Chicago Teachers Strike Shows Shift for Schools Once Near Ruin

(Bloomberg) -- The Chicago teachers picketing in the streets, striking for higher wages and smaller class sizes, are one sign of the financial improvement for a city school system once seen on the verge of collapse.

Less than four years ago, Illinois Republicans were pushing for a state takeover that would allow Chicago’s school district to file for bankruptcy. Dozens of schools had been shuttered. Its bond rating was dropped deeply into junk because of soaring pension costs and years of declining enrollment.

Chicago Teachers Strike Shows Shift for Schools Once Near Ruin

Enrollment hasn’t rebounded, nor have its pension debts gone away. But the schools are benefiting from legislation enacted in 2017 under former Governor Bruce Rauner, a Republican, that boosted state aid, generating $444 million of additional revenue last year, as well as rising home values that have lifted the district’s share of the city’s property tax. As a result of the increased state support, Illinois provided about $233 million for the district’s 2018 pension payment, up from about $62 million in 2015, according to financial documents.

“There is the buildup in demand. The teachers have been thinking about the administration and how the school district has been run for five years and now they’re finally able to ask,” said Matt Fabian, a partner with Municipal Market Analytics. “It’s been years since the union has been able to credibly ask for things.”

Chicago Teachers Strike Shows Shift for Schools Once Near Ruin

The nation’s third-largest school district reported a $312 million surplus in the 2018 fiscal year, the most recent for which audited financial statements are available, marking the first year without a deficit since 2012. In August, S&P Global Ratings upgraded the Chicago Board of Education’s bonds to BB-, three steps below investment grade, because of that surplus and what its analysts expect to be a balanced budget for the year that ends in June.

Such improvement has been recognized in the bond market. A taxable Chicago Board of Education bond due in 2040, one of the most active, is trading for about 111 cents on the dollar, up from as little as 70 cents in early 2017. That’s cut the yield to about 5.65%, about 3.63 percentage points more than top-rated debt, roughly half the penalty investors demanded at the start of that year.

Christopher Brigati, head of municipal trading at Advisors Asset Management, said he’s “bullish” on Chicago and that Mayor Lori Lightfoot, a Democrat who took office in May, “is at least talking the talk.”

“There is still some good potential,” Brigati said about the district’s bonds. “What I really want to see is how does a strike effect the revenue of the city and the district. That’s what’s going to be meaningful. That takes a long time to develop, you’re not going to find that out within a week of a strike, it’ll be months before you get a real inkling in how that effects the revenue.”

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