Chicago schools eye bond sales despite new budget hole

CHICAGO, Dec 2 (Reuters) - The junk-rated Chicago Public Schools (CPS) on Friday announced a bigger, largely bond-financed capital budget a day after a veto by Illinois' governor put a $215 million hole in the district's budget.

CPS said it added $600 million in projects to its fiscal 2017 capital plan, bringing the total to $938 million. That plan will be funded in part with $840 million of bonds backed by a $45 million property tax levy earmarked solely for capital expenses, according to CPS.

The district is struggling with pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency - factors that have pushed its credit ratings deep into the junk category and led investors to demand fat yields for its debt.

On Thursday, Republican Governor Bruce Rauner vetoed a bill to give CPS a one-time $215 million state payment to help cover pension costs. While the Senate quickly overrode the veto, no action was taken in the House.

A spokesman for Chicago Mayor Rahm Emanuel, who controls the schools, said late on Thursday the city will be working to complete a veto override in the coming weeks.

CPS, the nation's third-largest public school system, included the money in its $5.46 billion fiscal 2017 operating budget.

Moody's Investors Service said on Friday the lost money could result in a net cash deficit of more than $1 billion when the district's fiscal year ends June 30.

"The bigger issue for the district is its poor liquidity position. Even if they had gotten this money, they still would be very stressed," said Rachel Cortez, a Moody's analyst, pointing to an increased need for cash-flow borrowing.

For the current fiscal year, CPS can borrow $1.55 billion for cash flow purposes, up from $1.065 billion in fiscal 2016.

Dan Solender, who heads municipal bond investments at Lord Abbett, said CPS will have a hard time selling bonds due to its fiscal woes.

"Anything sizeable is unlikely to be acceptable (by the municipal market)," he said.

CPS said new debt sales will be dictated by market conditions and construction schedules. Last month it put a $426 million general obligation bond sale on hold after muni prices dropped in the wake of the presidential election.

(Reporting by Karen Pierog; Editing by Matthew Lewis)