Overview

S&P Global Ratings maintains ratings on 417 school districts in Illinois. Currently, 64% of Illinois school districts are in the 'A' category, 34% are in the 'AA' category or above, and 2% have debt rated in the 'BBB' category or lower. During the period of Jan. 1, 2018 to July 29, 2019, more entities' GO ratings/ICRs were upgraded (27) than downgraded (8).

We anticipate continued overall stability in the Illinois school district portfolio for the coming year. Most Illinois districts continue to see stable and growing tax bases and steady to growing enrollment in most of the state. We note that some districts in Illinois, however, are challenged by stagnant tax bases and declining enrollment. Due to the implementation of the new evidence based funding formula (EBF) that went into effect for school districts in fiscal 2018, declining enrollment is not as big of a factor in district finances as it traditionally has been. Thanks to the "hold harmless" provision, school districts with declining enrollment will not receive less funding than they initially received in fiscal 2018 (this is called the "base funding minimum") for perpetuity. However, these school districts will not receive new dollars released into the school district funding pool.  Overall, we believe state sources of revenue should remain stable in the near term, even if the district is in a declining enrollment environment. Long term, we believe the state's financial situation could affect future school funding via the evidence-based formula, whether it is timeliness or ability to fully fund the formula.

Rating Changes Due To GO Credit Factors

Upgrades in the portfolio typically were driven by material and sustained improvements in financial reserve levels. In general, most upgrades reflect a return to structurally balanced budgets through managerial cost controls, improved timeliness of state funding payments, and steadily growing tax bases. Many districts also benefited from increased revenue under the new evidence-based funding formula. For instance, we raised the ratings on Kankakee County Community Consolidated School District No.258 (St. George), Franklin & Williamson Counties Community Unit School District No.188 (Zeigler-Royalton), and Chicago Board of Education for their improved reserve levels and progress in managing their budgets. We revised our outlook to stable from negative on Cook County School District No. No.169 (Ford Heights) and Clinton and Bond Counties Community Unit School District (CUSD) No. 1 (Carlyle), for their steadily improving financial prospects, as well.

Several school district's ratings were lowered during 2018 and in the first half of 2019. These include: Cook County School District No. 154 (Thornton), Randolph County Community Unit School District No.138 (Steeleville), and LaSalle County Community Consolidated School District No.195 (Wallace), to name a few. Structurally imbalanced budgets and weak reserve levels, exacerbated by worsening economic trends for some, are main contributors to the downgrades sustained by credits in the portfolio.

Rating Changes Owing to Criteria

In accordance with our new "Issue Credit Ratings Linked to U.S. Public Finance Obligors' Creditworthiness" criteria, published on Jan. 22, 2018, a number of issuers experienced rating changes to various types of bonds that fall under this criteria. Several issuers, such as Kane & DeKalb County Community Unit School District No.302, Lake County School District No.67 (Lake Forest), and Mason County Community Unit School District No.126 (Havana), experienced rating changes to their GO debt certificates, and this debt is now rated on par with our view of their general creditworthiness. The fungibility of resources and the ability to manage those resources drive our view of the obligor's ability and willingness to pay.

School districts need voter authorization to issue unlimited tax GO bonds, with a simple majority required. But they also can turn to non-referendum types of debt to meet their capital needs. The most common debt types are GO alternate bonds, limited tax bonds, and debt certificates, which are unvoted general fund obligations.

GO alternate bonds are secured both by a pledged revenue source and an unlimited property tax levy. Generally, the rating assigned to the bond issue reflects the unlimited-tax GO rating of the entity, since ultimately, it tends to be the stronger of the two pledges. School districts subject to the property tax extension limitation law (PTELL) can issue limited tax GO bonds which are secured by a debt-service-extension base, and this type of debt is payable from ad valorem taxes levied against all taxable property in the entity's taxing boundaries without limit as to rate but limited as to amount. We typically rate these bonds on par with the unlimited GO pledge, or issuer credit rating (ICR), due to the obligation to use all legally available funds to pay debt service.

Districts not subject to PTELL are also able to issue limited tax bonds, though on a different basis, and we typically rate these on par with the unlimited-tax GO or ICR. As per our criteria, we typically rate non-ad valorem debt and general fund-backed bonds on par with our view of the obligor's general creditworthiness, as reflected in the rating on the unlimited-tax GO bonds or ICR.

For more information, please see the following articles:

• "Various U.S. Local Government Obligors' Non-Ad Valorem Debt Upgraded One Notch Following Criteria Application" published Feb, 23, 2018, on RatingsDirect).
• "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness" published Jan. 22, 2018, on RatingsDirect.

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