UPDATE 1-Fitch cuts Chicago Board of Education rating to A-minus

Mon Sep 23, 2013 5:51pm EDT

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CHICAGO, Sept 23 (Reuters) - Fitch Ratings on Monday downgraded the rating on the Chicago Board of Education's $5.5 billion of outstanding general obligation debt to A-minus from A due to the school system's large structural budget gap.

The rating agency also maintained a negative outlook on the lower rating because of the board's limited options to fix the problem.

"Fitch will downgrade the rating into the BBB category if there is not a clear and meaningful reversal in this trend over the near term," it said in a statement.

The nation's third-largest public school system faced an approximately $1 billion deficit for fiscal 2014, which began July 1, due in part to a big jump in pension payments after a three-year, state of Illinois-sanctioned partial pension holiday ended.

The district, along with the city of Chicago, which is also facing a huge increase in pension payments in 2015, would need state legislation to rein in pension costs. But lawmakers have yet to reach an agreement on dealing with the state's own pension funding problem.

The fiscal 2014 budget included the closure of dozens of schools, a property tax increase and the use of reserves to tackle the deficit, according to Fitch. But the board is projecting budget gaps topping $900 million for each of the next two fiscal years.

In July, Moody's dropped the school system's rating a notch to A3. It cited a high debt and pension burden by the school system, which shares the same property tax base with Chicago. Also in July, Chicago had its GO rating cut three notches to A3.

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