KBRA assigns a long-term rating of BBB- to the Unlimited Tax General Obligation Refunding Bonds (Dedicated Revenues), Series 2025B and Unlimited Tax General Obligation Refunding Bonds (Dedicated Revenues), Series 2025C of the Board of Education of the City of Chicago, IL (Chicago Public Schools, or CPS).

The downgrade to BBB- (from BBB) applies to the Series 2025B and Series 2025C Bonds and certain outstanding parity series for which KBRA has not received a legal opinion provided by the Board and approved by KBRA's outside counsel stating that the property taxes securing the bonds should likely be treated as "special revenues" as defined under the U.S. Bankruptcy Code in a Chapter 9 legal proceeding. For those outstanding series with associated special revenue legal opinions, the rating is downgraded to BBB (from BBB+). The Outlook on all bonds remains Negative.

The rating downgrade reflects our view that, by way of the proposed Unlimited Tax General Obligation Refunding Bond transactions—which, based on preliminary figures provided to KBRA, will include approximately $43 million in capitalized interest—Chicago Public Schools (“CPS,” “the District,” or “the Board”) is effectively borrowing to balance its FY 2026 operating budget. KBRA has previously indicated that the Board’s adoption of credit-negative policies, including borrowing for operations, would likely trigger a rating downgrade.

Maintenance of a low-investment grade rating on the G.O. Bonds reflects our view that despite persistent fiscal challenges, the District will likely retain near-term market access and state support sufficient to meet essential obligations, including payment of debt service on Alternative Revenue Bonds (“ARBs”) issued under the Local Government Debt Reform Act and School Code and secured by Pledged State Aid Revenues.

The Negative Outlook is maintained at the new rating level, given our view that ongoing structural budgetary imbalance, weak liquidity, and heavy reliance on one-time measures, including debt restructuring for purposes of balancing the budget, continue to undermine the District’s financial resilience. Further liquidity erosion, failure to secure adequate long-term revenues, significant mid-year budget revisions or a loss of market access would likely trigger further downward rating pressure.

Key Credit Considerations

The rating actions reflect the following key credit considerations:

Credit Positives

• Sound security structure, with Pledged State Aid Revenues as the primary source of repayment and a dedicated property tax levy as a secondary source. The dedicated property tax levy, if required, is directly deposited with the Bond Trustee.
• State funding under the EBF formula includes hold harmless provisions that effectively remove enrollment decline related funding risk.
• The Board’s annual teachers’ pension costs are supplemented by a dedicated pension property tax levy and the State contribution for normal pension costs.

Credit Challenges

• Despite significant growth in the unassigned General Operating Fund balance over the past five years (14.1% of FY 2024 expenditures), the District’s very narrow cash flow position necessitates reliance on TAN borrowing to support operations at various points throughout the fiscal year.
• Mounting fiscal challenges, a new teachers’ contract, and layoffs have destabilized District leadership, which is operating with an interim CEO and a newly elected/appointed 21-member Board. The District’s CFO left the District in early September 2025, and the Chief Education Officer has announced her plan to leave at the end of the school year.
• Pension costs continue to grow despite a dedicated pension property tax levy and the State’s assumption of normal pension costs.

Rating Sensitivities

For Upgrade

• Sustained improvement in the Board’s liquidity position.
• Structurally balanced financial operations going forward, as projected by an annually published long-term financial plan.

For Downgrade

• Further deterioration in the Board’s liquidity position.
• Worsening structural budgetary imbalance.
• Non-adherence to fiscal discipline and/or Board adoption of credit negative policies, including borrowing for operations.

To access ratings and relevant documents, click here.

Methodologies

• Public Finance: U.S. Local Government General Obligation Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.

Doc ID: 1011661

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