Moody's Investors Service has revamped the way it rates K-12 school districts, which is likely to bring rating changes to hundreds of school districts across the country.
When it announced its new rating methodology Tuesday, Moody's placed 637 of the roughly 3,400 school districts it rates on review for upgrade or downgrade, affecting $65 billion of debt.
Of those, Moody's said, 304 school districts are being evaluated for possible upgrade, 236 could be downgraded and 97 are on review with the rating direction uncertain.
The rating agency also upgraded 85 school districts. The remainder will be assigned issuer ratings in coming months.
Moody’s doesn’t anticipate a wave of multi-notch upgrades or downgrades, but it ultimately depends on how things shake out when the rating agency analyzes individual school districts.
Each school district under review will be analyzed individually based on their unique features to determine whether they will receive an upgrade, downgrade or retain their current rating, said Eva Bogaty, a Moody's vice president.
It's unlikely to create many multi-notch swings, she said. “Not to say it couldn’t happen, but it would be a small minority.”
The school districts were chosen for review because when Moody’s analysts ran the data on those school districts, against the newly developed scorecard developed, they were either indicating a higher or lower rating, Bogaty said. “We introduced some new analytics and those drove the outliers.”
Under the new guidance, analysts will use different criteria to rate school district debt than the rating agency uses to rate local government debt.
“Previously school districts fell under our general obligation bond or lease revenue methodology,” Bogaty said. “This is really carving them out to their own distinct methodology.”
The new rating criteria recognizes, for instance, the impact that enrollment changes have on school districts as much of their funding is based off those numbers, which is not the case for other GO or lease revenue debt, Bogaty said.
The new methodology involves creating an “issuer rating” that all the other school district debt will be arrayed around, Bogaty said.
“We are assigning an issuer rating based on the fundamentals of school districts,” she said. “We would then rate the securities in a notched fashion based off the issuer rating.”
The issuer rating would be based off factors including the school district’s finances, the economy, debt obligations and the institutional framework, she said.
Moody’s has upgraded the general obligation unlimited tax bond ratings of 85 school districts and assigned them issuer ratings. Of these 85, eight have certificates of participation ratings that Moody’s has affirmed.
Debt that has additional security features, like a lockbox feature, would receive a one-notch lift above the issuer rating. For instance, in California, Arizona and Colorado GOULT debt issued by school districts is secured by statute and has a lockbox feature protecting bond payments, she said.
The ratings boost reflects that those financial instruments carry additional security features such as a lockbox insuring that money used to repay the bonds is separate from operations. So, those bonds could be viewed more favorably than the separate issuer rating assigned to the school districts, which are based on school district finances, and other factors.
The affirmation of the ratings on the certificates of participation, one notch below the newly assigned issuer rating, reflects the contingent nature of the obligations, which are subject to appropriation, and the more essential nature of the financed school district facilities or assets.
