ALAMEDA, Calif. — Collapsing property values and a threatened Nevada funding raid led all three major ratings agencies to take negative actions this week on the Clark County School District.
The moves come as the nation's fifth-largest school district prepares to sell $100 million of general obligation refunding bonds next week.
Moody's Investors Service and Fitch Ratings both downgraded CCSD, which has more than $4 billion of outstanding limited-tax GO bonds.
Moody's dropped the district to Aa2 from Aa1, while maintaining a negative outlook, and Fitch downgraded it to AA-minus from AA and revised its outlook to negative from stable. Standard & Poor's affirmed its AA rating, but revised its outlook to negative from stable.
The district serves Clark County, which is centered on Las Vegas, where the real estate market has cratered.
"Home prices have dropped an estimated 57% since 2006, and data available to Fitch indicates that foreclosure rates of non-agency loans are high and increasing," the rating agency said in its report.
"Along with the decline in tourism and hotel occupancy, commercial real estate, suffering from over-supply, over-leverage and foreclosures, is expected to experience sharp declines in value over the near term," Fitch said.
Declining real estate values mean lower assessed valuations for property taxes that back the district's limited-tax GOs. The severe recession has also hammered state government revenues, and state transfers are CCSD's primary source of operating revenue.
"Although the district has made significant budgetary cuts since fiscal 2008, we believe that future educational cuts from the state level, coupled with the potential loss in property tax revenues should AV levels continue to drop, will likely contribute to the district's financial pressure," Standard & Poor's analyst Michael Taylor said in the news release.
The Nevada government's budget woes prompted the newly elected governor, Brian Sandoval, to propose tapping a reserve fund the district maintains to support its GO bonds.
To be clear, Sandoval's proposal does not involve a reserve funded by bond proceeds and included in the bond indenture. It involves a budget reserve fund, funded by property tax collections, that state law requires the district to maintain.
The irony, CCSD officials say, is that the governor wants to tap into that reserve at precisely the time it is needed.
The debt reserve requirement was created in connection with legislation that gave the Clark County School District the authority to successfully ask voters in 1998 to approve a 10-year authorization to issue GO bonds backed by property taxes.
The authorization for new debt expired in 2008, and the district quietly dropped plans to ask voters for a new authorization as the scale of Nevada's economic calamity became clear.
Sandoval's budget proposal — under debate right now as state lawmakers meet in Carson City — would take $300 million from CCSD's bond reserve over the next two years and use it to reduce the state's operating funding for the district by the same amount.
"This reserve was actually set up and mandated basically to be a shock-absorber in times like we're in now," the school district's chief financial officer, Jeff Weiler, told a school board meeting earlier this month.
At the current tax rate, officials project property tax receipts through 2016 will fall short of the debt service schedule; the district plans to make up for the shortfall by tapping its budgetary debt reserve.
There's no danger of missing debt service payments, but Weiler said if the state grabs the reserve fund, CCSD will be faced with the choice of either raising the property tax rate, or refinancing its outstanding debt to stretch out the bond amortization over a longer period of time.
"The property-tax rate would go up to support our debt-service obligation," Weiler said. "The alternative would be a non-economic restructuring. It's non-economic because it would cost the district in the long term. It'd be like extending our mortgage at home; you'd pay interest for more years. Either way it would be an increase in property tax for no benefit."
He said problems with a debt restructuring include higher bond interest rates, a likely adverse impact on the district's bond rating, and a reduction in future capital construction capacity.
It is not an opportune time to go to market with bonds with a weaker credit profile, CCSD's financial adviser, Pat Zamora of NSB Public Finance, told the school board at its Feb. 17 meeting — before this week's round of ratings downgrades.
"Right now in the market there is what I would call a taint on all Nevada paper," he said.
"It's essentially the result of the economy here, the foreclosures, the unemployment," Zamora added. "It's harder than ever to place Nevada paper out in the market."
State law requires the school district to have a debt-management policy, Weiler noted. And that policy does not permit non-economic bond refinancings.
"Bond investors and ratings agencies like to see that we have a policy and that we follow it," he said.
The district's bond council, John Swendseid, told the district that state law currently requires the district to maintain the bond reserve fund.
"That's just a law and the Legislature can change the law," he said. "You're at their mercy. That's kind of the way it is in Nevada, with the Legislature having this much control."
Next week's bond sale is an economic refunding, meeting CCSD's policy requirement of at least 3% present-value savings.
The bonds are slated to sell Tuesday by competitive bid, in two separate sales: the $70 million Series 2011A and the $30.2 million Series 2011B.
The Series B has additional support from a subordinate lien on county room taxes and property transfer taxes.