Moody's Investors Service said it has downgraded to Aa2 from Aa1 the rating on the Cincinnati City School District, Ohio's $66.8 million of outstanding Series 2005B general obligation limited tax bonds and affirmed the Aa2 rating on the district's $106.7 million of outstanding Series 2006 certificates of participation. The outlook for the district's rating remains stable.
Debt service on the Series 2005B bonds is secured by the district's general obligation limited tax pledge, which is subject to the state of Ohio's (general obligation rated Aa1/stable outlook) statutory ten mill limitation.
Debt service on the Series 2006 COPs is secured by base rental payments made by the district, subject to annual appropriation.
Both series of debt also carry a pledge of payments in lieu of taxes (PILOTs) from the city of Cincinnati (Aa1/stable outlook) and Hamilton County (Aa2/negative outlook).
Total debt service on the bonds and COPs has been structured such that the combined PILOTs from the city and county provide sum sufficient coverage through final maturity of the COPs in 2032. The Series 2005 bonds mature in 2021.
The downgrade to Aa2 on the Series 2005B bonds primarily reflects the weakening of the credit quality of Hamilton County, as well as the county's increased share of combined PILOTs to meet debt service requirements.
From 2002 to 2006, both the city and county made annual payments of $5 million to the trustee to cover debt service. Since 2010, the county has accounted for nearly 70% of annual payments. Beyond 2019, the county will be relied upon to cover 100% of annual debt service payments.
The county's general obligation rating was recently assigned a negative outlook, reflecting its weakening credit quality. The increased reliance on the county's payments to meet annual debt service requirements and the county's decline in credit quality is the basis for the downgrade of the Series 2005B bonds as the pledge of the combined PILOTs forms the basis of the rating.
Affirmation of the Aa2 rating on the Series 2006 COPs is based upon the equivalent pledge of PILOTs from the city and county to make debt service payments.
Although payment of the COPs is subject to appropriation by the district, the district's decision not to appropriate would not enable it to capture the PILOT revenue for other purposes.
As a result, it is our opinion that the risk of non-appropriation is mitigated. Furthermore, payments from the city and county are made directly to the Trustee, and do not flow through the district prior to debt service.
The Aa2 rating and stable outlook on the district's outstanding general obligation debt, which does not carry the added pledge from the city and county, was affirmed on May 25.