Ratings get boost as City Colleges of Chicago prepares deal

The City Colleges of Chicago is planning to issue $201 million in unlimited tax GO refunding bonds next year, bolstered by one rating upgrade and another new positive rating outlook.

The proceeds will help manage debt service on a 2013 issuance.  

S&P Global Ratings upgraded the district’s longstanding BBB rating to BBB-plus, with a stable outlook, on Nov. 9.

“The raised rating reflects the district’s improved enrollment trends, with a sizable enrollment base and sound demand, strengthened financial performance and growing reserves, which we expect will be maintained in the outlook period,” S&P analyst Mel Brown said in a news release.

The community college system’s score from Fitch Ratings — A-plus and revised to positive from stable Nov. 2 — reflects steady improvements in financial resilience and above-average enrollment rates, as it’s recovered from financial trouble and a rating downgrade in 2016, the rating agency said.

“With the improvement in our financial position and the recent recognition by the rating agencies, we look forward to going to market in 2024,” said City Colleges of Chicago CFO Maribel Rodriguez.

The system, officially called the Cook County Community College District No. 508, has shown “slow revenue growth, solid expenditure flexibility, a moderate long-term liability burden, and consistent efforts in support of financial flexibility,” Fitch said in its report. 

“It is the nation’s third largest community college district, with seven colleges and five satellite sites,” the Fitch report said. “The district employs about 3,500 faculty and staff, and currently serves about 62,000 students. Its taxing jurisdiction is coterminous with the city of Chicago.”

In September, the college district’s board approved Siebert Brandford Shank & Co., Blaylock Beal Van, and Estrada Hinojosa as co-managers for the upcoming issuance. Loop Capital Markets and Cabrera Capital Markets will serve as joint bookrunners.  

The board selected PFM Financial Advisors as the financial advisor for the deal, and according to a press release, women and minority-owned businesses will serve as 100% of underwriting services. 

The City Colleges of Chicago plans to issue the bonds in 2024 after the release of its fiscal year 2023 audit, Director of Communications Victoria Resa said. 

Since its first issuance in 2013, Illinois’ financial problems have repeatedly created obstacles for the district. That first issuance received an AA-minus rating from Fitch, and AA from S&P. 

Illinois’ budget impasse, which left the state without an enacted budget from 2015-2017, disrupted the third of the district’s funding that came from the state. This also happened to coincide with the district’s planned drawdown in its reserves, according to Ashlee Gabrysch, Fitch’s director for U.S. public finance in the midwest. 

The district’s reserves fell from around $245 million, 47% of its spending, to $50 million, roughly 10% of spending, Gabrysch said. 

That spurred bond rating downgrades.

Since the impasse ended, the district has rebuilt its reserves to $160 million, around 30% of its spending. 

“That is due to, I think, two primary reasons,” Gabrysch said. “One being strong budget management and two being an improved revenue environment because of steady state funding.”

The district’s funding mostly comes from the state, rather than the city of Chicago, so it’s been spared from the city’s financial woes. However, its taxing jurisdiction is coterminous with the city of Chicago.

S&P said its rating reflects its view of City Colleges’ “very strong” enterprise risk profile and “vulnerable” financial risk profile.

Around a third of the district’s 2022 revenues come from the state; around 26% come from taxes, 25% from federal grants and 4% from tuition revenues. 

The state funding is tied to enrollment, which has been declining since 2015; however, it’s declined at a slower rate than other community colleges, so it hasn’t put the district’s funds in jeopardy. 

Enrollment continued to fall in fiscal 2022, but has increased in 2023, slowing the declining trend to 6% a year on average since 2019, according to the Fitch report. 

“The enrollment totals in fall 2022 and spring 2023 saw increases of 7% and 13% year over year respectively, which are well above the state enrollment average trends for community colleges,” the report said. “Management attributes this increase in enrollment to initiatives implemented prior and during the pandemic, including ongoing financial support to students; flexible in-person, hybrid and online course options; mental health supports for students and staff; and upgrades in infrastructure.”

In recent years, the district has also benefited from higher personal property replacement tax collections and pandemic-related federal grants, the report said. These led to operating surpluses for the district in 2021 and 2022, after years of deficits going back to 2015. 

Preliminary results from fiscal 2023 suggest the district will have a slight operating deficit of $3 million, .5% of spending, the report said. The cash reserve sits around $159 million, basically the same as 2022.

“Management has noted that their intent is to continue to build and maintain reserves above their 90-day cash balance minimum policy, the successful execution of which could result in positive pressure on the rating,” the report said.

This is the district’s first issuance since 2017, when it issued $78 million of unlimited tax GOs in a deal managed by George K. Baum & Company and Loop Capital Markets. 

This deal will also be the district’s first refunding bond issuance. The district had a higher credit rating when it issued the 2013 bonds that this deal will refund and those bonds’ interest rates ranged from 4% to 5.25%. 

The year 2023 has seen the Federal Reserve driving interest rate increases across all debt markets, although municipal bonds have rallied in recent months.

In its debt management policy, the district said it would generally seek a “minimum 3% overall present value savings threshold” if it refinanced debt, while considering factors “including negative arbitrage, optionality and market timing.” The policy said that the district may also issue refunding bonds that do not produce savings but restructure debt, retire a bond issue, or achieve other financial goals.