Moody’s, Unhappy with Budget Impasse, Downgrades School Districts’ Credit Ratings

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download (33)Investment rating service Moody’s has shouted a warning to the Commonwealth of Pennsylvania this week; its mechanisms to help struggling school districts obtain favorable debt terms and rescue them from default are now much less helpful.

Thanks to the ongoing state budget battle, Moody’s downgraded numerous public school districts’ enhancement program bond ratings, and the announcement will make it more expensive for the Coatesville Area School District to borrow money — or worse.

“While we expect the commonwealth to cover any missed debt service payments on enhanced bonds, the current lengthy budget impasse has heightened risks to bondholders and raises doubt about whether the pre-default mechanisms will work effectively every time without funds appropriated to districts,” Moody’s stated.

Moody’s downgrade affects schools in the Fiscal Agent Agreement Intercept Program and Act 150 School District Intercept Program, both of which allow the state to cover missed debt payments by diverting future state aid. Coatesville’s rating went from A3 to Baa1, and Pottstown School District’s rating was confirmed at the new maximum of A3.

If a breakthrough doesn’t arrive soon, Pennsylvania may run out of resources to rescue schools from debt defaults.
“During the commonwealth’s budget impasse, it has paid debt service for school districts on a pre-default basis by using property tax relief funds, leftover appropriations from prior years and other tools,” Moody’s noted. “However, as the stalemate drags on, the tools it has to make these payments are running out, and it’s not clear whether the commonwealth can continue to meet these obligations if the impasse continues much longer.”

Moody’s could also further downgrade enhanced credit ratings for financially weak school districts.

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