Rating Action: Moody's upgrades to Ba2 Chicago Board of Education, IL's issuer and GOULT; outlook stableGlobal Credit Research - 03 Mar 2022New York, March 03, 2022 -- Moody's Investors Service has upgraded to Ba2 from Ba3 Chicago Board of Education, IL's (Chicago Public Schools, CPS; the district) issuer and general obligation unlimited tax ratings. The outlook is stable. The district has approximately $7.8 billion in general obligation unlimited tax (GOULT) debt outstanding.RATINGS RATIONALEThe upgrade of the issuer rating to Ba2 incorporates continued growth in operating liquidity and improved revenue certainty provided by federal relief aid, growing state aid that will continue into fiscal 2023 and stable property tax receipts supported by increasing valuations. The district's liquidity should continue to improve through the next two years. However, the district's net cash position will remain narrow compared to peers and require ongoing cash flow borrowing. The rating also incorporates our view that the district will face revenue declines when federal aid is exhausted in September 2024, which will require expenditure cuts that the district intends to make to maintain its improved reserve position. Still certain cuts could prove difficult given the district's active teachers union. Positively, contracts with the Chicago Teachers Union (CTU) have been settled through fiscal 2024, which will provide some expenditure certainty over the near term, a factor which is incorporated into the rating upgrade. The district benefits from Chicago's substantial economic base and the district's close governance connection with the City of Chicago (Ba1 stable) and a hold harmless provision under the state funding formula that prevents revenue decline because of enrollment loss. The district also has very high direct and overlapping leverage from debt and post-retirement liabilities. A long-term trend of enrollment declines also weigh on the rating.The GOULT rating is Ba2, the same as the issuer rating, based on the district's pledge of all available funds and its authority to levy an unlimited ad valorem property tax.RATING OUTLOOKThe stable outlook reflects our view that recent revenue increases will support growing expenditures over the next several years while maintaining improved but still limited liquidity. The outlook also incorporates our view that the district's diverse economy with declining enrollment and high leverage will not materially change.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Sustained growth in operating liquidity- Continued revenue growth, which will likely require the state to continue to meet funding targets of the evidence-based funding formula- Moderation of long-term leverageFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Declines in operating liquidity or increased reliance on cash flow borrowing or other nonrecurring revenue- Stagnant revenue trends that are outpaced by the district's growing expenditures - Continued enrollment loss LEGAL SECURITY All the district's rated debt is secured by its GOULT pledge and backed by an alternate revenue pledge which is secured primarily by pledged state aid revenue. An unlimited tax levy is filed with the county at the time of issuance. The property tax is abated only after the district deposits sufficient alternate with the trustee. If the deposit is not made with the trustee, the levy is extended.PROFILECPS is coterminous with the City of Chicago. The district operates approximately 650 schools inclusive of 126 charter schools and serves approximately 330,000 students inclusive of approximately 55,000 students enrolled in district charters. The Chicago Board of Education is responsible for organizational and financial oversight of CPS.METHODOLOGYThe principal methodology used in these ratings was US K-12 Public School Districts Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1202421. 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