Factors influencing bond issuer ratings

Moody’s lists factors impacting a school district’s bond rating.

A new ratings methodology by Moody’s Investor Service downgraded the Seaside School District’s issuer rating. The rating reflects the district’s ability to repay debt and obligations.

“Moody’s has adopted a new methodology for rating school district bonds that claims to standardize their review in accordance with a scorecard,” the district’s business manager Justine Hill said. “In that effort, they have reduced the rating on the district’s bonds from Aa3 to A1. This occurs despite the fact that on every metric, the district’s performance was improved since its last rating in October of 2020.”

Under the new methodology, introduced in January, the school district’s rating is one notch lower at A1, David Jacobson of Moody’s Public Finance Group said.

“In accordance to the new methodology, we placed 637 school districts around the country on review — 304 for potential upgrade, 236 for potential downgrade, and 97 in a ‘direction uncertain,’” Jacobson said.

Results are announced on a rolling basis, and Seaside School District’s review was concluded last week.

The methodology, used to analyze K-12 school districts, was introduced in January. “The main factor is a school district’s credit is now no longer solely derived from the towns the district represents,” Jacobson said.

The grade is based on factors including resident income, a district’s available fund balance and cash, long-term liabilities and fixed costs.

A key consideration for the downgrade is the district’s elevated financial leverage driven by the substantial amount of debt issued to replace existing schools with new facilities located above the tsunami inundation zone in the event of a very large earthquake. The district has $102.9 million in Moody’s rated debt.

The district’s fixed costs are also high, with debt service set on an escalating schedule through 2047 and including deferred interest.

As Seaside School District approaches the end of construction, final costs for new campus construction will cap at more than $131 million.

The number, about a quarter more than the original 2016 construction bond of $99.7 million, is supplanted by bond sales, interest, state grants, timber money, school sales and most recently a $9 million 20-year loan.

Despite the downgrade, the district’s financial profile is described as “healthy, with solid reserve levels supported by consistently structurally balanced operations.”

In their rating report, Moody’s notes the financial strengths of the district, as well as its “substantial” tax base, Hill said. “However, because the new methodology reduces the importance of the tax base in their criteria, the district’s debt is now regarded as elevated.”

The district’s tax base generates more property tax revenue than the minimum amount guaranteed under the state funding formula given the district’s total enrollment.

Because the district’s capital plan is essentially completed with the new campus, the district’s debt burden should decline over time, Hill said. “The district does not anticipate borrowing again in the foreseeable future; therefore, the reduction in the current bond rating should have no effect.”

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