Another Wisconsin School District Gets Downgraded

CHICAGO — Moody’s Investors Service this week lowered Kimberly Area School District’s general obligation debt one notch to Aa3, making it the third district to suffer a downgrade after reneging on a moral obligation pledge to repay asset-backed notes issued by their non-pension retiree health care trusts.

Five southeastern Wisconsin school districts were involved in a now-worthless investment scheme tied to funding their unfunded other post-employment benefit liabilities. They opted not to honor their moral obligation pledge on the notes held by Depfa Bank Plc by refusing to include repayment in their preliminary fiscal 2011 budgets. The notes were issued in 2006.

The Kimberly downgrade affects $43.2 million of outstanding GO debt. Moody’s assigned a stable outlook. The rating took into consideration the district’s decision to tie its moral obligation pledge to the performance of high-risk investments and the board’s decision not to repay the notes in 2011. The district owes $4.3 million.

“We view the district’s failure to comply with the spirit of the moral obligation agreement to be a notable lack of willingness to pay on this agreement,” Moody’s wrote. The rating factors in the district’s modest and growing tax base, above-average resident wealth, healthy financial operations with strong general fund reserves, and manageable debt levels.

The five districts’ trusts issued a combined $165 million to fund the investment scheme in collateralized debt obligations that involved credit default swaps.

Moody’s last week downgraded the Kenosha Unified School District by one notch to Aa3 and assigned a stable outlook after its board adopted a preliminary budget that did not appropriate repayment of $27.7 million of notes. Moody’s in June downgraded the Waukesha School District to A1 from Aa3 and assigned a negative outlook after its board adopted a preliminary budget that did not fund repayment of $47.5 million of notes.

The West Allis/West Milwaukee School District and the Whitefish Bay School District have also adopted budgets that do not include repayment of the notes. Moody’s is reviewing their ratings.

Kimberly officials could not be reached for comment. Other districts said they want to wait for litigation they have filed — alleging fraud against the firms that put the investment together — to be resolved before repaying Depfa as the bank has demanded under its loan agreements.

Moody’s considered the status of the lawsuit in its review and the district’s ability to repay the notes with available resources or through debt issuance. “The stable outlook takes into account the potential multi-year timeline for the resolution of the lawsuit,” analysts wrote.

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