Fitch Rates Chicago Board of Ed (IL) UTGOs 'A+'; Outlook Stable

Fitch Ratings assigns an 'A+' rating to the Chicago Board of Education, IL's $95.1 million unlimited tax general obligation (UTGO) refunding bonds (dedicated revenues), series 2011C, consisting of $51 million series 2011C-1 UTGO refunding bonds and $44.1 million series 2011C-2 UTGO refunding bonds.

The bonds are expected to sell via negotiated sale the week of Dec. 12. Proceeds are being used refund outstanding series 2000D bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from pledged state aid revenues, and if insufficient, from unlimited ad valorem taxes levied against all taxable property in the City of Chicago.

KEY RATING DRIVERS

2011 Surplus: Chicago Public Schools (the district) was able to restore reserves to satisfactory levels, in fiscal year (FY) 2011, largely as a result of one-time revenue benefits.

Diversified but Stressed Service Area: The city of Chicago (rated 'AA-', with a Stable Outlook by Fitch) benefits from a large and diverse economic core whose employment base and housing market are nonetheless under substantial stress.

Aggressive Expense Management: District management is actively cutting costs to close current and future budget gaps.

State Aid Delays: Catch-up payments from the state aided FY 2011 results, but anticipated delays in state payments continue to limit financial flexibility.

Pension Woes: Pension funding levels continue to decline, and though payment deferrals provide short-term relief, they will create major stresses in FY 2014 and beyond. Other post-employment benefits (OPEB) are similarly underfunded.

Elevated Debt Levels: The district's debt levels are above average with very slow amortization, including a large increase in debt service payments in FY 2014.

Stabilized Enrollment Levels: Student enrollment has somewhat stabilized.

WHAT COULD TRIGGER A RATING ACTION

Mounting Fixed Costs: Management's ability to address mounting fixed costs, including full funding of annual pension contributions.

Debt Service Management: District's ability to absorb substantial upcoming increases in debt service levels into its overall budget and tax structure while maintaining its capital program and avoiding further debt deferrals.

Chicago Improvement: Stabilization in the local economy.

CREDIT PROFILE

The Chicago Public Schools is the nation's third largest school district, serving over 400,000 students in 677 schools. Student enrollment is projected to be down 1% in 2011-2012. While the city is the economic engine of the state and benefits from a diverse tax and employment base, it has experienced significant jobs losses in the recession, driving the unemployment rate to a high 11.2% in September 2011, well above the state (9.5%) and national (8.8%) averages. In addition, the city's housing market continues to suffer from price declines.

After two years of operating deficits, the district is projecting that it finished FY 2011 with a $316 million surplus, bringing its unreserved fund balance to 10.6% of expenditures. The surplus was driven largely by non-recurring sources of budget relief. The district received $127 million of an unanticipated $139 million of tax increment financing (TIF) funds from the city in FY 2011.

The district has also suffered for the past few years from delayed payments from the state. However, at the end of FY 2011 the state paid the district $160 million of the $328 million owed, $69 million of which was unplanned.

The district also generated over $110 million of relief in FY 2011 by refinancing debt to delay maturities. Finally, the state granted the district $400 million of pension relief per year for FY 2011-2013, so the district only paid $187 million toward its pension in FY 2011. The district also received about $50 million of EduJobs money in FY 2011 and will receive a similar amount in FY 2012.

For Fiscal 2012, the district initially projected a $712 million deficit. The final budget reduced this gap to $241 million, which represents the anticipated draw-down of reserves. The deficit was caused in part because fewer non-recurring solutions were available than in FY 2011. The district eliminated a 4% union pay increase and increased property taxes by the 2.4% maximum to generate an additional $150 million. Such taxes had not been increased over the previous three years.

The district is attempting to lengthen the school day at select schools, and would potentially pay teachers a small stipend to compensate them for additional hours. The new administration is also eliminating and consolidating central office services, and is closely examining facility usage for savings, with the phase out of three schools already begun and several additional phase outs and closures proposed.

The district's overall debt burden, including overlapping entities, is a high $6,576 per capita and 6.3% of market value, and amortization is slow at 36% in 10 years. Included in the district's debt portfolio is $725 million of variable-rate bonds (16% of total debt outstanding), most of which is hedged with interest rate swaps. This is down from a high FY 2007 34% variable-rate portfolio.

The district does not plan to issue any additional new money debt in FY 2012. The refunding structure of the district's FY 2011 bonds helped cause the district to have an increase of approximately $100 million in annual debt service to level annual debt service of about $500 million in FY 2014 and beyond, creating a challenge for the district's already tight budget.

Similarly, the district's pension deferrals in FY 2011-2013 will create additional challenges in FY 2014. Pension contributions are expected to jump from $196 million in FY 2013 to $534 million in FY 2014. The combined $440 million increase in debt service and pension contributions leads Fitch to believe the district will be challenged to achieve structural balance in FY 2014 and beyond.

Pension funding levels have been declining consistently and were at 59.9% as of June 30, 2011, before the on-set of large deferrals. Using Fitch's more conservative 7% discount rate assumption, the funding level would be 53.9%. The district and the city are actively seeking further pension relief from the state.

The district's OPEBs are managed through the pension fund. The unfunded actuarial liability for OPEB is a significant $2.8 billion or approximately 1% of market value as of June 30, 2010, with an annual required contribution of $216 million. State statute limits the contribution to OPEB by the pension fund to $65 million per year.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 15, 2011.

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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