The Toms River Regional School District's bond rating was dropped one notch by S&P Global Ratings, a move that comes after school officials threatened to file for bankruptcy.
The rating agency cut the local board of education's grade to A-minus from A, according to a report on Tuesday. While removing the credit from negative CreditWatch, S&P assigned a negative outlook to the rating. The agency cited New Jersey's intervention in the budget process and "the recent use of unsustainable one-time budget-balancing measures, including extraordinary tax rate increases and land sales" as reasons for the downgrade.
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The district's recent downgrades and potential for future cuts could threaten the liquidity of the issuer, as local school credits "particularly depend upon the willingness of retail investors to invest," according to Chris Brigati, chief investment officer at SWBC Investment Services.
"'Headline risk' and perception of credit quality concerns could undermine the market for such issues even further, thereby increasing borrowing costs in the future," he said. "Some investors could simply avoid the credit completely to avoid the risk of owning a deteriorating credit within their portfolios."
Toms River, the largest Republican-led town in the state, has been fighting lawmakers in Trenton on funding for its schools for years. The district's finances have been deteriorating recently due to decreasing state aid, which accounts for about 40% of its revenue, the S&P report said.
In 2018, Gov. Phil Murphy signed a law that changed New Jersey's school funding formula effective in fiscal year 2020. The seven-year plan was meant to reduce aid to overfunded districts and increase aid to underfunded districts.
This latest downgrade "is the direct result of State Bill S2, the millions of dollars in cumulative losses it has imposed on our district during its seven-year run, and the State of New Jersey's unwillingness to reconsider the clearly flawed funding formula on which the bill is based," wrote Mike Kenny, a spokesperson for Toms River Regional Schools, in an emailed statement.
The rating agency's negative outlook reflects a one-in-three chance that it could lower the credit rating further over the next two years if budget adoption issues continue, especially if it impacts the district's reserves or ability to meet obligations. S&P said it would consider raising the rating if Toms River could consistently show that it can adopt a budget without intervention from New Jersey or reliance on one-time measures.
"Given recent history, if the district were to fail to adopt another budget we could lower the rating by multiple notches," S&P said in the statement.
