A student at James Shields Middle School opens a locker on Friday, Sept. 30, 2016.

A massive property tax hike is the "most likely" way for the financially teetering Chicago Public Schools to find its way out of a sea of red ink, a major Wall Street ratings agency said Thursday — a conclusion district officials were quick to reject.

A tax hike of "more than $400 million annually" is one of three "painful options" the district could consider if it fails to secure more state funding and runs out of rope in its ongoing practice of borrowing money and cutting costs to stay afloat, according to a pair of reports on city and school finances issued by Moody’s Investors Service.

The new tax revenue would be used to make debt payments now covered with state aid meant for the classroom. The two other options are pushing off contributions to an already underfunded teachers’ pension system or declaring bankruptcy, the reports state.

CPS officials are weighing a series of cost-cutting options after Gov. Bruce Rauner late last year vetoed $215 million in teachers’ pension fund relief — money the district was counting on to help balance the budget for this school year. The district has depleted its once substantial reserves and has relied on short-term borrowing to pay its bills. Moody’s concluded that CPS could max out its legal authority for short-term borrowing as soon as next year.

District spokeswoman Emily Bittner said the school district rejects Moody’s suggestions, particularly the idea of bankruptcy, which couldn’t happen without legislation from the state. She said CPS would find a way to "maintain a balanced budget this year" as it continues to seek more state funding.

The Moody’s reports acknowledge a major CPS tax increase could weaken "the city’s political and practical ability to increase taxes" to continue addressing its own problems. They were released as Mayor Rahm Emanuel’s top financial aides were preparing next week’s sale of nearly $1.2 billion in bonds. The timing created some consternation at City Hall.

"You cannot tell me the timing of these reports is not based very much on when they know we’re going to market," city financial spokeswoman Molly Poppe said. "You’re driving up our borrowing costs. Taxpayers are the ones who pay that."

But David Jacobson, a spokesman for Moody’s, said both reports had been in the works since November. "We put the report out this week so it does not interfere with the sale next week," Jacobson said.

The critical reaction from City Hall was in keeping with Emanuel’s previous characterization of Moody’s as "irresponsible." Earlier this week, Emanuel’s administration released a letter from the mayor asking the top executive at Moody’s to withdraw the firm’s junk rating of the city’s creditworthiness. In the letter, Emanuel said the firm’s evaluation fails to account for progress that has been made in addressing the financial problems that he inherited upon taking office six years ago.

"We don’t understand their methodology," Poppe said Thursday. "We don’t understand how they come to their conclusions. The mayor said as much in his letter."

Richard Ciccarone, president and CEO of Merritt Research Services, noted that Moody’s has been hired in the past to rate city bond issues, even though the city stopped using the agency in 2014 after it issued a series of downgrades on city debt. Ratings agencies typically continue to rate the debt of an issuer for the life of the bonds, he said.

"Clients tend to look for rating agencies to confirm their positions at the time of a bond sale, so that’s not unusual," Ciccarone said of the reports issued Thursday.

Moody’s in recent months has not followed the lead of other ratings agencies that have changed the city’s financial outlook to stable from negative. It is currently the only major ratings agency to place the city’s credit rating in junk territory.

In Moody’s report on city finances, the agency gives Emanuel credit for raising taxes to significantly increase contributions to the city’s four government worker pension systems, for pledging to stop pushing debt off into the future at higher cost, and for ridding variable-rate debt from the city’s financial portfolio.

But the agency also concluded that the city’s overall pension debt would grow for 15 more years under Emanuel’s plan, which in the early to mid-2020s would "necessitate further tax increases or reductions in city services" absent "continued and robust economic expansion." The city’s own bond documents also note that future tax increases and budget cuts may be needed.

Moody’s said CPS’ financial woes create drag on the economic health of the entire city, saying "continued negative headlines about CPS could discourage some businesses and residents from moving to our remaining in the city."

Over the past six years, CPS has increased annual property taxes by a total of $477 million. That includes the maximum increase allowed by the state each year for school operations, about $45 million for school construction projects authorized by the City Council and another $250 million for pension contributions approved by the state.

The Moody’s reports state that CPS also has the authority to collect property taxes on more than $400 million in annual bond debt now covered with general state aid. It’s a scenario detailed in a Tribune story published in March.

In an accompanying report, Moody’s cites a litany of causes for the district’s financial problems, including years of spending more than it takes in, "overly optimistic budget assumptions" and rapidly rising pension costs. By the end of the current school year, CPS said its operating fund balance will be $88 million in the red, the report states.

Moody’s acknowledges that CPS officials have "not publicly contemplated" any of the three "painful options" and concedes they could "ultimately prove costly, controversial and unsustainable."

Legislators in the past have resisted moves to further put off paying down debt to the teachers pension fund and, although Rauner has raised the specter of CPS bankruptcy, Emanuel has consistently opposed it.

The "best case scenario" is providing more money for the district’s operating costs and pension contributions, states the report, which also notes that Illinois government is grappling with its own financial woes and lacks "political consensus" on helping CPS.

This article was sourced from http://newsyellowstone.com