School district’s credit rating improves

The Warren County School District’s bond outlook has improved.

Moody’s Investor’s Services, which rates both specific debt issuances such as bonds and future credit ratings of debt issuing entities, has revised its outlook on the district from negative to stable.

An outlook is the rating agency’s current opinion of the relative future credit risk of an entity.

“The contributing factor was the considerable year we had,” District Business Manager Jim Grosch said. “It shows a more stable financial position. It will remain there as long as we don’t erode fund balance.”

According to a Nov. 27 Moody’s press release, “Moody’s Investors Service has assigned an A2 underlying rating and a Aa3 enhanced rating to Warren County School District’s (PA) General Obligation Bonds, Series 2014. Concurrently, Moody’s has affirmed the A2 underlying rating on the district’s $46.6 million of parity bonds and revised the outlook to stable from negative.”

The A2 rating, according to Moody’s, reflects a “modestly sized rural tax base with below-average wealth levels and a manageable debt profile, as well as adequate financial flexibility and an improving cash position.”

The upgrade to stable “reflects management’s recent successes in restoring financial reserves and liquidity despite rising pension costs, stagnant state aid revenues and limited revenue-generating flexibility.”

The Aa3 rating, meanwhile, has less to do with the district and more with the actions of the state.

“The Aa3 enhanced rating reflects the additional security provided by Pennsylvania’s School District Fiscal Agent Agreement Intercept Program, a pre-default state aid intercept program created as a subset of the state’s Act 150 Intercept Program. The program provides for the intercept of state aid for the current fiscal year in the event of a potential failure by the district to pay timely debt service and reflects the program’s inherent programmatic strength, which is reflective of the credit profile of the Commonwealth, which carries a general obligation rating of Aa2 with a stable outlook,” the release said. “Pursuant the Pennsylvania School Code, the state is authorized to intercept aid appropriated in the current fiscal year. In the case of the district, the program is further enhanced by a fiscal agent agreement that requires the fiscal agent for the bonds to notify the secretary of education of the commonwealth if the school district fails to make a sinking fund payment 15 days prior to any debt service payment date. Pursuant to a memorandum of agreement among the secretary of education, the labor, education and community services comptroller, and the state treasurer, the timing of the state aid intercept would allow for the timely transfer of appropriated funds to the fiscal agent in amounts sufficient to pay the required debt service on each debt service payment date.”

The effects of the decision, according to Grosch, are investor confidence and lower costs-over-time from debt issuances.

“From a layman’s perspective, it gives bond investors greater confidence in our ability to repay and confidence in taking on greater risk,” he said. “Lower yield rates. This is a good thing for us.”

A yield rate is essentially a non-loan debt instrument’s equivalent of an interest rate. A non-loan instrument, such as a bond, acts as a means to borrow money from the investors who purchase the bond with the expectation of earning a profit, or yield, over time. It’s similar to a bank expecting a return through interest on a loan. Similar to a lower interest rate on a loan being favorable to a borrower, as the individual will payout less to the lender over the life of the loan; a lower yield on a bond results in a borrower paying out less to investors over the life of the bond.