a degree in American Studies, with a focus in politics.
The loss in its S&P credit rating is a stiff price to pay for a very bad contract with the teachers union, Klingner said in his report.
"Not only does the new teachers’ contract contain no major reforms, it’s expected to cost CPS a total of $9.5 billion over the next four years -- costing at least $100 million more in 2017 when compared with the last contract," Klingner said.
S&P also cited the school district’s habit of borrowing to pay its bills as another reason for the downgrade.
"As Moody’s Investors Service noted in its own recent downgrade of CPS, the interest rates on some CPS debts are now a sky-high 9 percent," Klingner said. "As a result of those borrowing costs, nearly 10 percent of all CPS revenues are dedicated to paying the district’s annual debt service. The fact that CPS is spending so much money on debt costs is not surprising. CPS has borrowed irresponsibly for decades."
Meanwhile, Chicago Public Schools' debt load has tripled since 1998. That year, the debt load was about $2 billion, considerably less than the outstanding debt burden of more than $6 billion that the school system operates under today.
"Beyond borrowing costs, the massive debt owed to teachers’ pensions is the single biggest crisis facing the school district," Klingner said. "The Chicago Teachers’ Pension Fund is already basically insolvent. It has over $9.5 billion in debts and only half the money it needs to pay out future benefits to teachers."