09/27/2012 07:37 pm ET Updated Nov 27, 2012

Chicago School Credit Rating Cut After Teachers Strike: Moody's

Sept 27 (Reuters) - The credit rating for the Chicago Board of Education was cut to A2 from A1 by Moody's Investors Service on Thursday, which cited the "moderate" increase salaries for teachers under the new labor accord that has yet to be ratified.

The school system, the nation's third largest, has not budgeted for those pay rises, Moody's said.

The outlook on the debt - about $6.4 billion - remains negative.

Chicago's teachers returned to the classrooms after striking for more than a week, having won an average 17.6 percent pay rise over four years. The school district said the new contract would cost it about at $74 million a year..

Moody's said the downgrade was also due to other factors, including plans to spend reserves to fund operations in fiscal 2013, an "impending spike" in pension payments and continued delays in getting state aid.

The school system must close a $1 billion deficit in fiscal 2014 and Moody's said the strength of the teachers union might make it harder for the Board of Ed to reduce spending.

"Significant budget adjustments will be necessary, but the demonstrated power of collective bargaining suggests that future budget controls may be difficult for the district to implement," the credit agency said.

Moody's noted Chicago has a large and diverse tax base. The city's strengths include its historical role as an economic powerhouse, with its futures and options exchanges.

But its teacher pensions were only about 60 percent funded in fiscal 2011, according to a report by the Civic Federation, a finance watchdog group. The group's president has forecast the Board of Ed will have to cut personnel, including teachers, and close low-enrollment schools, to pay for the new contract.

Voters would have to approve any plan to increase the property tax levy above its current cap.

But Moody's warned: "If progress is not made toward improving the financial condition and liquidity of district operating funds, or if challenges arise in making the required pension contributions, the district's general obligation credit quality will be impaired."