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Exigencies May Not Lower Texas School District Ratings, S&P Says

DALLAS — A wave of financial emergencies brought on by deep cuts in Texas education spending will bring additional credit scrutiny to school districts but not necessarily downgrades, Standard & Poor's analysts said Tuesday.

The rating agency put out a special report after several large school districts declared financial exigencies in preparation for layoffs. Under state law, a district must declare an exigency before it can violate a teacher's contract to help balance the budget.

Analysts Kate Choban and Horacio Aldrete-Sanchez noted that the declaration of financial exigency does not, in and of itself, have direct rating implications.

"Our focus remains on the districts' overall budgetary performance and how that may affect their ability to meet their debt-service obligations on time and in full," they wrote.

"While declaring financial exigency may help alleviate short-term budget challenges, we believe that some of the underlying factors that could lead a school district to seek financial exigency may also indicate a deteriorating financial and economic profile, which could put downward pressure on our ratings."

The Austin Independent School District, one of the state's largest systems, expects to declare an exigency on Monday that will allow it to begin laying off hundreds of teachers. With an estimated shortfall of $94 million, the district is also planning to close several schools, the first time it has closed more than one at a time.

Austin ISD has an underlying rating of AA-plus from Standard & Poor's, and will continue to carry triple-A ratings on its outstanding bonds with enhancement from the Texas Permanent School Fund.

However, declaring a financial exigency could disqualify any Texas school district from receiving future bond guarantees from the PSF. If the district has declared or plans to declare financial exigency in the current school year, the policy of the Texas Education Agency is to deny the bond guarantee request until the district can demonstrate financial stability.

As a result, underlying ratings again become important to local schools. The PSF just became available again in 2010 after a year's hiatus due to capacity limits. With the fund back in action, Texas school debt issuance rose nearly 28% in 2010 over the previous year.

Because it is considered a property-wealthy district under Chapter 41 of Texas Education Code, Austin ISD will have to remit $113 million of local property-tax revenue to the state for redistribution in fiscal 2010, down from $178 million in fiscal 2009.

The Dallas Independent School District recently voted to lay off 290 employees. That will include teachers who were hired in 2009 with $105 million in federal stimulus funds. In a $250 million budget reduction plan, the district also anticipates cutting nearly 4,000 employees.

Foreseeing $200 million in state funding cuts, the Houston Independent School District is also bracing for teacher and administrative layoffs, as are other districts throughout the state.

Of the 1,031 independent school districts in the state, 41 have declared financial exigencies within the past two years, according to the TEA. That is before the deep cuts of up to $9.3 billion contemplated in the current session of the Legislature.

Republican leaders have vowed not to raise taxes, and Lieut. Gov. David Dewhurst joked at The Bond Buyer's Texas Public Finance Conference that he would not raise taxes even if he were tortured.

For most school districts, payroll makes up the largest operating cost. The declaration of financial exigency is at the discretion of each district's school board, but historically has been used as a tool of last resort to aid in the stabilization of budget imbalances.

While the funding issue is an emergency for the districts, lawmakers and Gov. Rick Perry have put other social issues such as illegal immigration and pre-abortion sonograms ahead of the schools.

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