Moody’s warns of another credit downgrade for CPS after district fails to make full $733 million pension payment
Chicago Public Schools failed to pay in full the $733 million pension payment that was due June 30, instead making a partial payment of $464 million, even after taking out a $387 million loan from JPMorgan.
On the same day the Illinois General Assembly voted to override Gov. Bruce Rauner’s veto of a budget with a 32 percent income tax hike, Moody’s Investors Service warned Chicago Public Schools of a coming credit downgrade, according to the Chicago Tribune.
Another downgrade would spell trouble for CPS, as the Tribune reported the district is pursuing the sale of $250 million worth of long-term bonds.
This bad news comes on the heels of the district’s failure to make good on a hefty pension payment due at the end of June. CPS was scheduled to make a massive pension payment of $733 million to the Chicago Teachers’ Pension Fund, or CTPF, on June 30. But that didn’t happen. After years of kicking the can down the road, using “pension holidays” to avoid making payments to CTPF, CPS missed a pension payment outright, paying only $464 million of $733 million owed.
Historically, CPS has pushed payments back using pension holidays to underfund or completely skip payments due to CTPF. With the Illinois General Assembly’s backing, in 1995 CPS officials enacted a 10-year pension holiday that diverted more than $1.5 billion in taxpayer dollars away from pensions and toward school operations, most notably to salaries.
These pension holidays have caused today’s payment totals to skyrocket. Had CPS made its pension payments on time rather than delaying them through pension holidays the district would have been on the hook for $215 million rather than more than $730 million on June 30.
As early as May 10, nearly two months before the pension payment was due, CPS officials issued statements saying they may miss the pension payment unless the district received an influx of funding from the state or took out a large loan.
On June 19, CPS took out two loans from JPMorgan worth a total of $387 million dollars with interest rates of around 6.4 percent. Because of CPS’s sub-junk B3 rating bond rating, the district must pay significantly higher interest rates than other borrowers. CPS’s high interest loan will generate an estimated $70,000 of interest a day for a minimum of $7 million in interest.
The district stated June 20 that the $387 million “creates sufficient cash” for CPS to meet its obligated contributions to CTPF.
But on June 27, the director of the Chicago Teachers’ Pension Fund said that he was doubtful CPS would be able to make the $733.2 million pension payment in full, despite CPS stating it would be able to meet its pension obligations using loans from JPMorgan.
After failing to make the full pension payment June 30, CPS must now pay off the balance of the incomplete payment to a tune of more than $250 million in addition to $7 million in interest from the high interest short term loan from JPMorgan.
CPS plans to pay off the remaining quarter-billion dollars due to CTPF from the June 30 payment using future taxpayer money from property taxes, according to the Chicago Tribune.