Chicago Board of Ed oversight authority's GO outlook is poor, Moody's Investors says.

CHICAGO--Moody's Investors Service last week said the rating outlook is poor for general obligation bonds of the Chicago Board of Education and its financial oversight authority, citing fiscal problems associated with the school system's budget crisis.

Meanwhile, the board on Friday continued negotiations with its teachers' union to reach an agreement before a court-ordered deadline of midnight. Without an agreement by the deadline, the school system would shut down indefinitely. The board has been seeking concessions from the union to help eliminate a $298 million deficit in its $2.8 billion budget for fiscal 1994, which began Sept. 1.

Paul Devine, a vice president and assistant director of the Great Lakes regional ratings group at Moody's, said the Baa rating on the board's bonds and the A rating on the finance authority's bonds have been under formal review since August when the board's budget problems began to worsen.

"After the dust settles," Devine said, Moody's will finalize its review and either confirm or downgrade the outstanding debt of the board and authority.

In a comment issued Thursday, Moody's said that events since mid-August "highlight the gravity of the budget imbalance and point to the structural credit deterioration of the board." The credit standing of the finance authority is "inextricably tied to that of the board," the rating agency said.

Moody's pointed out that possible legislative action permitting the authority to issue bonds to fund the board's operating deficit "could serve to weaken the credit standing of the authority."

While the board's budget-balancing problems have been an annual rite, this year's situation is the "most precipitous" since the board's financial crisis in the late 1970s--which led to creation of the finance authority by the Illinois General Assembly, Moody's said.

This year, the school system has been kept open with several legislative and court-ordered suspensions of a state law that requires the board to have a balanced budget before classes can begin.

"Discussions surrounding the budget impasse address none of the board's long-term problems, the financial and labor situations remain unresolved, and the powers of the school finance authority, which had provided some oversight control, have been significantly diminished as a result of recent legislative and judicial action," Moody's said.

The rating agency pointed out that proposals to help eliminate the board's budget deficit "do not provide a basis for long-term, realistic financial planning leading to structural balance." For example, the board has supported the issuance of $120 million of GO bonds by the finance authority and the transfer of $55 million from the teachers' pension fund to help fill the gap.

"Borrowing and pension contribution diversions are temporary fixes which utterly fail to address the structural financial imbalance of [the school system]," Moody's said.

Last Monday, U.S. District Court Judge Charles Kocoras granted a third four-day temporary restraining order, suspending the state's balanced budget requirement until Friday. If the board and union have reached an agreement by the deadline, the restraining order would be extended to Oct. 15 to allow the Illinois General Assembly to consider a two-year, $300 million bonding plan to bail out the school system.

If the board and union have not reached an agreement by midnight Friday, board officials said they would consider passing a "doomsday" budget that would eliminate the budget deficit with drastic cuts, including a 10% salary cut for all union employees and elimination of teacher raises and bonuses.

Total outstanding debt figures for the board and authority were unavailable from Moody's.

Standard & Poor's Corp. last month placed about $30.5 million of board-secured debt on CreditWatch with negative implications.

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