Governor approves $427 million of bonds to help close Chicago schools' budget gap.

CHICAGO -- Gov. Jim Edgar of Illinois signed into law late Sunday a two-year $427 million general obligation bonding plan to help bail out the Chicago public school system, which faces a $298 million deficit in its fiscal 1994 budget.

The bonds, which will be issued by the Chicago School Finance Authority, the Chicago Board of Education's financial oversight panel, will provide $378 million for the board's operations over the next two years, according to state officials.

About $175 million of bond proceeds will be used in fiscal 1994 to help eliminate the deficit. The board's 1994 fiscal year began on Sept. 1. The remaining $203 million of bond proceeds will be used in fiscal 1995.

Rating agency officials called the plan a stopgap measure that does not address the board's long-term fiscal problems.

The authority has not determined whether the bonds will be issued in one or multiple issues, or if the bonds, which will sold competitively, will be insured, an authority official said.

The bonds will be paid off with the School Finance Authority's property tax levy and will not require an immediate property tax increase.

Chicago taxpayers receive property tax bills that incorporate Board of Education debt and operating levy and a School Finance Authority debt levy.

As the authority's property tax levy decreases due to retirement of bonds and savings from refundings, the difference, known as a "difference levy," is passed along to help pay for the school board's operating expenses. Thus, taxpayers do not see a change in their property taxes.

When the $427 million of bonds is issued, the School Finance Authority's portion of the levy will increase. However, to prevent an increase in property taxes to Chicago residents, authority property tax proceeds slated for the school board's operating expenses will be decreased by an identical amount to help pay for debt service on the authority bonds. After fiscal 1995, the board will run out of bond proceeds for budget purposes, but will receive a reduced amount of the authority's property tax proceeds to cover debt service on the $427 million of bonds. At that time, the board will be forced to seek more funding to maintain or increase operating fund expenses in fiscal 1996.

The board's budget crisis ended Sunday when state lawmakers approved a funding plan for Chicago schools after three months of inaction. Lawmakers struck a deal after a federal appeals court last week overturned a lower court's ruling that allowed Chicago schools to stay open without complying with a state law requiring a balanced budget, The school system would have closed yesterday if lawmakers had not acted.

Besides authorizing the bonds, the agreement allows the board to use $32 million of Chapter 1 poverty funds, which are designed to help educate the city's poorer students, and $17 million of School Finance Authority restricted funds to eliminate the budget deficit.

The agreement, which passed with no votes to spare in the House, also strengthens the authority's oversight powers and requires a property tax referendum for Chicago schools in 1995.

State lawmakers and Edgar on Sunday agreed to suspend the state's balanced budget requirement for 30 days to allow the board to draft a revised budget, which must be approved by the School Finance Authority.

Lawmakers agreed on the $427 million bonding plan after they failed to vote on a $300 million bonding plan proposed by Mayor Richard M. Daley of Chicago. The increased amount of bonding eliminates the need to borrow $110 million over two years from the Chicago Teachers' Union pension fund, which was included in Daley's plan.

Rating agency officials said yesterday that the bonding package is a short-term fix that does not address the board's long-term budget problems. They said they may issue additional comments after they receive copies of the legislation or when a detailed bond plan is completed.

Paul Devine, a vice president and assistant director of the Great Lakes rating group at Moody's Investors Service, said that the plan relies on "one-shot" fixes, such as the shift in Chapter 1 funds, that do not create recurring revenues to meet recurring expenses.

"It will push the [the board's] budget off the cliff in three years. The one-shots won't be available to them and they will lose the [School Finance Authority] difference levy on top of the loss of the one-shots," Devine said.

Though the $427 million of bonding may result in lower interest rates compared to borrowing $110 million from the teachers' pension fund, it still results in "borrowing against the future to pay today's bills," Devine said.

Steve Eaddy, an associate director at Standard & Poor's Corp., said that the rating agency has consistently had concerns about the board's "inability to come up with a long-range solution to their fiscal troubles."

"The bigger the bonding, the more cost and concern," Eaddy said. "Even if you say this is the best solution for them, what do they do two years from now? That's the question no one seems to be able to answer.

Eaddy said that deficit reduction bonds are considered a "red flag" by Standard & Poor's. "That certainly hasn't changed and we have expressed that to [the board]," he said.

Standard & Poor's has placed about $30.5 million of board-secured debt on CreditWatch with negative implications. The debt is rated BBB by Standard & Poor's and Baa by Moody's Investors Service. Moody's has said the rating outlook is poor for the outstanding debt of the board and the School Finance Authority. The authority has $480 million of outstanding debt.

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