Chicago Public Schools drew an upgrade from Moody’s Investors Service Thursday as a flood of federal relief and rising state aid levels have buoyed the district’s balance sheet.

The upgrade to Ba2 from Ba3 moves the Chicago Board of Education’s general obligation rating two notches away from an investment grade level. A stable outlook was assigned.

The higher rating “incorporates continued growth in operating liquidity and improved revenue certainty provided by federal relief aid, growing state aid that will continue into fiscal 2023 and stable property tax receipts supported by increasing valuations,” Moody’s said.

While liquidity should continue to improve over the next two years “the district’s net cash position will remain narrow compared to peers and require ongoing cash flow borrowing,” Moody’s warned.

The district’s positive ratings trajectory could run into trouble in the coming years.

CPS has said it will make the expenditure cuts required to match revenues to preserve fund balances once its federal aid is exhausted but “certain cuts could prove difficult given the district’s active teachers union,” Moody’s said.

Positively, contracts with the Chicago Teachers Union have been settled through fiscal 2024, which will provide some expenditure certainty over the near term, Moody’s said.

CPS received a total of $1 billion from the first two federal relief packages and another $1.8 billion from the American Rescue Plan Act signed in March 2021. The $9.3 billion fiscal 2022 budget relies on about $1 billion of relief with remaining funds supporting budgets through 2024. The district spent $206 million in fiscal 2020 and $339 million in fiscal 2021 leaving about $1.2 billion for the next two fiscal years.

The district struggles with ongoing liquidity challenges that require cash-flow borrowing, high leverage and declining enrollment. A weakening on those fronts could drive a downgrade while ongoing liquidity improvement, moderating debt, and ongoing revenue growth from state aid could drive an upgrade.

Gov. J.B. Pritzker’s proposed fiscal 2023 budget honors the scheduled $350 million annual increase in statewide aid under the revised evidence based formulas adopted in 2017. The changes hold the district’s aid levels harmless based on enrollment.

The district last sold debt in January when it issued $872 million of new-money and refunding bonds that priced into a rocky market grappling with rising rates and more fickle demand among high-yield buyers.

Compared to its January 2021 sale that set a new low for spread penalties in recent memory, the district’s spreads mostly held steady but spreads widened from recent secondary market trading valuations.

Fitch Ratings in December upgraded its CPS rating to one notch below investment grade.

Kroll Bond Rating Agency, the sole rating agency that has CPS GOs at investment grade, raised the ratings one notch to BBB-plus for bonds with a legal opinion on the insulation of special pledged revenues and to BBB for those without the opinion like the upcoming sale.

S&P Global Ratings affirmed the district’s BB. The district has won a series of upgrades over the last few years thanks to new local and state funding and an infusion of federal pandemic relief.

Moody’s was not asked for a rating.

The district’s operating fund balance has grown to $804 million in fiscal 2021 from $567 million in 2020 and negative $275 million in 2017. It has trimmed its annual cash-flow borrowing by a total of $600 million over the last four years. The district has more than $8 billion of debt.

Kroll said the upgrade reflects the district’s “strengthened financial position” but it will be watching for any “absence of adherence to fiscal discipline and adoption of credit negative policies by future elected school boards.” The district will move in the coming years to an elected board from one appointed by Chicago’s mayor under legislation approved by state lawmakers last year.

The district is the third largest in the country with an enrollment of 340,658. Enrollment was down nearly 14,500 students in fiscal 2021 following a loss of more than 6,000 students the prior year.