Total Overhaul: Chicago School Board Changes Leadership And Borrows Millions

Forrest Claypool, second from right, and new CEO of Chicago Public Schools, addresses reporters after Mayor Rahm Emanuel, lef
Forrest Claypool, second from right, and new CEO of Chicago Public Schools, addresses reporters after Mayor Rahm Emanuel, left, named Claypool to the post during a news conference Thursday, July 16, 2015, in Chicago. Also listening to Claypool's remarks are Frank Clark, second from left, the new President of the Chicago Board of Education, and Janice Jackson, the new Chief Education Officer. (AP Photo/Charles Rex Arbogast)

CHICAGO, July 22 (Reuters) - The Chicago Board of Education on Wednesday approved the sale of up to $1.16 billion of bonds for its cash-strapped school system as well as new leaders, according to a spokeswoman for the district.

The nation's third-largest public school district is struggling with falling credit ratings, a big budget deficit and lack of an approved plan to ease escalating pension costs.

The general obligation bonds will provide as much as $650 million in school facility improvements, $250 million in budget relief by restructuring existing bonds, and $300 million to convert variable-rate debt into fixed-rate bonds and pay banks to terminate swaps used to hedge interest-rate risk, according to a presentation to the board.

At a public hearing on the bonds, James Bebley, the district's general counsel, said talks were continuing with banks over the swaps and outstanding debt.

Downgrades by Moody's Investors Service and Fitch Ratings in March triggered about $228 million in termination payments by the Chicago Public Schools (CPS) to bank swap counterparties. Moody's cut the district's rating to "junk" in May. Earlier this month, Standard & Poor's dropped its rating two notches to BBB, while warning another downgrade could come without a "credible" fiscal 2016 budget.

A spending plan is expected to be unveiled in August. School officials have said the budget will rely on $500 million in pension savings that have yet to be enacted by the Illinois Legislature and will incorporate a $106 million cut in state funding.

The board also approved a new leadership team announced by Chicago Mayor Rahm Emanuel last week that includes his chief of staff, Forrest Claypool, as the district's chief executive officer, and former electric utility executive Frank Clark to head the board.

CPS has projected a $1.1 billion deficit in its fiscal 2016 budget, largely because of an approximately $675 million pension payment.

The school system made its $634 million fiscal 2015 pension payment to the Chicago teachers' retirement system on June 30 by tapping borrowed money, including $200 million of tax anticipation notes and spending cuts.

The school board last month approved those notes, as well as up to $935 million of notes in anticipation of the district's 2015 property tax revenue. Debt sales by the district in March and May resulted in hefty yields. (Reporting by Karen Pierog; Editing by Matthew Lewis)