DALLAS - Moody's Investors Service slashed Cardinal Local School District, Ohio to a junk rating following the district's default on a December 2015 bond payment.
Cardinal defaulted on a $203,000 payment owed in December on library improvement bonds from a 2002 issue, but made the payment in full on Feb. 2, 2016. The default, along with an "ongoing structural imbalance which has led to narrow cash reserves and lack of revenue raising flexibility without voter support," drove the five-notch downgrade to B1 from Baa2.
The district's rating is now four levels into speculative territory. Moody's said the district is at risk of further credit deterioration because of severe cash pressures and other risks to its credit profile. The downgrade and placement of the credit under review for a further downgrade impacts $7.5 million of debt.
"The district's operations are expected to remain stressed given a trend of deficits and narrow reserve levels," Moody's analysts said Feb. 17. "Our review will include confirmation of the district's ability to make timely debt service payments on all outstanding obligations, to maintain sufficient cash flows for ongoing operations, as well as a review of the legal covenants" on bonds privately placed last year.
The district privately placed $300,000 of GO limited tax debt with The Middlefield Banking Company last year.
The district recorded a fiscal 2015 general fund operating deficit of $461,000, which added to its negative fund balance of $623,000. Available fund balance across all operating funds which includes the general fund and debt service funds was $64,000 or a very narrow 0.4% of total operating revenues. Management is projecting a general fund deficit of approximately $80,000 for fiscal 2016.
Property taxes comprised the majority of the district's 2015 operating revenues, accounting for 50.2% of total receipts, followed by state aid at 41.5%.
The outstanding privately placed bonds are secured by the city's general obligation limited tax pledge, subject to the ten mill limitation defined in Ohio law. The GO debt is secured by a general obligation unlimited tax pledge which benefits from a dedicated property tax levy which is not limited as to rate or amount.
Cardinal is 35 miles southeast of Cleveland in Geauga County. In 2015, the district had an approximate population of 15,000 and enrolled 1,155 students.
Student enrollment has declined in recent years, with a five-year average annual loss of 2.4% since fiscal 2011. "The enrollment loss has continued despite modest population growth over the same time period, reportedly due to students taking advantage of open enrollment to enroll in other districts, charter schools and online education programs," said Moody's.
The school district also faces liquidity constraints on the back of rising contributions to the State Teachers Retirement System of Ohio and the School Employees Retirement System of Ohio, according to Moody's. The district's audited fiscal 2015 contribution to the plans for both pension and retiree healthcare was $1 million, or 6.9% of operating revenue.
Moody's said that growth in the plans' pension debt raises the risk that state lawmakers will reassess payment requirements so the plans remain in compliance with a statutory 30-year amortization mandate.
