CHICAGO - Standard & Poor's Corp. yesterday downgraded the ratings on the outstanding general obligation debt of the Chicago Board of Education and its financial oversight authority, citing the board's persistent budget problems and the authority's increased involvement with board operations.
The rating agency lowered the rating to BBB-minus from BBB on $5.6 million of board debt and $1.5 million of Chicago Public Building Commission debt secured by the board. Standard & Poor's also revised the board's rating outlook to stable from negative, removing the debt from CreditWatch, where it had been placed in September.
The rating on $659.4 million of Chicago School Finance Authority debt was lowered to AA-minus from AA.
On Monday, Moody's Investors Service dropped the board's rating to the non-investment grade level of Ba and downgraded the authority's rating to Baa1.
Todd Whitestone, a managing director at Standard & Poor's, said the rating agency kept the board's debt in the investment-grade category because the affected debt will mature by December 1995 before proceeds run out from a two-year $427 million bonding plan intended to help eliminate the school system's budget deficit.
Whitestone said the downgrade of the board's rating reflects concern at Standard & Poor's over the board's use of bond proceeds for operating expenses and the lack of a long-term funding solution.
"We wanted to make the point that we are concerned about the way they are handling" their finances, Whitestone said.
Standard & Poor's said it downgraded the authority's debt because of its "increased fiscal responsibility and involvement" in school operations as a result of recent school bailout legislation. However, Whitestone pointed out that the authority's debt warrants a rating in the AA category because its tax base and debt service coverage are "strong."
The $427 million bond plan, enacted in November, will provide the board with $378 million of bond proceeds for operating purposes in fiscal 1994 and fiscal 1995. The bonds will be issued by the authority and paid off with its property tax levy and will not require an immediate property tax increase.
The plan allows the board to use other revenues to help eliminate a $298 million deficit in its $2.7 billion budget for fiscal 1994, which began Sept. 1. It also strengthens the authority's oversight powers and requires a property tax referendum in Chicago in two years.
About $175 million of the bond proceeds will be used in fiscal 1994. In fiscal 1995, $203 million of bond proceeds will be used to help close a projected $349 million shortfall, Standard & Poor's said.
The rating agency pointed out that it does not expect additional bonds to be issued to fill in an anticipated $300 million budget gap in fiscal 1996.
In a press release, the rating agency said that the $427 million bond plan "does not bode well" for the board.
Barbara Holt, executive director of the authority, said that Standard & Poor's rating action, which kept the authority's bonds in the AA category, was "particularly appreciated on the heels of the action by Moody's," which the authority will attempt to appeal. On Monday, Moody's lowered to Baa1 from A the rating on the authority's $46 million of debt. Moody's also dropped to Ba from Baa the ratings on $8.58 million of the board's debt and on $5.29 million of Chicago Public Building Commission debt secured by the board.
Moody's also said the two-year $427 million bonding plan, drafted by Mayor Richard M. Daley of Chicago and state lawmakers to bail out the school system, could pose potential risks to the credit standing of both the city and state.
Holt pointed out that authority officials do not understand how Moody's could downgrade the authority's bonds to Baa1, considering the strength of the authority's property tax base.
"That's a major reason of consternation about Moody's action." Holt said.
Holt said the authority is in the midst of structuring the bond issue, which is scheduled to be sold in the first quarter of 1994.
Paul Devine, a vice president and assistant director for the Great Lakes regional ratings group at Moody's, yesterday stood behind the rating agency's action, saying that the authority's strengths were included in its rating action.
Devine said that after a rating action is taken, an issuer has the opportunity to present new information that was not considered during the review process. However, he noted that "is not the case" in the authority's situation.
Lauri Sanders, a spokeswoman for the board, said that the downgrades by both Standard & Poor's and Moody's "point to the need for a prompt and permanent solution to the [school system's] funding crisis."
Sanders said that although Standard & Poor's downgraded the board's debt, board officials were "pleased" that the rating action kept the bonds in the investment-grade category and removed them from CreditWatch.
