DALLAS – Dallas County Schools, the bus operator for the Dallas Independent School District and smaller districts, was downgraded to a junk bond rating of Ba3 by Moody’s Investors Service, which kept its outlook negative.

Wednesday's rating action came as Texas lawmakers considered dissolving the district. Financial difficulties raise prospects for the district defaulting on its $130.7 million of outstanding debt, analysts said.

“Failure to restructure and extend certain maturities of the district's GOLT (general obligation limited tax) bonds and Series 2012-B obligations will likely result in a default on the June 1, 2017 debt service payment,” analysts noted.

“The proposed legislation to dissolve the district is not expected to impact GOLT bondholders because it requires the continued levy of an ad valorem tax for the purposes of paying any principal and interest on any bonds issued by the district prior to the effective date of the act,” they added.

The downgrade from Baa3 “reflects severe deterioration in the district’s liquidity position, its acute need to restructure a portion of its outstanding debt and its reliance on cash flow borrowings to meet current fiscal year obligations,” Moody's analysts said.

The district plans to restructure $40.6 million of outstanding principal to make the scheduled June 1 debt service payment, analysts said. The restructuring is designed to extend the original maturity of the bonds by five years at an estimated net present value loss of $2.5 million and would increase the amount of outstanding general obligation debt to $64.5 million.

The district also plans to issue $14 million of tax anticipation notes to provide operating liquidity for the remainder of calendar 2017.

The state legislature is considering legislation to abolish the district in 2018. Approved by the Senate on May 4, Senate Bill 1122 by Sen. Don Huffines, R-Dallas, still needs House approval and Gov. Greg Abbott’s signature to become law. The Senate version of the bill was amended to require a vote of district residents to shut down the system.

The district ran into financial trouble in the process of investing in cameras mounted on the side of school buses to capture license numbers of drivers who passed buses when stopped. Moody’s cited the “non-essential” investment as a factor in its downgrade.

The district is authorized to levy a 0.1 mill property tax, which provides 83% coverage of maximum annual debt service.

As part of the downgrade, Moody’s also lowered the district’s $3.2 million of promissory notes to Caa1 from B1, which analysts said “incorporates the nonessential enterprises funds' limited liquidity, substantially increased leverage and history of extreme revenue underperformance and budget shortfalls.”

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