Fitch Ratings downgraded the Chicago Public Schools (CPS) credit rating on Friday to one notch above junk status.
The triple downgrade, to BBB-minus with a negative outlook, could cost CPS over $220 million in penalties associated with interest rate swap deals the district entered into with banks, according to reports.
CPS, which faces a reported $1 billion budget shortfall in fiscal year 2016, also saw its credit rating lowered to one level above junk status earlier this month by another ratings agency, Moody's Investor Services.
Fitch said the downgrade was driven in part by the district's structural budget gap, diminished liquidity levels, large pension liabilities and its "poor labor history."
On that last point, the bond-rating agency said in its report, "Fitch believes the contentious settlement of the last contract negotiation with the Chicago Teacher's Union (CTU) in 2012 may pose challenges for upcoming contract negotiations."
In response to the Fitch downgrade, Chicago Public Schools CEO Barbara Byrd-Bennett said the district's financial woes are mostly due to pension costs. Byrd-Bennett, appointed by Chicago Mayor Rahm Emanuel, stressed the need for pension reform.
"It is not a secret that Chicago Public Schools has long faced serious fiscal challenges that are primarily driven by a broken pension system -- something the recent downgrades cite as the most critical issue that simply must be addressed to maintain CPS' fiscal stability," she said in a statement. "Without reforms, CPS will be forced to decide between funding the pensions of retirees and funding the education of its students."
Mayoral challenger Jesus "Chuy" Garcia, a Cook County commissioner, weighed in on the downgrade, calling it "another sign of [the] Emanuel administration's failed fiscal policies."
Here's the full statement from Garcia:
Today's bond downgrade by Fitch is the latest example of the consequences of Mayor Emanuel's fiscal mismanagement. He appointed David Vitale -- the banker who orchestrated our school system's irresponsible swap deals -- as his hand-picked school board president. That board has failed to do what school advocates have been demanding for years -- to fight legally to get out of these fraudulent deals and change the way our school administration prioritizes precious public resources.
Mayor Emanuel has insisted that he -- and not the people -- should control who sits on the school board. We've seen the cost of that control -- school bond downgrades that will cost taxpayers millions, a $1.1 billion budget gap, and contracts that fail to deliver on services while enriching Emanuel donors.
Mayor Emanuel has consistently put the interests of his contributors, political allies and insider friends first -- at the expense of our students, parents, taxpayers and neighborhoods. The administration has put the finances of our schools and our city in greater jeopardy.
Mayor Emanuel continues to rack up a track record of broken promises, bad choices and wrong priorities for our schools and finances-- a record to which voters should hold him accountable on April 7.