DALLAS –Dallas County Schools, the bus operator for 12 Dallas county school districts, defaulted on its June 1 debt payment after a failed effort to issue refunding bonds, according to a notice on the Municipal Securities Rulemaking Board’s EMMA Web site.
The refunding bonds were intended to reduce debt service in the face of a cash-flow shortfall. However, Texas Attorney General Ken Paxton on May 26 refused to approve the bonds, preventing issuance.
The five series of bonds and notes were issued in 2012, 2013 and 2014, according to the notice. About $10 million of debt service was due.
Serving 12 school districts in Dallas County, the DCS employs more 2,000 people and has more than 1,900 buses. DCS transports more than 75,000 children to and from school each day.
The district has $130.7 million of outstanding debt, including $44.8 million of rated general obligation bonds and $3.2 million of rated promissory notes.
With the default imminent, Moody’s Investors Service downgraded the district’s GO debt to B3 from Ba3 on May 31 and lowered the note rating to Ca from Caa1. The default was the first for a Moody’s-rated credit since Puerto Rico two years ago, a Moody’s spokesman said.
The outlook remains negative.
The downgrade and negative outlook reflected not only deteriorating liquidity and an inability to restructure debt, but also uncertainty about the district’s future under recently passed legislation.
“The negative outlook reflects our expectation of sustained and ongoing financial stress given the lack of liquidity to meet payment obligations and uncertainty as to how the district will achieve sufficient operating liquidity in the near term,” analysts Nathan Phelps and Gera McGuire said.
In Texas’ 85th Legislative session that ended May 31, lawmakers approved Senate Bill 1566 that would abolish the district on Nov. 15, 2017 unless a majority of voters in Dallas County vote to preserve the district at the Nov. 7 general election.
State Sen. Don Huffines, R-Dallas, who originally sought to abolish the district by legislation, agreed to let voters decide in his bill that won final approval. As of Monday, Gov. Greg Abbott had not signed the bill. Huffines introduced the bill based on local news reports detailing questionable business dealings and safety concerns.
"The Texas Legislature has acted to give voters the opportunity they deserve: the chance to abolish Dallas’ corrupt and dangerous bus bureaucracy,” Huffines said after the legislation passed. “I’m confident that Dallas voters are fed up with the corrupt, self-serving politicians who have ripped-off taxpayers and threatened our students."
Dallas County Schools Interim Superintendent Leatha Mullins said that dissolving the district would create chaos for families and the school districts that rely on the district’s bus service.
Closing the district "would cost school districts in Dallas County over $262 million to provide their own transportation and that the legislation will make efficient, effective transportation unfeasible," Mullins said in a prepared statement.
Mullins said one of DCS' smaller clients, the Cedar Hill Independent School District, recently requested bids from for-profit bus providers and learned that it would cost them an additional $900,000 per year for equivalent service.
“To put that in perspective, that would be like forcing that ISD to sacrifice about 18 classroom teachers and never be able to have a way to bring in enough money to replace them," Mullins said.
Mullinssaid the district has complied with state lawmakers and has taken steps to correct deficiencies.
“We have met every single demand from the legislature,” Mullins said. “We have completed an audit, refinanced the bonds, reorganized procedures and there’s a complete team of new leadership including the Board of Trustees. We accomplished the impossible with this new team and did everything we were asked to do but we can’t seem to be heard over this runaway freight train.”
The district’s GO debt matures in fiscal 2022 and includes maximum annual debt service of $10.3 million in fiscal 2018. Outstanding enterprise-related debt matures in fiscal 2025 and includes maximum annual debt service of $19 million in fiscal 2018.
The district had planned to extend the maturities of some GO debt and all of the Series 2012-B contractual obligations by five years at a net present value loss of $2.5 million.
The amount of outstanding GOLT bonds would have increased to $64.5 million and matured in fiscal year 2026. Pro forma maximum annual debt service on the proposed GOLT bonds would have increased to $15.6 million and occurs in fiscal 2021.
While the district can appeal the attorney general’s ruling on the refunding bonds, the default dims those prospects.