The city’s cash-strapped school system is seeking to borrow up to $700 million as finance officials work to manage the district’s many debts.
Chicago Board of Education members on Wednesday voted 6-0 to approve a measure providing for up to $300 million in bonds for recent projects and about $400 million more to restructure existing loans. None of the money would go to future projects,
Large debt issuances are fairly routine for the massive school district with a total debt load of about $6 billion. Chicago Public Schools borrows hundreds of millions of dollars annually and pays off hundreds of millions of dollars a year in principal and interest.
Capital projects funded with the $300 million include the installation of air conditioning units and the upgrading of playgrounds, said CPS spokesman Bill McCaffrey. These projects have been undertaken using short-term borrowing, a common way to fund capital projects in between major bond issues.
McCaffrey said the district would use the $400 million worth of refinancing to lower its borrowing costs — not to put off future debt payments.
Refinancing — the use of new loans to pay back old loans — can save money if the district trades in a higher interest rate for a lower one. But in recent years, CPS has increasingly used refinancing to delay principal payments as they come due, buying short-term relief at a higher long-term cost. A 2012 refinancing delayed until at least 2033 $60 million worth of principal payments due in 2013 and 2014, driving up interest costs.
Used often at City Hall for many years, this strategy is dubbed scoop and toss, because the new loan “scoops” up the debt and “tosses” it into the future. Steering clear of the tactic could help CPS in the eyes of ratings agencies. Both Moody’s Investors Service and Fitch Ratings have downgraded CPS within the past two years.
“We look at scoop and toss less favorably than refunding for savings over the life of the bonds,” said Fitch Ratings analyst Eric Friedman. Friedman emphasized that he was speaking generally and has not reviewed CPS plans or documents.
In recent ratings statements, Fitch analysts listed “debt restructuring” as an action the agency considers “detrimental to credit quality.” Further drops in CPS’ ratings could drive up borrowing costs and aggravate the district’s financial problems.
On the six bonds now slated for refinancing, CPS is scheduled to make nearly $100 million in payments this year and next year. Whether the district plans to maintain that schedule will be clear when the refinancing bond is issued after March 1.
But CPS officials said the goal is long-term savings, not short-term relief. “This is not a ‘scoop and toss’ restructuring,” the district said in a statement Tuesday. “It’s pure refunding for savings and the life of the bonds are not being extended.”
The nonpartisan Civic Federation budget watchdog group noted that the school district already faces burdensome annual debt payments stretching more than a decade, raising questions about its ability to pay for future capital improvements.
“As an educational institution that represents the bulk of most Chicagoans’ property tax bills, the district has an obligation to communicate its plan for managing the district’s short-term and long-term financial needs,” Civic Federation President Laurence Msall said.
Illinois school districts typically need voters’ approval to issue debt, but CPS is able to avoid referendums by pledging a revenue source other than property taxes — per-pupil funding from the state — toward repayment of bonds.
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