Moody's Blues: Dallas Independent School District's Bond Credit Ratings Slip

By Robert Wilonsky Thu., Jun. 18 2009 at 8:38 AM

Categories: Edumication News

In a subscription-only story published this morning, The Bond Buyer notes that both Moody's Investors Service and Standard & Poor's have downgraded their ratings of the Dallas Independent School District. Both still consider the district a relatively safe investment, but the downgrades reflect an added note of concern, as evidenced by the comments below. One reason: The district's recently announced plans to borrow $100 million just to cover next year's expenses since there ain't no reserves in the reserve, a result of prolonged budget problems. And that doesn't look good when you're expected to go to market over the next three years with more than $900 million in bonds left to be sold from the $1.35-billion '08 election.

Writes Jason Philyaw:

Moody's lowered its rating on DISD's $1.7 billion of debt outstanding to A1 from Aa3, citing "ongoing concerns regarding the reduction in financial flexibility that is a product of structurally unbalanced budgets, as well as the district's financial reporting shortcomings." The agency assigned the A1 rating to the upcoming sale and revised its outlook to stable at the lower rating from negative at the Aa3 rating. Moody's analysts said the downgrade also reflects the district's "substantial future borrowing plans." ...
Standard & Poor's pushed its rating down to A-plus with a negative outlook from AA-minus due to "the district's continued financial deterioration." The lowered ratings also apply to DISD's sale of $105.1 million of general obligation refunding bonds that may price as early as next week. Fitch Ratings assigned a AA-minus rating to the refunding and said the financial profile of the second-largest school system in Texas "has deteriorated due to an unanticipated significant drawdown in reserves in fiscal 2008."

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WARNING--this comment has a lot of mind-numbing numbers in it! The Chinese have a curse, "May you ALWAYS live in interesting times." The last few years certainly have been interesting times for DISD. DISD's budget for 2008-2009 was $1,386,928,139 - a staggering sum - and they were short by $100M. And we can estimate that expenses will rise on average 3.2% or 47.5M for next school year. ( A Cost Analysis for Texas Public Schools: http://moakcasey.com/articles/viewarticledoc.aspx/costanalysis09.pdf?AID=734&DID=781 ) That would bring an estimated budget target for 2009-2010 to $1,534,509,839 or an increase of $147,581,700 just to maintain 2009 level of services. According to this article: http://finance.yahoo.com/news/Fitch-Rates-Dallas-ISDs-Texas-bw-2962850577.html?x=0&.v=1 "District staff estimates the payroll savings from the layoffs will total roughly $26 million for fiscal 2009 and more than $50 million for fiscal 2010." Although Throm also stated at the May 28th Board meeting that the $26M savings was really only going to be $10M because fewer teachers will retire in 2009-2010. But hey, that -$16M difference is just a drop in the bucket. And then there's -$3.5M that the Feds say DISD owes for misappropriated Title 1 Funds. http://www.ed.gov/about/offices/list/oig/auditreports/fy2009/a06h0011.pdf So let's add this up: DISD will need $147.5M more next year than this year plus the $16M deficit pass-through from the RIF plus the 3.5M to the FEDS. DISD needs $167M more revenue this upcoming school year than last year. Yipes. Also, times are hard and less property tax is being collected. County budget director Ryan Brown calculates that once all appeals are settled, the county will see a drop in its tax base ranging from 4.39 percent to 7.17 percent. The City of Dallas is using a 5% drop in revenues to figure its new budget. In a much re-printed article: "Larry Throm, Dallas ISD's executive chief financial officer, said the school district's preliminary values are down about 4 percent from last year's preliminary values, as expected." http://www.txcn.com/sharedcontent/dws/news/localnews/tv/stories/DN-daltaxrolls_23met.ART.State.Edition2.50a3d96.html OK--that's not what the County Budget Director or the City of Dallas thinks but let's just say there is a decrease in revenue of only 4% from 2008-2009 or approximately -$55,477,126 So DISD needs $167M more in 2009-2010 but has $55.5M less revenue to work with - a spread now of -$222.5M it has to cover. (If revenue actually drops by 7.17% then DISD will see $99.4M less tax revenue in the coming school year instead vs. $55.5M.) "Throm told trustees the full effect of the cost savings efforts [$50M] would kick in and no deficit would exist in next school year's [2009-2010] budget. An additional $20 million is expected to be in the fund balance at the end of the next budget year from departments not spending their entire budgets." And the Easter Bunny comes on December 25th and leaves quarters under my pillow. But even if you apply Throm's whimsical $70M savings to the $222.5M (or larger) projected budget shortfall DISD is still $152.5M in the hole before school starts.
John Wiley Price should issue bonds. South Dallas may be a third world pit because of him, but with his 15% cut I'll bet he's a great investment for years to come.

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