The inability of Pennsylvania's Penn Hills School District to obtain full financing for a bridge loan is a credit negative, said Moody's Investors Service, and "illustrates the exceptional magnitude of its credit pressure."
Penn Hills, which sits about 10 miles east of Pittsburgh, received a commitment from PNC Bank for a $12 million loan, only two-thirds of the $18 million the district sought to meet payroll and operating expenses for three months.
The district nearly defaulted on its general obligation bonds on April 1. Pennsylvania intervened, forwarding a portion of state aid to the bond paying agent to cover debt service and avert bondholder impairment.
Moody's two months ago downgraded the district's general obligation underlying and enhanced ratings to B3 and B1, respectively, both with negative outlooks. Moody's cited "the rapid and severe deterioration of the district's financial position."
Penn Hills again must borrow money in mid-September, when Moody's expects it to lack the cash to meet all its expenses.
The district intends to redeem the bridge loan through a long-term bond issue with a 10-year amortization secured by the pre-default, Pennsylvania School District Fiscal Agent Agreement Intercept Program. Janney Capital Markets said this reflects the benefits of the state program.
"We still expect that, should the district fail to meet its $6 million debt service on Oct. 1, the state will make the payment on the district's behalf through the post-default intercept program, though not necessarily on time," Moody's said in a commentary on Tuesday.
Penn Hills faces an estimated $18 million fund-balance deficit at the end of 2015. According to Moody's, the fiscal 2016 preliminary budget is just under $90 million with recurring revenues providing only $78.8 million resulting in a reported $10.6 million budget gap adjusted for some one-time revenues.
The revenue shortfall is due in part because the district plans a tax increase of only 2.7% equal to the state tax cap.
In January 2015, the school board did not seek permission to raise tax rates beyond the state index. "Balancing the 2016 budget will have to come from cuts to expenditures and the pending takeout financing," said Moody's.
