Demise of school transportation district in Texas brings mixed tidings for its investors

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DALLAS – The voter-approved dissolution of the Dallas County Schools transportation agency is a positive credit factor for the agency's bondholders but negative for noteholders, according to Moody’s Investors Service.

Moody’s applies junk-bond ratings of B3 to the agency's bonds and Ca to promissory notes, with negative outlooks on both.

Though identified as a “school district,” Dallas County Schools only operates buses for school districts in the Dallas area.

A campaign to eliminate the agency led to a ballot proposition on Nov. 7 that garnered support from 58% of voters in the 171-year-old district that has provided transportation for 90 years. If the vote had gone the other way, the district would have continued to provide bus transportation.

The district hit a financial skid after an investment in stop-arm cameras on buses went bad. The stop-arm activates from the side of the bus when it stops and is designed to keep cars from passing the parked bus and endangering school children as they disembark. DCS, working with a vendor, installed cameras on the stop-arms that could record images of traffic violators. The district’s plan was raise revenue by ticketing drivers who pass school buses illegally. The district also expected to benefit from sales of the technology to other districts.

“The program has severely underperformed and challenged the district’s essential operations,” Moody’s noted.

For bond-holders, the property taxes pledged to the debt will continue to be levied. Continued property tax revenue is more than sufficient to pay annual debt service on the general obligation bonds on which the district owes $10.3 million in fiscal 2018, according to Moody’s. Similar-sized annual payments are due through final maturity in 2022.

“But for promissory note-holders and other debtors this is a negative development, and another default on the promissory notes is likely on Jan. 1, 2018, because the notes are not secured by property taxes,” Moody’s pointed out.

“The camera program likely will be halted and is unable to generate sufficient revenue to pay the remaining $712,000 of debt service on the promissory notes on New Year’s Day,” analysts added. “Of the $51 million of debt related to the camera program and the purchase of school buses, we rate $709,000 of outstanding promissory notes.”

Bus operations will continue in fiscal 2018, and the district will receive monthly operating revenue from member districts. However, at the end of the 2017-18 school year, the committee must distribute all buses, vehicles and bus service centers to member school districts in proportion to current bus services, and at no cost to the districts.

“This would leave Dallas County Schools with few assets that it could sell to repay promissory note-holders and other debtors,” Moody’s said.

In responding to the election results, Dallas County Schools pointed out that only 6.5% of the district’s eligible voters decided the district’s fate.

“DCS staff are disheartened with the outcome but extremely thankful for the support we received,” the district stated in a statement.

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Ratings General obligation bonds Junk bonds Texas