DALLAS — With its rocky financial situation appearing to stabilize, the Dallas Independent School District leads a parade of Texas school bond issuers to market this week with a $166 million refunding.
The flood of issues enjoys the backing of the Texas Permanent School Fund, a triple-A bond guarantee that was not available last year.
The PSF was sidelined in late 2008 when the fund neared its capacity limits, and declining investment results made the situation worse.
In 2009, school districts had to issue under their own credit or withhold issues until the state guarantee became available again.
In December, the Internal Revenue Service allowed the PSF to double its capacity to insure school bonds, and the program resumed this year.
With the PSF back online, underlying ratings are less critical. But they provide insight into how the districts are coping with the declining property values and economic troubles that have forced severe cutbacks.
With the upcoming issue, DISD regains its stable outlook from Standard & Poor’s, which rates the bonds A-plus. Standard & Poor’s downgraded the district to A-plus from AA-minus on June 18, 2009, citing deterioration in finances and a plummeting general fund balance. Though the economy was a factor, the district’s financial distress was due primarily to faulty accounting, including underestimates of payroll costs. To regain control, the district eliminated 1,000 jobs.
Standard & Poor’s analyst Horacio Aldrete-Sanchez in his latest report said that the district’s efforts have resulted in greater discipline and better financial posture.
“The outlook revision reflects our view of the district’s expenditure cuts, which have resulted in a projected increase to reserve levels at fiscal year-end 2010,” Aldrete-Sanchez said.
“While we expect that demands for salary increases and other services will continue to pressure Dallas ISD’s budget, we also expect that the board and management will remain committed to maintaining operating reserves consistent with the rating,” he said.
Of the three rating agencies, only Fitch Ratings maintains a negative outlook. The agency assigns a AA, the highest of the three underlying ratings.
Moody’s Investors Service downgraded DISD on June 16, 2009, to A1 from Aa3, but the rating rose to Aa2 when Moody’s recalibrated its ratings scale on April 23.
“While the district has a recent history of structural imbalance resulting in narrow financial reserves, the last rating action on June 16, 2009, incorporated our concerns into the rating assignment,” wrote Moody’s analyst Kristin Button.
DISD chief financial officer Larry Throm projects a surplus of $23 million for the current fiscal year that would increase the district’s fund balance to at least $60 million.
Throm said that the district’s financial staff has worked on DISD’s accounting coding structure so that it matches that of every other school district in the state.
“That has helped paint a clearer picture of the district’s finances and allowed us to hold the line on staffing formulas,” Throm said. “If we continue to do this, we will be able to rebuild our financial reserves to pre-2008 levels in a couple of years.”
Financial troubles began in 2008 with a $60 million general fund shortfall that was far beyond expectations and shrank the general fund reserves by more than half.
District staff attributed the deficit to poor budgetary controls and inadequate communication between departments. The most glaring omission was the fact that the hiring of 750 teachers was not factored into the fiscal 2008 budget.
The fiscal 2007 district audit also found weaknesses and deficiencies in internal controls, accounting procedures, and financial oversight, magnifying the district’s financial disorganization.
The budget imbalance carried through into fiscal 2009, as administrators tried to overcome a deficit of more than $80 million through staff reductions and other spending cutbacks. The district declared a state of financial emergency in September 2008, which allowed it to lay off 700 teachers under contract while eliminating 300 other positions.
Despite the layoffs, officials projected another operating deficit of $30 million for fiscal 2009.
The fiscal 2011 budget was recently adopted and includes another modest decline in the tax base and no salary increases. Despite the decline in the tax base, the fiscal 2012 overall property tax rate will drop due to the district’s declining debt-service schedule.
To avoid future accounting crises, the district recently made several management changes, including hiring a new executive director of financial services, executive chief financial officer, director of accounting services, and director of budget services.
The district staff developed a plan to correct its accounting problems by June 30, 2011, and devised a financial recovery plan aimed at restoring operating reserves.
“Fitch views favorably management’s efforts to implement these plans in the near term, and continued demonstrated progress remains a crucial factor in stabilizing the district credit position and outlook,” wrote analyst Mark Campa.
Proceeds from this week’s deal will refund a portion of the district’s outstanding general obligation bonds for interest savings. The refunding will shorten the maturity schedule by several years.
Voters approved bond packages of $1.3 billion in both 2001 and 2008. About $950 million of the 2008 authorization remains unissued. Officials expect to sell the next tranche within 12 months.
DISD’s capital improvement program includes new and replacement schools, renovations and additions at existing campuses, and a variety of other improvements. The program is expected to meet district needs through 2014.
Despite reduced operating flexibility, officials report that the CIP continues as planned and school openings remain on schedule.
Meanwhile, other districts are going to market with smaller deals under the PSF guarantee.
One of the largest comes from DISD’s neighboring Mesquite Independent School District, which this week plans to offer $78 million of GOs in two series.