Duluth schools’ credit rating takes a hitThe Moody’s bond ratings service has downgraded the Duluth school district’s credit rating one notch, citing its lack of reserves and high debt burden, among other reasons.
By: Jana Hollingsworth, Duluth News Tribune
The Moody’s bond ratings service has downgraded the Duluth school district’s credit rating one notch, citing its lack of reserves and high debt burden, among other reasons.
According to Moody’s, which lowered the rating from Baa1 to Baa2, the rating “reflects the district’s depletion of reserves over the past few years, reliance on cash-flow borrowing for operations, declining
enrollment, and high debt burden with weak amortization structure.”
The rating will have little immediate effect on the district, but it reflects Moody’s concern with the district’s failure to sell unused properties — including Central High School — along with its declining fund balance, said Bill Hanson, director of business services for the district.
The rating is concerning, Hanson said, but it won’t affect the interest rate on bonds issued for the Red Plan because that rate is fixed. It also won’t affect the money it will borrow next week for cash flow, he said, because that debt will be paid back through guaranteed state aid.
If the district sought to borrow again for building projects, it would be more expensive to do so.
“But we have no additional borrowing planned,” Hanson said. “So there is no
impact, per se.”
A local government’s bond rating is the government equivalent of a personal credit score, according to the local government center at the University of Wisconsin-La Crosse. Both indicate the likelihood of borrowed money being paid back.
The highest bond rating of Aaa indicates low credit risk to an investor; the lowest rating, a low C, means obligations are typically in default with little prospect of recovery, according to Moody’s Investors Service. Moody’s, one of the top three bond rating businesses with Standard & Poor’s and Fitch Group, does financial research on bonds issued by commercial groups and governments.
The Duluth school district’s Baa2 rating means moderate credit risk to an investor. The modifier of 2 drops it down a notch within its same category. By comparison, St. Cloud and Forest Lake school districts have Aa3 ratings and the Minneapolis district is rated Aa1.
Borrowing will be less costly for an issuer with a higher rating than with a lower rating. For each drop in ratings, bond issuers like school districts pay additional basis points. When millions of dollars are borrowed, a few basis points can translate into thousands of dollars.
Governments often borrow money for large projects to be paid back over time, with interest. That includes large school construction projects like Duluth’s Red Plan, which cost $315 million to be paid over 20 years.
The district’s reserves — held in its fund balance — have gone from nearly $15 million in 2010 to $3.6 million in December. The “weak amortization structure” Moody’s mentions, Hanson said, refers to the Red Plan’s reliance on revenue from sales of unused property.
“(That revenue) hasn’t materialized,” Hanson said. “We’ve paid (the debt), but as a result the fund balance has depleted. They would rather see that we just levy the taxes for those debt payments.”
Because of the fund balance spend-down and the need to help make debt payments, the School Board approved an 11.9 percent tax increase in December.
The district also has had to borrow about $23 million each year for three years to make up for payment delays from the state, a situation that all Minnesota school districts faced.
Enrollment in Duluth schools has declined for many years, partly because of demographics and partly from loss of students to charter and online schools and neighboring districts. In 1995, enrollment in Duluth schools was 14,000. Last year, the district had about 8,800 students. State aid to school districts is based on the number of students they have.
In St. Louis County, the County Board last week sold about $21 million in bonds to refurbish the downtown Government Services Center. Because the county has an Aa2 bond rating from Moody’s, it was able to secure a low interest rate of 3.65 percent, which means taxpayers will pay less interest over the life of the bonds. The county has a good rating thanks to a tight budget, ample surplus and low overall debt.
News Tribune reporter John Myers contributed to this report.