Chicago Public Schools (CPS) will ask its Board of Education for authority to sell up to $840 million of bonds backed by a new citywide capital improvement tax levy and to refund up to $160 million more, according to published reports.
“This up-to amount would be for construction under the supplemental capital plan and funded by revenue from the new capital improvement tax,” CPS spokeswoman Emily Bittner was quoted as saying in The Bond Buyer. “Because these bonds have a dedicated revenue source, they will not impact CPS’ operating budget. We anticipate releasing the supplemental capital plan after we’ve gone to market.”
The board approved an initial capital program of $338 million for fiscal 2017, but CPS chief executive officer Forrest Claypool has said a supplemental budget was in the works. The $840 million taps a previously approved initial $950 million bonding authorization.
While CPS struggled to complete a bond sale earlier this year, Claypool has expressed confidence that the new tax, combined with improvements in the district’s budget, will smooth market access issues, the Bond Buyer reported. “While that remains to be seen, the bond resolution included in the agenda packet provides a deeper but still sketchy look into the district’s intentions.”
Chicago city council approved the new levy last year along with a phased-in $543 million annual property tax increase to fund city contributions to its public safety pensions.
The dedicated capital improvement tax bonds would also carry the same ad valorem tax pledge assigned to the district’s other general obligation alternate revenue bonds. On its past deals, the district has pledged state aid or some other stream as the alternate revenue source although it can tap any available revenues. It has always abated the ad valorem tax but has stressed with bondholders that its lawyers believe the tax could withstand a restructuring.
On the new bonds, the ad valorem tax levy of $36 million this year jumps to $105 million in 2032, but it is the district’s intention to abate that levy. The new capital improvement tax levy, or CIT, rises to $48 million in 2017 where it holds steady until 2031 when it grows to $131 million as permitted.
The bond funds will be applied in part for the school district’s fiscal years 2017 capital plan with “$338 million for school repair, improvement, modernization, and overcrowding relief,” the school district says.
The fiscal uncertainty CPS faced in the spring precluded the district from releasing a comprehensive capital plan. Since then, however, support from Springfield has given CPS the ability to balance its operating budget and put forth a capital plan that addresses many of the District’s needs.
This year’s capital budget includes $266 million of funding provided by CPS through bond financing, and $72 million from the City of Chicago and Federal E-Rate funding. The $266 million of CPS funding represents a significant increase from the $90 million proposed for FY17 in last year’s 5-year plan. This increase is due primarily to the new Capital Improvement Tax levy approved by the Board and passed by the City Council in 2015.
The Capital Improvement Tax (CIT) levy is an annual property tax levy dedicated exclusively to school construction projects. In order to provide much needed overcrowding relief, major facility repairs and improvements, and upgrades to the District’s IT infrastructure, CPS plans to issue bonds to fund capital projects, using the annual CIT levy to fund debt service and principal payback on the bonds.
As of the FY17 budget release, CPS is working to determine the total amount of bond proceeds that can be raised against the CIT levy. As such, this capital budget includes only $233 million in CIT-bond funded projects. (An additional $33 million from CPS’ July bond issuance will be used to fund FY17 capital projects.) CPS expects to issue a supplemental capital budget in the fall to account for the remainder of the proceeds. This will give CPS additional time to receive community input and further prioritize the projects funded by bond proceeds.
The Bond Buyer reported that the Wednesday meeting is the board’s first since CPS and Chicago Teachers’ Union negotiators reached agreement on a new four-year contract that averted a strike set to begin earlier this month. The board will eventually vote on a revised budget that reflects the new contract if teachers ratify it later this week.
Last month, Moody’s Investors Service dropped the district further into junk, to B3 from B2, and maintained a negative outlook.
The rating setback came after the district won an infusion of funding from state lawmakers and put new credit lines in place. But some of its state funding depends on a future legislative agreement on pension reforms and the district’s liquidity remains precarious and dependent on short-term borrowing.
The district struggled with market access earlier this year and finally paid a punishing rate of 8.5% to get its bonds sold in the public markets, but was able to capture a lower rate of 7.25% on a $150 million private placement in July with JPMorgan, according to the reports.
The district has about $7 billion of debt and $9.5 billion of unfunded pension liabilities. CPS is rated B-plus by both Fitch Ratings and S&P Global Ratings and carries a low investment grade rating from Kroll Bond Rating Agency.