CHICAGO - Moody's Investors Service yesterday downgraded ratings on the outstanding general obligation debt secured by the Chicago Board of Education and the Chicago School Finance Authority, citing the school system's ongoing financial problems.

Moody's lowered to Ba from Baa the rating on $8.58 million of the board's uninsured debt and on $5.29 million of Chicago Public Building Commission debt secured by the board. The rating agency lowered to Baa 1 from A the rating on the authority's $46 million of unenhanced debt.

Ba is below-investment grade, a Moody's official said.

The rating agency also put the city of Chicago and the state of Illinois on notice that a two-year $427 million bond plan, drafted in part by Mayor Richard M. Daley of Chicago and state lawmakers to bail out the deficit-plagued school system, could pose potential risks to the credit standing of both the city and state.

Paul Devine, a vice president and assistant director of the Great Lakes regional ratings group at Moody's, said the rating agency dropped the board's rating mainly because there is "no solution in sight" to the board's problems.

"The problem has been on the horizon and building for a couple of years. This year it reached a point that required intervention and a solution, and the reaction was to defer [the problem] for two years," Devine said.

The $427 million bond plan, approved by state lawmakers on Nov. 14, will provide the board with $378 million of bond proceeds for operating purposes in fiscal 1994 and fiscal 1995. The bonds will be paid off with the authority's property tax levy and will not require an immediate property tax increase. However, the plan allows the city to hold a property tax referendum in 1996.

The plan also allows the board to tap into other revenues to help eliminate a $298 million deficit in its $2.7 billion fiscal 1994 budget. Despite showing a budget deficit as of Sept. 1, the beginning of the board's fiscal year, schools continued to operate despite a state law requiring a balanced budget. That was accomplished through restraining orders granted by a federal court judge in Chicago that kept schools open until state lawmakers passed the financial bailout plan last month.

Devine said that bonding for operational purposes may be effective in bridging a short-term problem. However, he said, "These bonds are bridged to nowhere."

Moody's said the bonding plan, which "results in a closer involvement" for the state-created authority on both an operating and oversight level, "serves to weaken the credit quality" of the authority. Waiving a state law that required the schools to have a balanced budget before schools can open "undermined the authority's power and credibility," Moody's said.

In a press release, authority chairman Martin Koldyke called the downgrade an "unsupportable and judgmental action," and said the authority intends to pursue a review "of this unfortunate action."

Koldyke said the "Moody's action is tantamount to a moral indictment flowing from its dissatisfaction with the means by which the Illinois legislature has chosen to temporarily address financial problems" of the school system.

A spokeswoman for the board said yesterday that the board will not have a response to the downgrade until it has been officially notified of the action by Moody's.

Devine said the board's fiscal problems will fall into the state's lap again if the property tax referendum in 1996 is unsuccessful or if the board fails to find other sources of revenue on its own.

Chicago's economic health could suffer if a property tax increase deters businesses from locating there. In addition, a sickly school system does not serve as a sign to companies to locate their firms in Chicago, Devine said.

"By orchestrating a scenario in which the board's fiscal problems are deferred rather than addressed, both the state of Illinois and the city of Chicago will face additional pressures, and potentially, risks to their own credit standing, when stop-gap measures sustaining the structurally imbalanced budget are unavailable in 1996," Moody's said.

John Holden, a spokesman for Chicago's Finance Department, called the Moody's statement "a warning" to the city that the school system's financial situation must be addressed for the long term.

"The Daley Administration remains concerned about the long-term financial stability of the Chicago public school system and will continue to work with the appropriate state and local authorities to try to put the system on a stable, sustainable financial basis," Holden said.

Chicago's general obligation debt is rated A by Moody's.

Mike Lawrence, a spokesman for Gov. Jim Edgar, said that all parties involved, including the governor and state lawmakers, realize that a long-term funding solution for the school system will have to be found within the next two years.

Illinois has already seen its GO rating with Moody's drop two notches in recent years, falling to Aa1 from Aaa in 1991 and from Aa 1 to its current rating of Aa in 1992.

The rating action was handed down after the conclusion of the board's most recent fiscal crisis, which lasted more than two months. The School Finance Authority on Dec. 10 approved the board's fiscal 1994 budget, balanced with $175 million of expected bond proceeds authorized by state lawmakers.

Rating action by Standard & Poor's Corp. is scheduled to be released today, according to officials at the rating agency. In September, Standard & Poor's placed $30.5 million of BBB-rated board-secured debt on CreditWatch with negative implications.

The board pays debt service on $646 million of insured debt that was issued by the Chicago Public Building Commission. The authority has $385 million of outstanding insured debt.

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