Moody's cuts Chicago Public Schools rating to Baa3

[March 07, 2015]  CHICAGO, March 6 (Reuters) - Moody's Investors Service on Friday dropped the credit rating for the Chicago Board of Education to Baa3, just one notch above the junk level, due to pension pressures affecting the school system and the city of Chicago.

The two-notch downgrade, affecting $6.3 billion of the school district's general obligation bonds, came a week after Moody's downgraded the rating on $8.3 billion of Chicago's general obligation bonds to Baa2 and a day after cutting the rating on $616 million of the Chicago Park District's general obligation bonds to Baa1. All the ratings carry negative outlooks, indicating they could fall further.

Moody's cited Chicago's growing costs related to its big unfunded pension liability for last week's downgrade. The credit rating agency said the school district's liability for retirement benefits was likely to grow as well, pointing out the annual pension payment has jumped from $197 million in fiscal 2013 to $634 million this year and $688 million next year.

"The costs of servicing those liabilities will place growing demands on the property tax base shared by the city and the district," Moody's said.

It also noted the public school district, the nation's third-largest, continues to rely on reserves to fund pensions and that it has a limited ability to raise operating revenue.

Another downgrade of the city's rating could also cause the school system's rating to fall, Moody's said.

Moody's last week warned Chicago's rating could be downgraded again if Illinois courts find pension reform laws enacted to shore up the state's financially ailing pension system and for two of Chicago's retirement systems are unconstitutional.

In a disclosure filing with the Municipal Securities Rulemaking Board on Friday, the city said it was continuing discussions with Wells Fargo over the termination of three interest-rate swap agreements triggered by last week's rating downgrade to Baa2. If terminated, Chicago could be required to pay $38 million to the bank.

The city also disclosed that the downgrade requires it to replace by March 29 a letter of credit from PNC Bank used as collateral in a sale/leaseback agreement related to a subway line. (Reporting by Karen Pierog; Editing by Ken Wills)

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