Moody's Applies Programatic Rating of A1 to the State of Georgia's School District Intercept Program

Business Wire, Dec 1, 1994

NEW YORK--(BUSINESS WIRE)--Dec. 1, 1994--Effective today, Moody's Investors Service has decided to make available a programatic base rating of A1 on certain bond issues offered by local school districts in Georgia.

The rating recognizes the ability for the state to make debt service payments for local districts, if necessary, from available state appropriations to the district such fiscal year.

The rating considers the availability of an intercept arrangement authorized by statute and by resolution of the school district, the program's structure which ensures sufficiency of funds, the State Department of Education's (DOE) strong oversight into local district performance (as empowered by the State Code), the requirement that districts and the state DOE sign parallel agreements for the state to pay debt service if necessary and the state's own strong and stable financial performance.

The program allows the state to withhold existing fiscal year allocations for each specific school district for debt service payment. Higher ratings would be assigned if warranted by the district's own credit standing.

How the program works

Prior to bond issuance, the school district submits a resolution citing the relevant state codes and requesting that the state withhold funds for debt service retirement if the district is unable to meet its obligations. The State DOE then acknowledges receipt of the resolution.

After bond issuance, if there is a deficiency in the debt service fund the debt service custodian informs the State Board of Education on the 15th day of the month preceding a debt service payment. The State Board of Education is required to transfer to the custodian funds sufficient to make up any deficiency, from state budgeted appropriations to the district for such fiscal year, no less than two business days before the debt service payment date.

Sufficiency of Funds

The program, authorized by state Code Sections 20-2-170 and 20-2- 480, allows the state Department of Education to withhold funds allocated to the district for the current fiscal year in order to make debt service payments on district long term bonds. The state currently provides school district allocations on a monthly basis in equal installments.

To assure sufficiency of funds and qualify for a programmatic Moody's A1 rating, Moody's requires that no debt service payment shall come due before August 1 or with less than two months of outstanding state appropriation available. The State of Georgia and local districts are on July 1, through June 30 fiscal year cycles.

By requiring at least two months of available state appropriation the program is protected against potential state financial difficulties that could affect the state's distribution to local districts for the final two months of the year.

Similarly, by requiring that debt service payments not occur prior to August 1, the bondholder is protected should the adoption of the state's budget be delayed and appropriations to districts affected. Customarily the state's budget has been adopted in a timely manner. In addition, for the year of issuance, available state appropriation levels must be equal to at least two times the maximum annual debt service outstanding for such fiscal year for all district debt secured by the program (including those that are not rated by Moody's).

Strong state oversight of school district financial performance The State Board of Education monitors all school district budgets, with particular stress on sufficiency of debt service funds for debt payment.

Any school district in a deficit position is required to submit a corrective financial program to the state board for approval. State Board of-Education Rule 160- 5-2-.02 empowers the Board to withhold state Quality Based Education (QBE) program funds from a local unit if it fails to comply with any contracts between the unit and the State Board of Education.

Local districts cited for failure to meet state board provisions as identified in the Official Code of Georgia (Annotated) Section 20-2-282 are required to present a "corrective action plan" for approval by the State Board of Education.

As part of a corrective plan a district that ends its fiscal year in a deficit position must reserve a portion of its property tax collections to return the district to a positive financial position. In fact, the state code allows the State Board of Education to require a local district to increase property tax revenues or reduce expenditures as corrective actions. Moody's takes comfort in the State Code requirements and the Board of Education's powers to require financially weakened districts to improve their financial position within three years.

The State of Georgia has a history of stable, satisfactory finances and conservative budgeting Over the last eight years the state has had only one modest (2.5% in fiscal year 1992) cut to local school boards. School funding occupies a major position among state programs.

Additionally, given Moody's requirement of at least two times coverage of debt service for assignment of the programmatic A1 rating, only draconian state measures affecting school aid might jeopardize debt service coverage. The state's commitment to education has been strong with funding increasing annually the last number of years.