DALLAS -- Fitch Ratings downgraded the $398 million of outstanding debt of Beaumont Independent School District, Texas, to A from AA amid a federal investigation of alleged embezzlement.
Fitch is keeping the district on its negative watch for another possible downgrade.
"The downgrade reflects significant gaps in internal control and financial management practices uncovered by the ongoing FBI embezzlement investigation into the former finance director and comptroller," Fitch analyst Rebecca Moses wrote in her March 3 report. "The downgrade further reflects the district's projection for a weaker financial position in fiscal 2013 compared to previous estimates and Fitch's expectations."
The Fitch action follows a two-notch downgrade by Moody's Investors Service on Feb. 18. Moody's dropped Beaumont ISD to A1 from Aa2 and also retained a negative outlook.
The Moody's downgrade came four days after the Texas Education Agency assigned a monitor to the district's special education program to ensure compliance with state regulations.
"Further state intervention is likely as the TEA concludes its investigation of the district's finances and contracting procedures, along with alleged cheating on state tests and attendance reporting irregularities, among other issues," Moody's analyst Karolina Norris noted.
As the state investigates the district, the U.S. Attorney's Office continues with a probe of the district's finances after indicting two officials on fraud allegations in January.
"Results of the investigations could bring significant liabilities and further erode the district's credit quality," Norris added.
The TEA found the district violated state regulations, including proper staff certification. The special education program, an area of ongoing concern, had an assigned conservator from 2009 to 2011.
State intervention could include a conservator or management team equipped with the power to take over Beaumont Independent School District's operations.
"Fitch has requested documentation showing adequate funding of obligations for the current fiscal year to confirm district statements," Moses said. "If the financial position proves materially worse than indicated and/or sufficient documentation is not available, the rating will be downgraded and/or withdrawn."
Serving nearly 20,000 students in a major port and petrochemical producing region on Texas' Gulf Coast, the Beaumont ISD has been tangled in lawsuits over plans to change the school board's representation and use of bond proceeds.
