Standard & Poor's Ratings Services has lowered its underlying rating on Atlantic City Board of Education, N.J.'s existing general obligation (GO) bonds to 'BBB-' from 'A-'. The rating remains on CreditWatch with negative implications, where it was placed on Feb. 11, 2015. At the same time, Standard & Poor's affirmed its 'A' school program rating. The outlook on that rating is stable.
The 'A' long-term rating reflects our view of the district's participation in the New Jersey Fund for the Support of Free Public Schools. The long-term rating continues to reflect the creditworthiness of the program rating. The long-term rating continues to reflect the creditworthiness of the program rating.
The downgrade reflects our view of:
• The continued uncertainty regarding negative implications following the recent history of late monthly property tax payments from the city to the school district and the potential liquidity risk placed on the district as a result of these late payments;
• The use of $12.6 million from the capital reserve fund to pay for debt service, offset by the anticipation of receiving an estimated additional $20 million in state aid, which reduces reserves and significantly weakens the district's projected cash in the absence of the state aid;
• The structural imbalance of $13 million that exists even after the district has cut about $20 million; and
• Our view of the weakened area economy, which is concentrated in the casino/resort sector and has recently suffered sizable employment and tax base losses. Those losses are exacerbated by significant and ongoing tax appeals, which continue to pressure the city's finances and which has a negative effect on the district's timely receipt of operating revenue. "The rating remains on CreditWatch with negative implications to reflect the district's short-term liquidity pressures," said Standard & Poor's credit analyst Danielle Leonardis. "In our opinion, the lack of timely monthly property tax levy payments for fiscal 2015, which will likely continue into fiscal 2016, and the potential for liquidity erosion, coupled with the potential receipt of no additional state aid, will likely continue to place fiscal strain on district's finances."
The rating further reflects our view of the continued uncertainty that surrounds the potential negative implications for the school district following the executive order, signed by the governor, which appointed an emergency manager and emergency manager adviser to Atlantic City. Following the Emergency Manager's 60-day report, there have been no subsequent updates regarding any further actions to be taken. And, in our opinion, the passage of time without clearer resolution to these financial challenges continues to leave the city and school district vulnerable.
Within the 90-day CreditWatch timeframe, we expect to have further clarity as to how, if at all, the executive order and all subsequent reports, affects the school district's budget and operations. We also expect to have confirmation as to whether or not the governor signs the bill and grants the district additional state aid. Eventually we expect to have a clearer picture as to the timeliness of city payments to the district--all of which point to either gradual stabilization of the district's fiscal and liquidity position or further erosion.
While recognizing the short-term uncertainty, we believe the next 90 days should provide greater clarity for the district and its financial operations. If the district receives less than the budgeted amount of Atlantic City's property tax levy in fiscal 2016, the district fails to secure additional state aid revenues, and the city's financial recovery plans negatively affect the district's finances, we could further lower the rating. The same holds true if the fiscal 2016 district budget utilizes any remaining cash to balance the budget for any purpose, again leaving the district vulnerable. In addition, the rating could be lowered if the district's cash position significantly narrows or the structural imbalance widens.
The bonds are general obligations of the district, for which it has pledged its full faith and credit pledge. The bonds are further secured by the district's participation in the New Jersey Fund for the Support of Free Public Schools program. The district, with an estimated population of 39,000, encompasses 12 square miles in Atlantic County and is coterminous with Atlantic City. The economy is weak due to significant employment and tax base concentration in the casino/resort sector.
