A small Texas public school district's underlying junk bond ratings are under pressure as it deals with financial woes that led to a state-appointed monitor.
Last week, Moody's Investors Service downgraded Tioga Independent School District's Ba3 general obligation bond issuer rating to B1 with a negative outlook, affecting about $5.3 million of debt outstanding as of June 30.
The rating agency said the downgrade "reflects the continued deterioration of the district's financial position with minimal liquidity and negative general fund balance."
"The weak financial position has required the district to cash-flow borrow over the past several years to cover operating costs and avoid defaulting on debt payments," Moody's said in a report.
On Friday, S&P Global Ratings placed the district's BB-minus GO rating on CreditWatch with negative implications.
"The CreditWatch placement indicates that within 90 days we could lower the rating by one or more notches following a larger-than-expected deficit in fiscal 2022 that resulted in material deterioration of fund balance levels and liquidity, as well as a going concern audit opinion," S&P analyst Lauren Levy said in a statement.
Some bonds issued by the district are backed by a guarantee from the Texas Permanent School Fund and continue to be rated triple-A. The district, which is located about 60 miles north of Dallas, has approximately 715 students in two schools, according to Moody's.
The Texas Education Agency (TEA) in February appointed a monitor for the district after giving it an "accredited-warned" status for the current school year, which followed the assignment of F ratings for financial accountability in 2021 and 2022. Tioga is one of only six districts in the state with a failing rating.
The monitor is tasked with overseeing actions by the district and its board and working on the development and implementation of "a corrective action plan," according to a Feb. 23 TEA letter.
Tioga Superintendent Josh Ballinger said this week the district has not missed any debt service payments and cut its workforce in December after declaring a financial exigency, resulting in a more than $1 million in annualized salary reduction.
"Tioga ISD will continue to work each day to become more fiscally sound moving forward into future school years with our students and staff," he said in an emailed response to questions.
According to the district's fiscal 2022 annual financial report, "overly optimistic" attendance numbers were submitted to TEA, resulting in overpayments of state aid that subsequently led to reductions in foundation school program allotments totaling $1.362 million in fiscal 2022 and $1.525 million in fiscal 2023. The then-superintendent resigned in October following an investigation by school board members.
The report also said the district continues to have cash flow problems and cited "significant uncertainty" over its ability to make debt service payments due earlier this year on lease revenue and short-term debt.
The district's public facility corporation sold $28 million of unrated lease revenue refunding bonds in 2019 for savings and to restructure longer maturities from a 2016 issue.
In August, the district placed a total of $1.7 million of tax and revenue anticipation notes in two issues with Bancorp South to fund debt service payments due that month and to cover operating expenses.
