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What went 'down' but sort of didn't go 'down' when Fitch lowered the CPS bond rating

In October 2010, as reported in the article above by John Kugler, Fitch Ratings reportedly lowered the CPS bond rating on some bonds from "AA-" to "A+." The narrative attached to the lowering of the rating is published with Dr. Kugler's story. But the Fitch narrative is puzzling, and given the fact that CPS refuses to subject its complex financial dealings to public scrutiny and CEO Ron Huberman refuses to answer any questions about CPS finances from Substance reporters (let alone do an entire interview based on the most recent CAFR, which we've requested since January 19, 2010), there are more questions than answers as CPS faces closer scrutiny from Wall Street.

A significant question arises when one compared the Fitch Ratings narrative of July 9, 2009 (when it assigned an "A+" to certain CPS bonds and in the narrative wrote positively about CPS) and the Fitch Ratings narrative of October 7, 2010 (when it supposedly "lowered" CPS bond ratings to "A+" and in the narrative wrote negatively about CPS). No one from CPS is holding a public meeting when they have to answer questions precisely, rather than with evasions. At the August 2010 budget hearings, a number of witnesses asked CPS about complex investments in variable rate bonds and derivatives. CPS said it was going to answer the questions on its website, but didn't.

Part of the July 9, 2009 Fitch Ratings evaluation of CPS finances that was based on a positive narrative and resulted in a rating of "A+" is reprinted below. At the time the evaluation below was written, Melanie Shaker was the analyst who did CPS for Fitch. She is now working for CPS as "Deputy Chief Financial Officer" at a salary that has not been disclosed because Ron Huberman has routinely violated Board of Education policy that requires submitting major executive appointments to a vote of the Board.

"The underlying 'A+' rating reflects the successful completion of three-quarters of the Chicago Board of Education's sizable $5.1 billion capital program, the City of Chicago's diverse economic base, and the board's moderately high overall debt burden. The Positive Outlook is based on an improved financial position and augmented reserve levels; demonstrated support from senior governments for both operations and the board's capital plan; and enhanced educational programs which have contributed to student achievement. Fitch expects the board will continue to face budgetary strain from increased pension payments and other personnel benefit costs. Fiscal 2009 is likely to produce a shortfall, although less than originally budgeted due to spending cuts, including staffing reductions, and additional revenue from federal and local sources. Fiscal 2010 will require further budget cuts as pension payments balloon further, though federal stimulus funds will help offset the need for program adjustments. Maintenance of adequate fiscal reserves, despite spending pressure and the financial effects of a weakened economy, is a key credit consideration.

"The City of Chicago's tax expanded at a rapid 10% average annual rate since 2003. Both the tax and employment bases are diverse, and the city is the economic engine of the state. Nonetheless, like many large urban areas, Chicago has significant subprime mortgage exposure and foreclosure rates are well above the national average. As the area has experienced job losses particularly in financial services and construction-related employment, the city's unemployment rate increased to a high 11.4% in May 2009."



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