Moody’s Investors Service downgraded Cincinnati School District’s certificates of participation from a 2006 issue one notch to Aa3 due to the credit’s links to the recently downgraded city.

About $105.8 million remains outstanding from the issue. Debt service is secured by base rental payments of the Cincinnati City School District subject to an annual appropriation. The district’s GO rating is Aa2.

The annual rental payments are made with payments from the city, which was recently downgraded by Moody’s to Aa2 and assigned a negative outlook, and Hamilton County, also rated Aa2 with negative outlook.

Combined debt service on the COPs and the district’s Series 2005 GOs, which carry a pledge of city and county payments, was structured such that the combined payments in lieu of taxes from the city and county provide sufficient coverage through final maturity of the COPs in 2032.

Bonds subject to annual appropriation typically receive a rating one notch below the issuer, but in the COPs case it had remained equivalent to the district given the weighted average credit quality of the city and county and the inability of the district to utilize the PILOTs for general operating purposes.

“These provisions mitigate the risk of non-appropriation,” Moody’s wrote. “Following the downgrade of the city’s rating, the weighted average credit quality of the sources supplying the PILOTs used for debt service is weakened per Moody’s Public Sector Pool Financings methodology.”

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